IRS Form 1023: Secure Tax-Exempt Status with Confidence

For organizations seeking tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, completing and filing IRS Form 1023 is a critical step. This application process allows nonprofits to obtain recognition as tax-exempt entities, enabling them to access benefits such as exemption from federal income tax, eligibility to receive tax-deductible charitable contributions, and certain state and local tax advantages. At Seder & Chandler, LLP, we provide guidance to help nonprofit organizations navigate the complexities of filing Form 1023 and positioning themselves for long-term success.

What Is IRS Form 1023?

IRS Form 1023, officially titled “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” is the primary document used by organizations to apply for tax-exempt status. By submitting this form, nonprofits provide detailed information about their mission, operations, governance, and finances to demonstrate that they meet the requirements for tax exemption.

For smaller organizations, the IRS also offers Form 1023-EZ, a streamlined version of the application for entities with gross receipts under $50,000 and assets under $250,000. While shorter and more straightforward, Form 1023-EZ still requires careful preparation to ensure compliance with IRS standards.

Eligibility for Tax-Exempt Status

To qualify as tax-exempt under Section 501(c)(3), an organization must meet specific criteria:

Exclusively Charitable Purpose: The organization must operate exclusively for religious, charitable, scientific, educational, or similar purposes.
No Private Benefit: The organization’s income and assets cannot benefit private individuals or shareholders.
Operational Test: The organization must demonstrate that its activities align with its stated charitable purpose.
Lobbying and Political Activity Limits: Certain restrictions apply to lobbying and political campaign activities.
Organizational Structure: The entity must be properly formed under state law, typically as a nonprofit corporation, with governing documents that meet IRS requirements.

Steps in Filing Form 1023

Filing IRS Form 1023 involves multiple stages, each requiring precision and attention to detail:

Formation of the Organization: The entity must first be established under state law, often as a nonprofit corporation, and secure an Employer Identification Number (EIN).
Preparation of Governing Documents: The organization’s bylaws, articles of incorporation, or trust agreements must explicitly define its tax-exempt purpose and comply with IRS guidelines.
Completion of Form 1023: This comprehensive application includes sections on the organization’s mission, programs, financial data, governance policies, and any planned fundraising activities.
Submission to the IRS: After ensuring accuracy and completeness, the form and the required filing fee are submitted electronically.
IRS Review and Determination: The IRS reviews the application and may request additional information before granting tax-exempt status.

Challenges in the Application Process

The Form 1023 application process can be daunting due to its complexity and the level of detail required. Common challenges include:

Ensuring Compliance with IRS Guidelines: Organizations must carefully structure their activities and governance to meet IRS standards.
Drafting Accurate Financial Projections: The IRS requires detailed financial information, including budgets and past financial activities.
Avoiding Incomplete or Inaccurate Filings: Mistakes or omissions can lead to delays, additional requests from the IRS, or even denial of tax-exempt status.
Understanding Organizational Restrictions: To ensure compliance, organizations must navigate restrictions on lobbying, political activities, and private benefits.

The Role of Legal Counsel in IRS Form 1023 Applications

Obtaining tax-exempt status is a significant milestone for any nonprofit organization, but it is not without its legal and procedural hurdles. Working with experienced attorneys during the application process offers several advantages:

Tailored Guidance: Attorneys can help tailor the application to reflect the organization’s unique mission and activities while aligning with IRS requirements.
Document Preparation and Review: Legal counsel can assist in drafting governing documents and ensuring they include the necessary language to meet IRS standards.
Compliance Assurance: Attorneys stay updated on the latest IRS rules and can help organizations avoid errors that could jeopardize their applications.
Navigating IRS Inquiries: Legal counsel can respond promptly and effectively if the IRS requests additional information or clarification.

Why Filing Form 1023 Matters

Securing tax-exempt status under Section 501(c)(3) offers substantial benefits to nonprofit organizations, including:

Federal Tax Exemption: Income related to the organization’s exempt purpose is not subject to federal income tax.
Charitable Contributions: Donors can deduct contributions to the organization on their federal income tax returns.
Grant Eligibility: Many grants and funding opportunities are available only to 501(c)(3) organizations.
State and Local Benefits: Tax-exempt status often leads to additional state and local tax advantages, such as property tax exemptions.

How Seder & Chandler, LLP Can Help

At Seder & Chandler, LLP, we understand the importance of obtaining tax-exempt status for nonprofits striving to make a positive impact in their communities. We provide practical guidance throughout the Form 1023 application process, helping organizations meet their goals while ensuring compliance with all legal requirements.

If your nonprofit is ready to take the next step toward tax exemption, contact us today. Our attorneys are committed to helping you establish a solid foundation for success.