Tax Advice For Non-Profit Groups From Someone Who’s Been There

Jodi Today
Co-Founder — North Texas Strive

 

FALL 2018 ISSUE:
SMALL BUSINESS MATTERS

Making the decision to start your own not for profit organization is not to be taken lightly. The process is one that takes hours of researching, days of preparing, months of watching the mailbox for your final exemption letter, and a lifetime of maintaining and updating records. There are many different reasons people decide to apply for federal tax-exemption under the Internal Revenue Code Section 501(c)(3). Most people get discouraged with all the paperwork and often it falls to the wayside, never to be touched again. The application process, if not followed to the exact specifications of the IRS, will result in a delay. Because of this, I call Form 1023 the ultimate piece of delayed gratification. Organizations struggle through filling it out, proofreading, then waiting until they receive any news regarding the next steps they must take. Hopefully, the application is approved on the first try. The delays are frustrating because they represent missing substantial savings on tax exempt purchases, or corporate “In-Kind” or matching gift programs.

The IRS receives up to 70,000 applications each year (1).1 They are carefully reviewed for legitimate tax-exempt status requests. If an application is delayed after waiting 180 days from its submission, applicants can call 877-829-5500 to check the status.2 Organizations that are qualified to fill out the Form 1023EZ, one of the IRS’s newest and much needed digital tools, only have to wait 90 days before they can call to check the status of their 3-page, $400 submission. If the application is rejected for revisions, it is like stepping out of line on Black Friday and being moved back to the very end of the line. The organization must then correct their application and start at the beginning again.

Although I have a few colleagues whose application was rejected, fixed, and provided with a revision letter a month later, that was not the case for the non-profit where I sit on the board. We filled out the application ourselves and saved money by not seeking legal advice. We figured there are rows and rows of books and websites that lay out the exact steps needed to properly fill out the monster 26-page form, right down to the address you send your hard earned $850, so how hard can this be? Looking back, the best advice I have is to stay organized and remain diligent.

The IRS advises to allow 90 hours of preparation time to assure the form is filled out correctly and completely.3 The entire process of filling out the twenty-six-page Form 1023 can be discouraging to smaller groups that don’t have the budget to hire a lawyer to assist in completing the 501(c)(3) process. In light of this, the IRS recently unveiled a FORM 1023EZ that is only 3 pages long. This was a pleasant surprise to smaller organizations that wanted to apply for tax exempt status. According to the IRS, in August there was a backlog of 60,000 applicants waiting for decisions on their 501(c)(3) applications. The best part of this form is that it is all done online. I hope this is just the beginning of the e-submit era for the IRS because it could greatly benefit from a complete digital remodel.

An additional, and much-needed, digital addition to the IRS for maintaining a 501(c)(3) is an instantaneous electronic version of Form 8822-b. This form is used by a non-profit to change its address or the identity of its responsible party. In our company’s case, we were recently made aware that the change of address for our 501(c)(3) was never processed. A donor contacted me to verify our mailing address when a check her company mailed for an employee matching grant donation was returned due to an invalid address. Her Fortune 50 company, like most other publicly traded companies, used GuideStar to provide the mailing addresses. GuideStar is a trusted third party directory whose data is comprised of the IRS Business Master File, IRS Forms 990/990EZ/990PF, and information provided by the nonprofits themselves. This public data is often used to verify everything from mailing addresses to financial transparency. Upon learning that our original address was no longer valid, I contacted the executive director to begin sorting it out. We had to fill out a form 8822-b, mail it via USPS to Ogden, Utah and wait to have the address updated. Due to a personal move, the change of address on a personal tax form was also carried over to the Form 990 tax filing of our organization. We reached out using the 800-number referenced earlier to try to track down the issue and resolve it in a timely matter. However, that was not the correct venue, so we filled out another form 8822-b to submit through the USPS. A tax deadline was upon us so we just used the new current address on our Form 990, which was rejected because the addresses did not match up. Everything we previously read stated that either using the Form 8822-b or submitting the new address on the tax form would suffice for making a change of address. We finally reached a customer service rep from GuideStar who was able to request a change of address on behalf of their client—my organization. The entire process to get the address accepted and then updated on the GuideStar website took upwards of five months.

Our address is now correct with both the IRS and GuideStar, and we look forward to a new year of corporate match gifts. This lengthy process would have been easily resolved with a simple online update tool that is directly linked to the IRS. This revision would undoubtedly be much more complicated than simply adding a button or link. The security measures on the IRS website alone would take far more than a few “clicks” to create. But, regardless of how it is built, it is something that the IRS needs to upgrade. For all of the hassle and difficulty associated with creating a tax exempt entity, the advantages of having a 501(c)(3) status can still be worthwhile—just plan appropriately.

 


Sources

Doug White, The Nonprofit Challenge: Integrating Ethics into the Purpose and Promise of our Nation’ Charities 45 (2010).

2 Where's My Exemption Application, IRS, https://www.irs.gov/charities-non-profits/charitable-organizations/where....

3 Instructions for Form 1023, Department of the Treasury Internal Revenue Services, 25 (2013), https://www.irs.gov/pub/irs-pdf/i1023.pdf.

The information and opinions published by Accessible Law are offered for educational purposes only and should not be construed as legal advice.

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