Making a Difference – One Nonprofit at a Time

For our clients who need to set up a nonprofit, they need to know the steps to take and the proper order in which to do them.

I find great joy as an EA by helping people with hearts for charitable purposes establish a nonprofit organization. For our clients who need to set up a nonprofit, we need to have the tools to serve them. Here are some tidbits that will help you better serve your clients needing expertise in this area.

First of all, keep in mind that nonprofit organizations, by definition, exist to benefit the public or a broad segment of society, not to benefit the owners. Nonprofit organizations have a board of directors, officers, and/or employees, but do not have owners as a for-profit enterprise does. Their dream drives them to a higher purpose.

Once such a client determines the need to establish a nonprofit organization to accomplish a charitable mission, they need to know the steps to take and the proper order in which to do them. By following these crucial steps in the following order, we can serve the organization and enjoy fulfillment in knowing that we have partnered with someone for a greater good.

Organizational Meeting and Documents

Your client must form the organization with a Board of Directors and establish bylaws. The Board of Directors must meet and elect Officers, adopt the bylaws, and conduct any other foundational business as it deems necessary.

Some of these foundational documents may be necessary to submit as part of your Form 1023 filing. Minutes should be kept of all organizational board meetings and other formal or informal business meetings.

State Filing

The first step in starting a nonprofit rests in complying with all state laws relating to its formation. State laws vary in their procedures for establishing a registered nonprofit. Find out what your client’s particular state requires and follow this procedure.

Typically, this will include the filing of articles of incorporation (or some similar document). It may also include submitting a set of bylaws for your organization, along with other documents the individual state may require.

Be sure to find out about the state’s filing fees as well, and tender these with the appropriate documents.

Federal Filings

New EIN

Once your client has received approval from the state, the first federal filing they will need is to obtain a new Employer Identification Number (EIN) for their organization, as it is now its own entity. To receive the new EIN, complete and file Form SS-4 with the Internal Revenue Service (IRS).

One caution I offer, from my decades of experience: do not complete Form SS-4 and obtain an EIN until your client has officially been approved and registered in their state by receiving certified documentation from their state’s regulatory office. This will save time for you and your client if any problems or differences arise before receiving the state’s certification.

Form 1023/1023EZ Tax-Exempt Application Filing

After receiving the client’s new EIN, then the organization must file Form 1023/1023EZ with the IRS, if this client wishes to obtain 501(c)3 tax-exempt status..

Keep in mind that, while all tax-exempt organizations are nonprofits, not all nonprofits are tax-exempt. An organization can be a nonprofit organization with their state but not be tax-exempt with the IRS. The only way to obtain tax-exempt status for a nonprofit is to file the Form 1023/1023EZ with the IRS.

In my more-than-thirty years of tax practice experience, I have seen this mistake more than once. As many tax professionals well know, a new corporation may think it has been granted S-Corporation status but, if a Form 8832 or 2553 has not been filed, it is not an S-Corporation. Some nonprofits make a similar mistake by neglecting the Form 1023 series. The 1023 form signals to the IRS that this organization wishes to be tax-exempt.

In 2014, the IRS simplified the application process for many filing for tax-exempt status. They introduced a shorter and simplified Form 1023EZ, which many nonprofits will qualify to use.

The instructions for Form 1023EZ include an eligibility worksheet that you and your clients will use to determine if they are, in fact, qualified to file this easier form to apply. If qualified, this simpler form must be completed electronically online and its user fee (currently $400) must be paid online. Once this is done, the IRS will respond in expedited time over the long-form Form 1023 processing time.

For those who do not qualify to file Form 1023EZ, the long Form 1023 is an elaborate and time-consuming form to complete. In order for the IRS representative to accurately determine tax-exempt eligibility, much information is requested.

Instruction on the completion of this form exceeds the scope of this article, due to its complexity. Be aware that the document totals approximately 30 pages, some of which may or may not be applicable to your client. But all applicable pages must be completed, along with supporting or additional documents as required.

Follow the instructions for this form entirely, as well as supplying all requested and additional documentation with the form. In my years of experience, I have learned some of the specific documents that, though they are not required, will be requested by the IRS in a follow-up letter. Therefore, I send them with my initial submission, hoping to expedite the process.

Also, note that, rarely does this form get accepted without any follow-up. It can take a series of back-and-forth communication to get the final approval, but I have always found the IRS agents helpful and sincerely desiring to do the right thing. It’s just a matter of accurately answering all of their questions and establishing for them the legitimacy of your client’s application for tax-exempt purposes.

Once you and your client have supplied all the necessary information for the IRS to make the determination by filing either the Form 1023EZ or the long Form 1023, your client’s organization will receive a determination letter. Make sure your client knows to keep this document with their permanent files, as it is very important and will be referred to for various reasons in the future.

A user fee, currently set at $400 or $850, must accompany the Form 1023EZ or Form 1023 application in order for the application to be considered duly filed.

Other Considerations

Required Policies

Certain policies need to be in place to obtain tax-exempt status for the organization. If the required Policies are not adopted, attachments to the Form 1023 must explain why they are not. The IRS may decide not to issue tax-exempt status if the policies of the organization do not satisfy its requirements.

Crucial policies to adopt include:

  • Conflict of Interest Policy
  • Dissolution Policy
  • Whistleblower Policy
  • Private Inurement Policy
  • Record Retention Policy

More information about these can be obtained from the instructions for Form 1023, including the policies which are required. The organization’s board of directors may decide to implement other policies as it deems fit as well, but the above policies are highly recommended.

Additional Items to Submit with Form 1023

Although the IRS may request other information or documents, I have learned that it will require, or at the very least request, the following:

  • A complete copy of your organization’s bylaws
  • Resumes of all board of directors
  • Required policies
  • Other statements or explanations as may be necessary to explain certain items on the Form 1023

I recommend attaching these, and all other required documents, to the original Form 1023 when filed. This tends to expedite the approval process. Make sure that all attachments match to the Form’s correlating sections through proper cross-referencing in the attachments.

Form 990 Series

Once 501(c)3 status is obtained, the organization becomes liable for filing an annual information return known as the Form 990 series. Most tax-exempt nonprofit organizations are required to file this form every year, although a few exceptions (such as churches) apply.

By understanding these processes, you can begin to offer much-needed guidance to up-and-coming nonprofit organizations that have a dream but need your help to fulfill it. You can then feel good about investing in a good thing that can be of great benefit to others – by helping one nonprofit at a time.


pic-of-kay24About the Author:

Kay Mortimer is an active Enrolled Agent with a Bachelor’s Degree in Accounting and over 26 years’ experience in taxes, mostly specializing in nonprofits, churches, ministers’ taxation, and small businesses.

She is the author of “Preparing Tax Returns for Ministers,” and has written and taught professional tax CPE classes locally, regionally, and nationally. Her writings have appeared in tax trade journals and tax software CPE materials, as well as online venues.

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