Frequently Asked Questions: Form 1023

 

Organizational leadership can learn more about these topics and the benefits, limitations and expectations of tax-exempt organizations by attending 10 courses at the online Small to Mid-Size Tax Exempt Organization Workshop.

Frequently Asked Questions about Form 1023


General Information

Yes, you must have an Employer Identification Number (EIN) to apply for exemption on Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

You can get an EIN online, by fax, by mail, or for international applicants only - over the phone.

Interactive Training
Learn more about tax-exempt organizations’ benefits, limitations and expectations by attending 10 courses at the online Small to Mid-Size Tax Exempt Organization Workshop

Yes, you may use a mailing address in Part I, Line 1c, instead of a street address. You may wish to do this to protect your privacy and that of your employees and clients (for example, for a battered women's shelter) given that Form 1023 is subject to public disclosure.

Someone other than an attorney of record, officer, director, or employee may represent your organization when you apply for exemption. However, the IRS can’t discuss an application with anyone, unless the organization submits Form 2848, Power of Attorney and Declaration of RepresentativePDF, or Form 8821, Tax Information AuthorizationPDF.
 

A fax number gives us other ways to contact you or your representative about your application. Providing this information on Form 1023 is optional, however.

An organization may qualify for exemption under section 501(c)(3) even if it's formed and/or conducts its activities in a country other than the United States. Note, however, that contributions to an organization formed in a foreign country aren’t generally deductible as charitable contributions for federal income tax purposes except under a treaty between the other country and the United States. (For example, contributions to Canadian charities may be deductible, while contributions to charities based in most other countries are not.) 

Form 1023 asks whether an organization was formed in a country other than the United States to help identify charities based in or operating in countries that may present tax risk issues.

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Currently, you can’t correct or change a form after you’ve submitted it electronically via Pay.gov. If you  need to make a correction or change, send the information with a cover letter, including the name and EIN of the organization, to the EO Correspondence Unit:

Internal Revenue Service
Attn: Correspondence Unit
P. O. Box 2508, Room 6-403
Cincinnati, OH 45201

For express/overnight delivery:

Internal Revenue Service
Attn: Correspondence Unit
550 Main Street, Room 6-403
Cincinnati, OH 45202

For answers to questions about charities and other non-profit organizations, you can call IRS Tax Exempt and Government Entities Customer Account Services at (877) 829-5500 (toll-free number). You  can also send questions to:

Internal Revenue Service
Exempt Organizations Determinations
P. O. Box 2508, Room 6-403
Cincinnati, OH 45201

Fax: (855) 204-6184

For answers to employment tax questions, call the Business and Specialty Tax Line at (800) 829-4933 (toll-free).

 

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Organizational Structure and Organizing Documents

Organizations that may qualify for exemption under section 501(c)(3) include corporations, limited liability companies (LLCs), unincorporated associations and trusts. A partnership may not qualify for exemption and therefore may not file Form 1023.

A limited liability company that files Form 1023 is treated as a corporation rather than a partnership. As a corporation, it may file Form 1023. Note, however, that a limited liability company shouldn’t file an exemption application if it wants to be treated as a disregarded entity by its tax-exempt parent. 

  • A charity's organizing document must limit the organization's purposes to exempt purposes  in section 501(c)(3) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further those purposes. This requirement may be met if the purposes stated in the organizing document are limited by reference to section 501(c)(3). 
  • An organization's assets must be permanently dedicated to an exempt purpose. This means that if an organization dissolves, its assets must be distributed for an exempt purpose described in section 501(c)(3), or to the federal, state or local government for a public purpose.  
  • To establish that an organization's assets will be permanently dedicated to an exempt purpose, the organizing document should contain a provision ensuring their distribution for an exempt purpose if the organization dissolves. For examples of provisions that meet these requirements, see Sample Articles or refer to Publication 557PDF. In certain situations, organizations may rely on state law to establish permanent dedication of assets for exempt purposes.  Revenue Procedure 82-2PDF has more information about when reliance can be placed upon state law.
  • If your organizing document doesn’t contain these provisions, then you should amend the organizing document before submitting your exemption application. State websites provide more information about how to amend organizing documents.

 

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Interactive Training

Learn more about tax-exempt organizations’ benefits, limitations and expectations by attending 10 courses at the online Small to Mid-Size Tax Exempt Organization Workshop.

 

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Activities

An organization must describe completely and in detail its past, present and planned activities, that are substantial. You can refer to other parts of the application rather than repeat information provided elsewhere. 

Describe either actual or planned activities, rather than possible or speculative programs. For example, your organization may plan to operate an after-school homework club and you should describe that activity in your application. The organization's director may have brainstormed about possible scholarship programs or creating a youth orchestra. The application doesn’t have to describe the scholarship or orchestra program because these are speculative.

The narrative description, including information referenced in other parts of the application, should include information that answers the following questions:

  • What is the activity?
  • Who conducts the activity?
  • When is the activity conducted?
  • Where is the activity conducted?
  • How does the activity further the organization's exempt purposes?
  • What percentage of the organization's total time is allocated to the activity?
  • How is the activity funded?

The purpose of these questions is to verify that an organization operates for public purposes and not for the private benefit of an organization's members or other private individuals or organizations.

Form 1023, Part IV, asks whether in conducting its exempt functions, an organization limits its programs to certain groups. It also asks whether individuals related to key individuals are eligible to receive benefits from the organization. 

In addition to describing the benefits your organization provides to members, you must also describe your organization’s requirements for membership and the relationship between individuals receiving benefits and key individuals within the organization.

We ask these questions to learn about past, current, or planned activities in commonly recurring areas. Please explain your responses or complete a schedule with additional details.

Form 1023 consolidates questions into Part IV and  asks for:

  • information about prohibited and restricted activities, including impermissible private benefit;
  • information to help the organization establish that its activities will otherwise further exempt purposes; and
  • information about the requirement to file annual returns or other tax compliance responsibilities.

Some of the specific activities covered in Part IV are:

  1. Political campaign intervention
  2. Legislative activities
  3. Ownership or other rights in intellectual property
  4. Credit counseling or other financial educational activities
  5. Making grants, loans or other distributions to organizations
  6. Making grants, loans or other distributions to foreign organizations
  7. Activities in foreign countries
  8. Donor advised funds
  9. Operating a school
  10. Providing hospital or medical care
  11. Providing low- income housing
  12. Providing scholarships, fellowships, educational loans, or other educational grants to individuals
  13. Fundraising activities

You must describe your actual or planned fundraising programs rather than possible or speculative programs, in Part IV.

We expect a general explanation about an organization's involvement in intellectual property, defined in the instructions as including patents, copyrights, trade names, and formulas.

We are specifically interested in situations in which an organization intends to exploit its intellectual property commercially. For example, if you intend to develop a smoking cessation program that you’ll market to the public, you should explain the ownership and rights, including sharing of revenues with private parties. If your organization intends to develop brochures and other materials for fundraising efforts, this type of general explanation would be sufficient.

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    Compensation and Other Financial Arrangements with Officers, Directors, Trustees, Employees, and Independent Contractors

    These questions are aimed at determining whether benefits paid to these individuals are appropriate, that is, whether they are consistent with exempt status under section 501(c)(3).

    Form 1023 Part V asks questions about compensation and other financial arrangements with officers, directors, trustees, highest compensated employees (receiving more than $100,000 annually) and highest compensated independent contractors (receiving more than $100,000 annually), along with certain other related parties.

    Form 1023 asks questions about:

    • how the organization sets compensation for key individuals. It defines compensation as all income including salary, wages, deferred compensation, retirement benefits, fringe benefits, educational benefits, low interest loans, payment of personal expenses, and bonuses.
    • family and business relationships and transactions that could indicate impermissible private benefit.
    • conflict of interest policies or practices and references the sample policy in Appendix A. It asks the applicant to disclose transactions with related parties, and how compensation is determined to be reasonable.

    Charitable organizations are frequently subject to intense public scrutiny, especially where they appear to have inappropriately benefited their officers, directors or trustees. The IRS also has an oversight role with respect to charitable organizations. An important part of this oversight is providing organizations strategies that will help avoid the appearance or actuality of private benefit to individuals who are in a position of substantial authority. The recommended conflict of interest policy is a strategy we encourage organizations to adopt to establish procedures that’ll offer protection against charges of impropriety involving officers, directors or trustees.

    A conflict of interest occurs where individuals’ obligation to further the organization’s charitable purposes is at odds with their own financial interests. For example, a conflict of interest would occur if an officer, director or trustee votes on a contract between the organization and a business that the officer, director or trustee owns. Conflicts of interest frequently arise when setting compensation or benefits for officers, directors or trustees. A conflict of interest policy is intended to:

    • help ensure that when actual or potential conflicts of interest arise, the organization has a process in place under which the affected individual will advise the governing body about all the relevant facts about the situation. 
    • establish procedures under which individuals who have a conflict of interest will be excused from voting on those matters.

    Apart from any appearance of impropriety, organizations will lose their tax-exempt status unless they operate in a manner consistent with their charitable purposes. Serving private interests more than insubstantially is inconsistent with accomplishing charitable purposes. For example, paying an individual who is in a position of substantial authority excessive compensation serves a private interest. Providing facilities, goods or services to an individual who’s in a position of substantial authority also serves a private interest unless the benefits are part of a reasonable compensation arrangement or are available to the public on equal terms and conditions.

    Yes, bonuses provided through retirement plans, such as those  under Code sections 403(b) or 457, are treated as non-fixed payments for  Form 1023, Part V.

    The questions in Part V are aimed at determining whether benefits provided to officers, directors and trustees along with other financial transactions are consistent with exempt status. If your organization doesn’t pay compensation, then answer Part V, Question 1 “no.” The remainder of Part V asks about various types of transactions between the organization and its governing members as well as other individuals or businesses. Answer these questions even if your organization doesn’t pay compensation.

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    Financial Data

    Form 1023 Part VI serves several purposes, including securing the information we need to determine whether an organization is (or will be) publicly supported, and therefore not a private foundation.

    Part VI-A (Statement of Revenue and Expenses) requires you to provide actual or projected financial information (such as, budgets) for three to five years (depending on how many years your organization has existed). Part VI-B requires a balance sheet for your organization's most recently completed tax year. A balance sheet is a snapshot of assets, liabilities and fund balances (net assets) on a particular date. If you haven’t completed a tax year, provide a statement of actual assets, liabilities and fund balances (net assets) based on your most current information.

     

    The tax years for which you must provide financial information for the Statement of Revenues and Expenses in Part VI depends on the number of tax years your organization has completed since it was formed. An organization’s tax year is its annual accounting period.

    The following examples explain how to determine the number of years your organization has completed since it was incorporated or formed.

    Example 1: X was incorporated as a nonprofit organization on June 4, 2020. It selected an annual accounting period that ends December 31. Therefore, its first tax year is June 4, 2020 through December 31, 2020. Its second tax year is January 1, 2021 through December 31, 2021. Its third tax year is January 1, 2022 through December 31, 2022. Its fourth tax year is January 1, 2023 through December 31, 2023.

    Example 2:  Y was formed as a trust on June 4, 2020. It selected an annual accounting period that ends June 30. Therefore, its first tax year is June 4, 2020 through June 30, 2020. Its second tax year is July 1, 2020 through June 30, 2021. Its third tax year is July 1, 2021 through June 30, 2022. Its fourth tax year is July 1, 2022 through June 30, 2023.
    If your organization has existed for less than 5 years, you must complete the schedule in Part VI for each year in existence and provide projections of likely revenues and expenses based on a reasonable and good faith estimate of future finances for a total of:

    1. Three years of financial information if you haven’t completed one tax year, or
    2. Four years of financial information if you’ve completed one tax year.

    If your organization was in existence for 5 years or more, you must complete the schedule for the most recent 5 tax years.

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    Foundation Classification

    Part VII of Form 1023 combines in one place information we need to rule on several related issues:

    • Classification of the organization as a private foundation or public charity ; and
    • Request for classification as a private operating foundation.
      If your organization is a private foundation, Part VII secures information we need to verify that organizing documents comply with requirements for the private foundation excise taxes. If your organization is requesting public charity status, Part VII cross-references required schedules.

     

     

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    Signature Block and User Fee Information

    A principal officer, director, trustee, or other official who’s authorized to sign for the organization must digitally sign Form 1023. Generally, a principal officer is the president, vice president, secretary or treasurer.

    Form 1023 captures the names of those individuals in Part I on line 9 (where the form captures information about officers, directors and trustees).
    When you complete Part X (the electronic signature of the form), the name of the person you identify as the signer of the form must exactly match one of the first 5 names listed in Part I, line 9 of the form.

    To electronically sign Form 1023, the signer must check the "penalties of perjury" box.

    No,  Form 1023 instructions state that an individual authorized by Form 2848 may not sign the application unless that person is also an officer, director, trustee, or other individual who’s authorized to sign the application. Form 1023 is an application an organization uses for the IRS to issue a determination letter or ruling letter that recognizes an organization's exemption from federal income tax. Revenue Procedure 2021-5 (updated annually), requires that you must include a penalties of perjury statement, signed by the taxpayer, not the taxpayer's representative, in your letter ruling or determination letter request. This requirement is based on the concept that by signing the application, an official of the organization is assuming responsibility for the information’s accuracy. Generally, an authorized representative wouldn’t be in a position to verify the accuracy of the information the organization is sending.

    The user fee for:

    • Form 1023 is $600.
    • Form 1023-EZ is $275.

    User fees are subject to change; the IRS publishes the latest user fee information at IRS.gov, keyword "user fee." You can also contact Customer Account Services for the latest information.

    1. You must pay the Form 1023 or Form 1023-EZ user fee through www.pay.gov when you file the application. You can pay directly from your bank account or by credit/debit card.
    2. The IRS doesn’t  process an application until the user fee has been paid.

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    Required Attachment to Form 1023

    Yes, a complete application includes one or more documents in addition to Form 1023. Pay.gov can only accommodate one uploaded file, so before you submit Form 1023, consolidate the following attachments into a single PDF file:

    • Organizing document (required)
    • Amendments to the organizing document in chronological order (required if applicable)
    • Bylaws or other rules of operation and amendments (if adopted)
    • Form 2848, Power of Attorney and Declaration of Representative (if applicable)
    • Form 8821, Tax Information Authorization (if applicable)
    • Supplemental responses (if the response won’t fit in the provided text field) and any additional information the organization want to provide to support the application (optional)
    • Expedite request (optional)
      Put your organization’s name and Employer Identification Number (EIN) on each page of the supplemental response and identify the Part and Line number to which the information relates

     

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    Processing Applications

    In general, IRS processes applications in the order we receive them. Sometimes, however, the IRS  works a case outside the regular order. For expedited processing to be granted, however, you must show  a compelling reason for IRS to process the case ahead of others. Compelling reasons include the following:

    • A pending grant, where failure to secure the grant will have an adverse impact on the organization's ability to continue operating.
    • A newly created organization providing disaster relief to victims of emergencies.
    • IRS errors have caused undue delays in issuing a determination letter.

    For a pending grant, the following specific information would help support a request for expedited processing:

    • The name of the person or organization committed to giving the grant or asset,
    • The amount of the grant or the value of the asset,
    • The date the grant will be forfeited or permanently redirected to another organization,
    • The impact on the organization's operations if it does not receive the grant/asset, and
    • The signature of a principal officer or authorized representative.

    You must request expedited processing in writing and fully explain the compelling reason IRS has discretion granting expedited processing. 
    You can’t  request expedited handling for Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code submitted under Revenue Procedure 2021-5, (updated annually).

     

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    Additional Information

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