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Form 1023: What You Need to Know About Applying for Tax-Exempt Status

what you need to know about filing a form 1023 with the irs for tax exempt status by davis law group pc in chesapeake, virginia

Form 1023: What You Need to Know About Applying for Tax-Exempt Status

November 10, 2023 Davis Law Group

What is Form 1023?
To be exempt from federal income tax, organizations must receive a determination letter from the IRS. The IRS only gives a determination letter after receiving adequate proof that an organization is organized and operated primarily for charitable, educational, and/or religious purposes. An organization provides this proof to the IRS through Form 1023.

Completing Form 1023
Filing Form 1023 can be a confusing and arduous process. Applicants must create an account on Pay.gov and submit the form electronically. The IRS no longer accepts paper applications.

Form 1023 is the IRS form that an organization must complete to apply for recognition of tax-exempt status. 501(c)(3)s, hospitals, organizations providing childcare, and charitable risk pools all apply for tax exemption recognition with Form 1023. The IRS also offers a shorter, streamlined version called Form 1023-EZ. Smaller organizations seeking tax exemption under section 501(c)(3) are usually eligible to file the EZ version. Typically an organization must have less than $250,000 in assets and less than $50,000 in annual gross receipts to file Form 1023-EZ.

The full Form 1023 asks for an incredible amount of information. There are 11 sections that all applicants must fill out, and there are 8 additional forms called “schedules.” Organizations must complete the schedules that apply to them. In the 11 mandatory sections, applicants must supply information about:

  • the organization’s structure,
  • the board of directors,
  • financial contributions and assets,
  • how much employees and officers are compensated, and
  • whether the organization is a private foundation.

The IRS also asks for a narrative description of all past, current, and planned activities. This is the heart of Form 1023 and should be crafted with special care and attention. Additionally, the IRS requires that organizations attach copies of their organizing documents to Form 1023, along with a conflict-of-interest policy if the organizations have one.

The Benefits of Hiring an Attorney to File Form 1023
Any interaction with the IRS has the potential to be fraught with complications. An attorney experienced in filing Form 1023 can provide great benefits throughout the entire process. First, an attorney will ensure that your organizing documents contain the necessary language to show that the entity is organized primarily for charitable purposes. An application will be rejected if the organizing documents do not contain this language. An attorney will also review or supply a conflict-of-interest policy, which every organization applying for recognition of tax-exempt status should have. Furthermore, an attorney can advise you on whether you even need to file Form 1023 (some groups, like churches, are not required to file for tax exemption recognition but may find it beneficial to do so) and if you do, whether you can file Form 1023-EZ.

An attorney also can advise your organization on whether it may be eligible for expedited review. The IRS usually processes applications in the order that it receives them, and, on average, it takes anywhere from 3 to 6 months for the IRS to consider an application. The process can be drawn out even further if the IRS returns the application with questions or requests for additional information. If the IRS approves expedited review of your organization’s application, it may issue a determination letter in weeks rather than months. Not only can an attorney draft a letter requesting expedited review, but an experienced attorney can decrease the likelihood that the IRS will return the application seeking clarification or supplemental information by knowing exactly what kind and what amount of information to supply. This can also save precious time and help your organization start receiving deductible contributions much sooner.

The fee for filing Form 1023 is $600. This is a significant amount of money. It also takes a great deal of time and effort to complete the Form (on average, it takes 3 weeks to complete). No one wants to invest so much time, energy, and money just to have an application rejected on a technicality. An experienced attorney can help you navigate all the IRS requirements and legal jargon to ensure that your organization receives recognition as a tax-exempt charitable entity.

Davis Law Group Can Help
Do you have questions about filing Form 1023 or creating a nonprofit? We have experienced nonprofit and church law attorneys on our team who can speak with you, provide sound consel and give you peace of mind. Contact us today.