Form 1023 Paperwork, In Millions of Hours, 1986 to 2016

Source: U.S. Office of Management and Budget. Click image to learn more.

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Small Organizations
By law, small public charities (gross receipts normally not more than $5,000 per year) are not required to file a 501(c)(3) application.  Keeping your group small to take advantage of this option is a simple, legal alternative.  HOWEVER, the IRS has made it clear that even these ultra-small charities must file an annual return - the 990-N, also known as the e-postcard.

The result is a classic Catch 22.  Ultra-small organizations do not have to apply to be tax exempt.  Because they do not have to apply, they are not normally listed in the IRS database of exempt organizations.  But you have to be in the IRS database in order to file the 990-N, which can only be filed electronically.  

The IRS does not seem to have clearly established procedures for getting these ultra-small organizations into the database so they can file their annual return.  Although normal IRS late penalties do not apply to the 990-N, there is a very harsh punishment for not filing: the IRS will automatically
revoke the exempt status of any organization that fails to file for three years in a row.  In other words, the exempt status these groups were not required to apply for can be revoked.


This website has only a fraction of the information you can find inPrepare Your Own 501(c)(3) Application


Adding insult to injury, once an organization has had its exempt status automatically revoked, it must file an exemption application to be reinstated, regardless of whether it was required to file an application in the first place.  So, if you decide to operate an ultra-small charity, be sure you obtain a federal ID number and file an annual 990-N.  Call Customer Account Services at 1-877-829-5500 and ask that the organization be set up to allow filing of Form 990-N.  From what readers have told me, you may have to contact the IRS well in advance of your 990-N due date, possibly multiple times, to get your organization into the IRS database so you can file. 

     Gross receipts (without deducting any costs or expenses) are "normally not more than $5,000" if:
          First year gross receipts = $7,500 or less
          Combined gross receipts for first two years = $12,000 or less,
          Combined gross receipts for first three years (or any three year period after that) = $15,000 or less

NOTE: An organization that no longer qualifies for the low gross receipts exception has 90 days from the end of the tax year in which average gross receipts exceed $5,000 to submit its application to the IRS and still get fully retroactive 501(c)(3) status.

Subordinates in Group Rulings
IRS Group Exemption procedures allow a central or parent organization to file a one-time request for exempt status for any subordinates affiliated with it and subject to its general supervision and control.  If your organization is affiliated with a state, regional or national organization that has received a Group Ruling from the IRS, you may not need to prepare your own 501(c)(3) application.  Check with the IRS or with your parent organization to see if this applies to your organization.


Churches
Churches that meet the requirements of section 501(c)(3) of the Internal Revenue Code are automatically considered tax exempt and are not required to apply for and obtain recognition of exempt status from the IRS.  Donors are allowed to claim a charitable contribution deduction for donations to a church that meets the section 501(c)(3) requirements even though the
church has neither sought nor received IRS recognition.  In addition, because churches are not required to file an annual return or notice with the IRS, they are not subject to automatic revocation of exemption for failure to file.  

Prepare Your Own 501(c)(3) Application has aSupplement specifically for Churcheswho decide to file.


Small organizations and churches might want to apply for 501(c)(3) status anyway for these reasons:

  • Although tax law provides deductibility of contributions for churches and small organizations, the burden of proof for tax deductibility is on the donor.  Your church or small organization might choose to apply for 501(c)(3) recognition to save donors possible embarrassment and inconvenience during an IRS audit.
  • Almost every grant-making agency, public or private, requires a 501(c)(3) determination letter from grant applicants.  Your church or small organization might need to apply for 501(c)(3) recognition if it plans to seek grant funding.
  • Other state and Federal agencies, such as the Postal Service, or your state's Gambling Commission, may require proof of exempt status before issuing permits or exemptions.  Each agency has its own rules, which may not provide exceptions for churches or small groups.  Your organization might have to apply for 501(c)(3) recognition to satisfy other governmental agencies.
  • Failing to apply for IRS exempt status can sometimes undermine an organization's credibility with the press or the public.  Your church or small organization might find that 501(c)(3) recognition is important for its public image.
  • An organization that expects to have employees can save a small amount of payroll taxes by applying for 501(c)(3) recognition.  A 501(c)(3) letter means your organization will not have to pay FUTA - Federal unemployment taxes.
  • Organizations that never apply for exempt status are not listed in Select Check, the list of organizations eligible to receive tax deductible contributions.​​

Prepare Your Own 501(c)(3) Application

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