Even under the best of circumstances, processing Form 1023 or Form 1024, the official forms used in applying for tax exemption under the 501(c)3 nonprofit status code, takes several weeks. If everything is filled out correctly and the correct addenda are added with the application, the application generally breezes through without delays, either being approved or denied. Although some delays may not be under the control of applicants, the majority of the reasons why applications are held up unnecessarily are in fact avoidable. Here are 10 things to avoid when applying for tax exemption status:
1. Not including copies of the organization’s adopted by-laws, code of regulations, and other rules of operation documentation. Fortunately, you can just take these from your incorporation papers or the organizational business plan.
2. Not submitting required financial statement schedules. Depending on how you answered some of the questions, financial schedules may be required. Be sure to pay attention to make sure that you follow to the letter the directions given for all questions involving finances or numbers.
3. Not completing all the required pages. Depending on what type of organization your are applying for, you must fill out all the pages that apply to that particular type of entity. An educational institution or a hospital, for example, has its own section that needs to be filled out. Also, remember to complete the check-off list at the end of the form. Some people forget to fill these out since some blank pages may be left between it and the pages that apply to the applicant.
4. Not including required information for all officers and board of directors. This includes names, mailing addresses, titles and positions, and the planned, proposed or established compensation for each.
5. Not providing enough financial data. If the organization has been around for only a year or less, then, generally, you need to provide at least 2 years of projected financial information. Follow the instructions given to see what financial information is required for your type of organization, depending on how long it has been in existence.
6. Not specifying the correct month on which the annual accounting period ends. It is imperative that whatever fiscal year specifications you provide on Form 1023 or Form 1024 match the fiscal year specified on tax returns, in financial statements, and in the by-laws.
7. Failure to demonstrate how the organization’s operational activities will uphold or justify its exemption purpose. What is it that the organization will do and for whom that justifies it being granted tax exemption?
8. Missing or improper signature of a highly-placed organizational representative on the application form. Did at least one of the highest appointed officials of the organization (the President, the Secretary, the Treasurer, the Chairperson of the Board, etc.) sign on the dotted line? If the application is missing such a signature, or if the signature is merely a “stamped” signature (rather than an actual, hand-written signature) or one that was merely faxed, the document will not be processed or approved.
9. Not attaching a copy of the entity’s legal organization documentation. This may be the articles of incorporation, but it can also be a drafted constitution, or articles of association, depending on what type of organization has been formed. The federal government wants to know that state legal requirements have been met before it grants the benefits being sought. Section 501(c)(3) applicants’ documents of organization must pass the “organizational test for exemption” established by the IRS.
10. Not submitting the correct user fees. Those seeking exemption need to pay special attention to the new fee schedules-these are clearly posted on the IRS’s website in the section under “charities.”
“Tax Information for Charities & Other Nonprofits.” (2010).