What You Need to Know About Filing for Tax-Exempt Status

by Jessica Sommerfield · 3 comments

Helping hand

Usually when the IRS is mentioned in a headline about tax fraud, they’re the ones doing the investigating. But in recent headlines, the IRS itself is facing allegations of discrimination.

The IRS is being sued by numerous representatives of non-profit Tea Party groups whose tax-exempt status requests were either denied or are still in limbo — some for several years. Federal investigations into the IRS have already resulted in the removal of two key members, including the IRS commissioner, Steven Miller.

If you’re considering filing for a 501(c)(3), this news might be discouraging. After all, if the IRS can discriminate against certain types of groups for political reasons, couldn’t they just as easily deny tax-exempt status for other reasons, as well?

First of all, the IRS is under serious investigation by the FBI and Congress, and it won’t be allowed to continue this type of discrimination. There will undoubtedly be changes and heightened monitoring. Secondly, about 70% of requests for tax-exempt status are granted without further investigation. As long as your organization qualifies and files correctly, you shouldn’t have a problem.

Here’s some basic information about the 501(c)(3):

Tax Exempt: What Qualifies?

The purpose of tax exemption is for charities, community or religious organizations, educational services, and non-profit businesses to further the development and well-being of society — without the burden of taxes.

In order for your organization or business to qualify for tax-exempt status, it must be completely non-profit and organized as either a trust, corporation or unincorporated association with your state.

“Non-profit” means that no private individuals can own the organization and receive personal profit or income from it. It’s considered to be owned by the general public and is monitored by a board of directors. Specific non-profit laws differ by state, so the specific guidelines vary.

Special Allowances

Although for-profit businesses are not allowed to claim tax-exempt status, you may be able to set up a separate corporation for the portions of your business that are charitable. You can also create a non-profit organization that owns and oversees your for-profit business.

As long as profits are used to further the charitable activities of the non-profit, they’re tax-exempt. In short, a non-profit organization can own a for-profit, but a for-profit business cannot “own” a non-profit.

Getting Approved

The most important rule to getting approved for tax-exempt status is to fill out all the appropriate forms and provide all necessary information required by the IRS.

Doing a sloppy job of filing for tax-exempt status is a surefire route to a denial. If you have questions or are uncertain of anything, seek the help of a tax professional before filing. If your request is denied, you have the option to appeal it, but this process can take months, further delaying the progress and financial stability of your non-profit business or organization.

With that in mind, be aware that you must file for and obtain an Employer Identification Number (EIN) with the IRS  before you can file a Form 1023 (the Application for Recognition of Exemption) — even if you don’t have any employees. After you’ve filed and been approved for federal tax-exempt status, you may need to meet additional requirements to be exempt from state tax.

Maintaining Approval

The IRS requires tax-exempt organizations to file specific tax forms every year, and it may require additional paperwork at given times. The best way to keep your tax-exempt status is to file promptly with the correct forms and to keep meticulous records in case of an audit.

Have you ever filed for tax-exempt status? What was your experience like?

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{ 3 comments… read them below or add one }

Free Money Minute May 24, 2013 at 5:08 am

I have never filed for tax-exempt status. I can’t image anything is easy to get by the IRS. What a country we live in with the power of our government.

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zimmy@moneyandpotatoes.com May 24, 2013 at 12:14 pm

Just remember to keep all of your books in order because the IRS will still be looking at you. I honestly think there are way to many tax exempt organizations anyways and who knows how many of them are committing fraud. We should just keep the tax exempt status to only real churches and also some charities that have passed certain requirements.

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Property Marbella May 27, 2013 at 2:34 am

Why try to be tax exempt and get more of the tax authority’s eyes on you?

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