Applying for tax exemption with IRS

Having filed the articles of association and the by laws of the new organization with the secretary of state, it is then time to apply for tax exempt status under section 501(c) (3) with the Internal Revenue Service which looks after tax related matters in the United States.

To grant tax exemption, the application is assessed against the Internal Revenue Code of IRS which in itself is a pretty exhaustive code. However the underlying concept remains the same.

The assessment is primarily conducted to ascertain whether the activities of the proposed organization are ‘Charitable’ in nature.

The application process involves filing in two applications –
1) Application for receving an Employee Identification number.
2) Application for receiving the tax exempt stauts for the organization.

There is a small application fee to be paid

Employer Identification Number (EIN) (also called Federal Tax Identification Number) is manadatory for non profit organizations (and all businesses) if it employs people and is the first criteria to be met for applying for a tax exempt status with the IRS.

After the EIN is alloted, the application for tax exemption is put up for assessment.

The application for tax assessment is to be submitted with an atatchment that describes the non profit organizations past and current activites and a brief narrative on the planned future activities of the organization. It is a good idea to supplement this annexure with copies of images, news publications, brochures and other documents that support the application.

The IRS authorities may also consider inspecting the work in actual during the assessment process. Therefore the annexures should provide a true and accurate picture of the actual activities.

The application form is to further accompanied by a tabular representation of compensation payable to the directors, trustees and officers of the organization. Any other financial arrangement involving the members is also to be clearly specified in the application process.

Typically, a non profit organization is not expected to constiute of more than one person from a family. They should also not be any blood relation between the members. If however the board consists of related members, this needs to be disclosed and suitably explained in the application for tax exemption.

The application form is to be accompanied by the ‘conflict of interest policy’ of the organization and must be in aggrement with the policies laid down in this regard by the IRS.

Another important annexure required to be filed with the application form pertains to the proposed fund raising activities of the organization.

The next section of the application form consists of presenting the financial data for the non profit organization in a provided format. To complete this section, you will require the services of a qualified accountant. An organization that has exsited for three years or more needs to furnish the actual figures. New start-up non profit organizations have to instead furnish financial statements for the current year and proected budgets for the next two years.

Besides these details, the application form consists of several small questions that need to be completed before submitting the form for assessment.

IF the application is error -free (duly filled up with all details), it usually takes around 1-2 months time to complete the assessment and award tax exempt status to a non profit organization.

For more information about the process click here.