How to Start a Nonprofit | Step 4: Filing for Federal Tax-Exempt Status

As noted in prior steps, the National Council of Nonprofits does not provide legal assistance for organizations seeking assistance with their application for tax-exemption. We recommend you review IRS StayExempt Tutorials that offer background on what it takes to become a 501(c)(3) organization that is recognized by the IRS as tax-exempt. See also IRS Publication 557. 

The user fee for applying for tax-exempt status depends on which form is filed but please don't decide which form is appropriate based on the cost of the filing fee. The decision which form to file is an example of why legal assistance is important at this stage of the process.

• Starting a nonprofit: Form 1023 or Form 1023-EZ? (NEO Law Group)

First Things First. Does The Organization Have an Appropriate Legal Form?

For the Internal Revenue Service (the IRS) to recognize an organization's exemption, the organization must be organized as a trust, a corporation, or an association. (It is possible for unincorporated associations to gain recognition as a tax-exempt organization, but not having a corporate form could expose all those volunteering for the organization to legal liability, so we highly recommend seeking legal advice before going this route.) Read about state law requirements for creating a nonprofit corporation.

Links to federal forms

• Form SS-4: Federal Employer Identification Number ("EIN") (needed for IRS, banking, hiring staff etc.)
• Form 1023-EZ - For small organizations with gross receipts of $50,000 or less and assets of $250,000 or less (exceptions include churches, schools, and organizations with mailing addresses outside the US). The fee to file the Form 1023-EZ is $275 (as of 7/1/16). But see our reservations about the Form 1023-EZ, below.
• Eligibility Worksheet / Instructions for Form 1023-EZ
• Recommended reading for any groups considering utilizing Form 1023-EZ - IRS Form 1023-EZ – Traps for the Unwary (Charity Lawyer)
• Regular Application for Tax-Exemption (User fee is $600):  IRS Form 1023
• Instructions for Form 1023
• Power of Attorney: IRS Form 2848
• IRS Form 5768: Also known as the "501(h) Election to Make Expenditures to Influence Legislation"
  • What is the (h) Election?
  • Benefits of the (h) Election
  • Why it's important for your nonprofit to engage in advocacy

Please note: The IRS requires the individual who files the application for tax exemption (if he or she is not an attorney or CPA) to register with the IRS.

A sampling of what concerns us about the Form 1023-EZ

• In a sample reviewed by the National Taxpayer Advocate, over a third of the applications for tax-exemption using the Form 1023-EZ were from organizations that did not meet the basic requirements, yet the IRS still approved them as tax-exempt public charities under Code Section 501(c)(3)! The New York Times quoted Nina Oson, the National Taxpayer Advocate, as saying that the new Form 1023-EZ is 'effectively making a mockery' of the IRS' supposed oversight function for determining which applications for tax-exemption are derserving of that status.
• Applications for tax-exemption are approved without any requirement to prove that the organization actually exists or describe the organization’s planned activities, or financial data, or any other explanatory material.
• One year after the 1023-EZ was introduced, more than half (58%) of all applications for tax-exemption were using the EZ version of the form. Source: Study of Taxpayers that Obtained Recognition as IRS Section 501(c)(3) Organizations on the Basis of the Form 1023-EZ

The process of receiving a determination letter from the IRS may take anywhere from a few weeks to several months, and may require submission of additional information to the IRS for them to rule on your application. Once you have received your determination letter from the IRS, it is time to move on to Step 5 | Heavy Lifting: Ongoing Reporting and Compliance.

However, be aware that even before your nonprofit has received recognition as tax-exempt by the IRS it may be required to file tax returns in the state where it was incorporated. For instance, if an organization in that situation (incorporated but not yet tax-exempt) has income, the income should be reported. We encourage you to check with tax preparation professionals for advice.