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How the IRS Processes
Exemption Applications

User Fee

The IRS has charged a non-refundable processing fee for exemption
applications since 1987. There is currently a two tier fee schedule.
Organizations whose gross receipts have averaged, or will average,
not more than $10,000 per year pay $400. Larger organizations pay
$850. Some experts feel your application will be handled more
promptly if you pay the User Fee with a cashier's check or money
order. Others disagree. If you pay with a personal check, watch your
bank statements carefully to make sure the IRS does, in fact, cash
your check for the User Fee. If they don't, your application may
have gotten lost in the mail.

Mailing Address

Currently, all exemption applications are initially handled in the
IRS Cincinatti Service Center, located in Covington, Kentucky.
If you mail your exemption application, it should be sent to:

Internal Revenue Service
E.O. Application Receiving
P. O. Box 12192
Covington, Kentucky 41012-0192

Note: This is a new address as of 12/2/08.

If you send your application by means of a delivery service which
requires a street address, it should be sent to:

     Internal Revenue Service
     E.O. Application Receiving
     Attn: Extracting Stop 312
     201 West Rivercenter Blvd
     Covington, Kentucky 41011

Screening

The Covington, Kentucky office should send you a brief letter
acknowledging receipt of the application a few weeks after you mail
it. All exemption applications are initially screened in Cincinnati
to determine whether they can be closed without further development
or with only minimal correspondence with the organization. In my
experience, the typical organization whose application is closed in
this way has all or most of the following characteristics:

1) a complete application (see below for more information)
2) "classic" 501(c)(3) activities (an example might be a PTA)
3) a relatively small budget
4) no paid employees
5) no problem areas, such as transactions with insiders, or
political activity.

An application the IRS approves without contacting the organization
may take only six to ten weeks, start to finish. During fiscal year 2010
56% of the applications the IRS received were merit-closed in this way.
When the IRS feels that additional development is needed, processing
is likely to take much longer.

Not surprisingly, many applicants are interested in expedited
handling. Although the IRS is very reluctant to consider any
application out of turn, they will sometimes be persuaded by a
letter from an unrelated third party, such as a potential grantor,
which explains the need for expedited treatment and mentions a
specific deadline. Because exemption applications may travel to
different parts of the country depending on the IRS workload, a
letter of this kind must accompany the application when it is
originally submitted. It probably wouldn’t hurt to write "Request
for Expedited Treatment" at the top in large, bold letters, either.

Inquiry Letter

Approximately half of the applications the IRS receives require
additional development. When an inquiry letter (Form Letter 1312)
is sent, you normally have 21 days to respond. If you need additional
time, the agent handling the case will routinely grant an extension of
ten days to two weeks. If that will not be enough time, however, the
IRS usually prefers to close the case (Form Letter 1314). Your file
is kept in the immediate work area, and reopened automatically when
your additional information comes in.

Caution! If you take more than 90 days to submit the additional
information, IRS rules say that they can charge you a new "User Fee."

Final Disposition

Once you have answered all of the IRS agent’s questions
satisfactorily, a favorable determination letter will be issued.

For fiscal year 2010, IRS closings for 501(c)(3) applications were as
follows:

Approvals82%
Denials1%
"Other"17%


("Other" includes transfer to National Office, failure to provide
additional information when requested, and status granted different
from status applied for.)

If the IRS denies your application, they must provide you with a
written explanation of the facts, law, and argument upon which their
decision is based, as well as an explanation of your appeal rights.
 

Putting Together a Complete Do-It-Yourself
Exemption Application Package


Forms

Your application package should contain the following items, in the
order shown.

1. An envelope containing your check for the User Fee. Make your
check out to "United States Treasury" for either $400 or $850.
It's a good idea to write the organization’s Federal ID number and
"Form 1023" in the memo area of the check.

2. The two-page Form 1023 Checklist, found at the end of Form 1023.
Note that you must indicate which Form 1023 schedules you are
filing, as well as entering the locations (from the articles of
incorporation) of your organization's purpose and dissolution clauses.

3. If your organization is represented by a tax professional, Form
2848, Power of Attorney.

4. If you want the IRS to discuss your application with a third
party, Form 8821, Tax Information Authorization.

5. If you are asking the IRS to expedite review of your application,
an Expedite Request, usually in the form of a letter.

6. Form 1023, Application for Recognition of Exemption Under
Section 501(c)(3). Make certain that all applicable parts of the
form are completed, including any schedules required for your type
of organization. The form must be signed by an authorized person.

7. Form 5768, if the organization has decided to elect to make
expenditures to influence legislation under section 501(h) of the
Internal Revenue Code.

Required Materials

These materials are required; if they are not included, it may delay
processing of your application:

1. A copy of the Articles of Incorporation (if your group is
incorporated...otherwise, submit your constitution, articles of
association, or other governing document - Bylaws alone are not
enough). Articles of Incorporation should clearly show that they
have been filed with the proper state authority. The IRS usually
asks for two signatures on the governing instrument of an
unincorporated association.

2. Bylaws. These should be signed and dated.

3. Actual financial data, including income statement(s) and a recent
balance sheet, if the organization has had any financial activity.

4. A two year projected budget, showing both expected sources of
income and anticipated expenses. Sometimes the IRS asks for a
projected budget even when the applicant can provide a full year of
actual financial data.

Optional Materials

The following materials are often requested by IRS agents reviewing
exemption applications:

1. Printed materials describing the history of the organization,
its activities and its plans for the future. This might include brochures,
pamphlets, descriptive literature, published materials,
etc. If you don't have any, it is a good idea to say so somewhere in
the application. If you have some in draft form, go ahead and submit
them, if that is all that is available.

2. If the organization publishes a newsletter, sample copies.

3. If the group is a membership organization, any materials prepared
for members - membership application forms, promotional materials,
sample membership certificates or identification cards, sample
copies of member-only publications, etc.

4. If you have received media coverage, copies of newspaper
clippings, transcripts of interviews, etc.

5. Any documentation you have regarding grant monies. This might
include grant applications, grant contracts, or correspondence
between your organization and the grantor organization.

6. If appropriate, a "schedule of events," showing where and when
your organization has held informational or other events during the
last 12 months. Include approximate attendance.

7. If your organization will have a scholarship or grant program:
- a description of how potential applicants will hear about your
program
- a description of eligibility requirements
- a sample (draft will do) of the application form(s) you will
require applicants to submit
- a description of the selection process, including a description of
the selection committee itself, and how the selection committee is
selected
- any guidelines prepared for the selection committee's use
- conditions placed upon grants or scholarships, including any
requirements for grade notification, etc. and a description of
action that will be taken if the terms of the grant are violated

8. In the absence of the several kinds of printed materials
described in items 1, 2, 3 and 4 above, it is sometimes useful
to have selected letters from your correspondence files, such as
letters between your organization and potential members or board
members, letters of appreciation from groups where you have made
presentations or otherwise helped out, or perhaps even letters
from public officials commenting on your efforts.

9. Any or all of the following:
- advertisements
- actual samples of items you have for sale
- copies of contracts, rental agreements, leases, and loan
agreements involving the applicant organization
- copies of Federal, State or local legislation, if any, regarding
the creation or continued existence of the organization
- resumes of board members and/or key employees, if readily
available, and/or copies of licenses, certificates, etc.
- independent appraisals of assets the organization is renting or
purchasing from related parties

10. Anything else you may have which would give the IRS insight into
your organization's mission or operations.

This is meant to be a comprehensive list. Many items may not apply.

 

If you find this website helpful, please consider Prepare Your Own
501(c)(3) Application
by Sandy Deja, which has all the information
on this site and more.

This page last updated March, 2011.