When a group decides it wishes to create a charitable organization, it must first review the expected purposes and activities of the proposed organization.  If it appears that the substantive requirements for exemption as a charitable organization will be satisfied by these purposes and activities, the group would proceed with the incorporation of the organization under the local state nonprofit corporation code.  At that point, the procedural aspects of obtaining tax exempt status for your organization come into play..

To qualify for exemption, a charitable organization must notify the IRS that it is applying for recognition of its exempt status. The notice is given by filing Form 1023, "Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code." The notice must be filed within 15 months from the end of the month in which the organization was organized. A user fee of $500 must accompany the application unless you anticipate that the organization's average annual gross receipts over the first four years of operation will be $10,000 or less. In that case, the user fee is $150.

A considerable amount of information must be furnished to the IRS on the application for recognition of exemption. For example, the following data must be supplied:

• Information identifying the organization;

• A specification of the organizational form and conformed copies of the organizing document and bylaws;

• A description of the organization's sources of support and of its fundraising activities;

• A detailed description of the organization's past, present and proposed activities and purposes;

• Information concerning the officers, directors and trustees; and

• Financial statements.

The data supplied on the application must be complete and accurate.  Careful attention to the preparation of this important document.

Assuming that the application demonstrates the organization's eligibility for exemption, the IRS will issue a ruling recognizing the exemption. A favorable ruling is effective as of the organization's formation. The ruling can be relied on so long as there are no substantial changes in the organization's character, purposes or methods of operation, subject to the power of the IRS to revoke the ruling due to changes in the law or other good cause.