The Internal Revenue Service sets the tax rules and regulations for all corporations that operate in the United States, including nonprofits and charitable organizations. Bylaws governing nonprofits can be found within Section 501(c)(3) of the federal tax code. Per 501(c)(3) of the code, nonprofits and charitable organizations must operate strictly in the public’s interest or for charitable purposes only. They cannot operate for the profit of any individual or group.
If your nonprofit conforms with these requirements, it is exempt from tax requirements. However, the IRS will make the final determination regarding your organization’s status, and only once you receive your IRS 501(c)(3) determination letter can you operate as a tax-exempt entity.
The IRS 501(c)(3) determination letter is a written notification that informs you that the IRS has either approved or denied your Application for Recognition of Exemption. The receipt of a favorable determination is exciting, as it means your corporation can now enjoy several unique benefits.
The most notable advantage is that your organization can now devote more time and attention toward serving the public’s interests and expend more funds on pursuing your mission. Any grants and donations your group collects to operate, as well as any income it generates from fund-raising activities, are not subject to taxation. Additional benefits worth mentioning include the following:
You are exempt from federal income tax.
You may be privy to discounts on postage rates with the USPS and related goods and services.
Your donors can claim charitable contributions on their personal income or business tax returns, making your organization more enticing to donate to.
You may have access to funding that is usually restricted to tax-exempt organizations.
Your nonprofit gains credibility for its mission.
Though the IRS 501(c)(3) determination letter grants your nonprofit tax-exempt status, you are still required to file an annual return. The 990 series is reserved for nonprofits and charitable organizations and is designed to inform the IRS of your annual gross receipts, assets, and expenses. If your group brings in less than $50,000 in gross receipts annually, you may be able to file electronically. However, if it generates more, you may be subject to stricter filing rules.
The review process for an Application for Recognition for Exemption can take anywhere from between two and 12 months to complete. Per the IRS’s website, the process can be delayed for a number of reasons, which range from minor errors on the application to concerns regarding the eligibility of the organization for exemption. That said, there are a few things you can do to speed up the process.
The best way to ensure swift approval is to thoroughly and accurately answer all questions on the application document. You should also submit all forms that the IRS requests along with your application. Doing so ensures that the agent assigned to review your case can make the most informed decision as quickly as possible.
In very few instances, the IRS will expedite an application. Typically, the agency processes applications in the order they are received, but it may make an exception for organizations that submit a compelling reason for expedition:
Your organization provides disaster relief to victims of natural disasters and emergencies.
A pending grant exists that is contingent upon your exempt status and failing to secure the grant would have an adverse impact on your group’s ability to operate.
Undue delays in the review process are the result of errors on the IRS’s part, not your own.
If you were awarded a pending grant and need to expedite your application, submit as much supporting evidence for your case as possible:
The name of the organization or person proffering the grant or award
The amount of the pending grant
The date on which the organization will either forfeit the grant or award it to another nonprofit or charitable group
The adverse impact forfeiture of the grant will have on your organization
The signature of an authorized representative or principal officer
You must submit your request for expedition in writing and thoroughly detail the compelling reason. The IRS will use its discretion when determining whether to expedite your application, so it is in your best interest to be as meticulous as possible.
As a nonprofit, you may find that you need to present proof of your IRS 501(c)(3) determination letter often. If you lose it sometime between retrieving it, scanning it and going back to filing it, you may panic, as that letter can dictate the direction of your organization’s future. The good news is, you can always request a copy. There are three ways you can do so:
Through the IRS’s website
If you operate a smaller nonprofit, you may be able to file for a copy using the 1023 EZ form online. Filing online comes with a lower filing fee and a quicker turnaround time. Once you pay the fee, you can simply download a copy of your IRS 501(c)(3) determination letter to your computer and print it at any time. This may be the best option if you frequently misplace your determination notice or need to print copies often.
You may need to request a copy by mail if you filed your application via the 1024 or 1023 form and mailed it in. If this is the case, fill out Form 4506-A with all the requisite information, including the name of your nonprofit, its address and the associated EIN. If you do not have this information, you can find it using the IRS tax-exempt search page. In addition to the basic information about you and your organization, you will need to provide a brief explanation of why you need a copy of the letter. Mail your completed forms to the IRS Correspondence Unit in Cincinnati, OH. After reviewing your forms for accuracy, the IRS will mail a copy of your IRS 501(c)(3) determination letter.
It is not uncommon for nonprofit operators to share their determination notices with other individuals and entities. For instance, you may have given a copy to other board members, lawyers, accountants, and friends. If you sought help when applying for exempt status, turn to those from whom you sought assistance. Another board member may have had the foresight to stash a copy in a bank safe deposit box or filing cabinet within the office building or satellite location.
Not all determination notices are cause for celebration. If you receive an adverse determination notice, you can either request a meeting or telephone call with the supervisor of the agent who issued the determination or you can file an immediate appeal. If you request the former, the supervisor will explain to you the reason for the decision. If, after the meeting, you agree with the determination, the supervisor will ask you to sign a consent form. This consent form does not waive your right to a future appeal, should you later decide you disagree.
If you do not agree with the agent’s decision, you can file an appeal, which is essentially your statement about why you disagree. For the IRS to hear your appeal, you must file it within 30 days of receiving the adverse decision. Your appeal must include the following information:
The name of your organization, contact phone number and EIN
A statement from your organization claiming it wants to protest the decision
A copy of the adverse determination letter
An explanation of why you disagree with the agent’s findings
Any evidence on which you’re basing your appeal
You or an officer of your organization must sign the appeal notice, along with a statement saying that everything in your appeal, along with documentation, is true and accurate to your knowledge.
In most cases, the Appeals Office handles all appeals. It is important to note that the Appeals Office is not required to consider your case. However, if you feel the IRS did not give proper consideration, you can bring the issue to your local Exempt Organizations Technical office. If the EO feels it’s prudent to do so, it will make a recommendation to the Appeals Office.
If, even after receiving a recommendation from EO Technical, the Appeals Office still denies your exempt status, you have the option to take your dispute to court.
If you are fortunate enough to receive an IRS 501(c)(3) determination letter with a favorable determination, keep the letter safe. Though you can order copies, it is in your best interests to keep the original copy on a computer hard drive, in a safe deposit box or in some other secure location from which you can easily access it. This makes it easier for you to apply for grants and other forms of formal funding, as the majority of programs require proof of nonexempt status.
You should also bear in mind that your tax-exempt status is not permanent. Depending on state law, you will need to reapply every so often to keep your tax-exempt status current. You may also have to file a 501(c)(3) determination letter with each state in which you plan to operate your nonprofit.
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