Archive for Charitable Contribution

IRS Mileage Deduction Rate Increases: $0.55.5-Business; $0.23-Medical or Moving; and, $0.14-Charitable

August 1, 2011 Business Expense, Charitable Contribution, Highway Tax, Tax Guidance & Preparation, Tax Problems & Requests

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Mileage Rate Changes

Purpose

Rates 1/1 through 6/30/11 

  Rates 7/1 through 12/31/11 

Business

51

55.5

  Medical/Moving

19

23.5

Charitable

14

14

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Charitable Contribution: Donated Real Estate

July 18, 2011 Charitable Contribution, Rental Real Estate

I have a new case involving donated rental real estate and in preparation for appeal I stumbled across the US Tax Court case of Theodore R. Rolfs, et ux. v. Commissioner 135 TC No. 24 in which the taxpayer donated a lake house with conditions to the local Volunteer Fire Department (VFD) for training purposes.  The following are my notes from reviewing the case.

The US Tax Court held that the taxpayers were not entitled to any charitable contribution deduction for the lake house because they failed to prove that the fair market value (FMV) of the lake house as donated exceeded the FMV of the demolition services foregone not withstanding the conditions of the donation that the lake house could not remain on the land on which it was sited, could not be used for residential purposes, had no value as a structure to be moved, and had no salvage value.

In 1998 the taxpayers claimed a charitable contribution deduction of $76,000 on their tax return for what they believed to be the fair market value (FMV) of their lake house as determined by a qualified appraisal which was attached to the return. The IRS denied the deduction and claimed that the taxpayer did not make a charitable contribution because the FMV of the lake house as donated with conditions did not exceed the FMV of the demolition services they received from the VFD in exchange for the donation. This is commonly referred to as the ‘quid pro quo argument.’

The Court determined that the taxpayers saved at least $10,000 in demolition costs as a result of their arrangement with the Volunteer Fire Department (VFD) in question and subsequently received a benefit with a FMV in that amount in exchange for the donation. As a result, the FMV of the lake house as donated had to exceed $10,000 for the taxpayers to claim a charitable contribution deduction for the difference.

FMV is determined at the time of the donation, measured by the willing buyer/willing seller standard. However, the FMV must take into account any restrictions or conditions limiting the property’s marketability. In this case the taxpayers had several restrictions on the property and their appraisal treated the value of the donated property as equal to the difference between the FMV of the property with the lake house and the FMV of the property without the lake house.

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Deductibility of Charitable Contributions – IRS Form 8283

March 24, 2011 Charitable Contribution

Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.  To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all non-cash contributions for the year is over $500, you must complete and attach IRS Form 8283, Non-cash Charitable Contributions, to your return.  Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser. Instructions for Form 8283, Noncash Charitable Contributions are here ->(PDF)

The biggest problems that I’ve run into lately occur when the donor also serves as an Officer of the qualified 501(c)3 organization receiving the donation and defining the degree to which benefit was received in return for the donation.  So be sure to document everything in a journal, or donate to another qualified organization.  As part of this process I also recommend checking out IRS Publication 561, Determining the Value of Donated Property (PDF 101K).

To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.  Donations of stock or other non-cash property are usually valued at the fair market value of the property on the date of the donation. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. You cannot deduct contributions made to specific individuals, political organizations and candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.  Or, Search for Charities or download Publication 78

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Guidelines for “Political Activities” by Churches and Pastors

September 27, 2010 Charitable Contribution, Church Pastor Religion, Deductible Expense, Disallowed Expenses, Tax Guidance & Preparation, Tax Problems & Requests

Lobbying activities may expose churches in some states to election law register and reporting requirements as a political committee. Many of these statutes are unconstitutional because they expose churches to intrusive regulations for a very small amount of lobbying.  The most important message I think is that Pastors need to make sure that they differentiate between acting as an individual rather than an official church representative.
The following is a list of guidelines developed by the American Defense Fund: 

  • Discuss the positions of candidates on issues-Church-Yes: Pastor-Yes
  • Endorse or oppose candidates-Church-No: Pastor-Yes
  • Financial contributions to candidates-Church-No: Pastor-Yes
  • In-kind contributions to candidates-Church-No: Pastor-Yes
  • Independent expenditures supporting or opposing candidates-Church-No: Pastor-Yes
  • Contributions to political action committees (PACs)-Church-No: Pastor-Yes
  • Payment of expenses for attendance at a caucus or state/national political party convention-Church-No: Pastor-Yes
  • Appearance of candidate at church meeting or service-Church-Yes: Pastor-N/A
  • Non-partisan voter registration activities-Church-Yes: Pastor-Yes
  • Non-partisan voter identification activities-Church-Yes: Pastor-Yes
  • Non-partisan get-out-the-vote activities-Church-Yes: Pastor-Yes
  • Non-partisan voter education-Church-Yes: Pastor-Yes
  • Lobbying for or against legislation-Church-Yes: Pastor-Yes
  • Expenditures related to state referendums-Church-Yes: Pastor-Yes
  • Distribution of Candidate surveys or voter guides-Church-Yes: Pastor-Yes
  • Distribution of Voting records of incumbents-Church-Yes: Pastor-Yes
  • Distribution of Candidate campaign literature-Church-No: Pastor-Yes
  • Distribution by others of political materials in church parking lots-Church-Yes: Pastor-N/A
  • Rental of church membership lists at regular rates-Church-Yes: Pastor-N/A
  • Rental of church facilities at regular rates-Church-Yes: Pastor-N/A
  • Political ads in Church Publications at regular rates-Church-Yes: Pastor-N/A
  • News stories about candidates or campaigns in Church Publications-Church-Yes: Pastor-N/A
  • Editorials endorsing or opposing candidates-Church-No: Pastor-N/A

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IRS Grants Tax-Exempt Status to Paranormal Group

September 16, 2010 Charitable Contribution, Non-profit

The IRS sometimes grants tax-exempt status to questionable-sounding groups, but paranormal research? What is this world coming to? All I have to say is your bogeyman still needs a valid social security number to be considered a deductible dependent.

On Saturday, a group known as the ParaNexus Anomalous Research Association Inc. announced that the IRS had approved the association’s application for 501(c)(3) tax exempt status on Aug. 24, 2010. The group noted that it submitted the application last November according to executive director Doug Kelley in the press release. A worthy read for anyone interested in pushing the limits of non-profit regulations.

The group was apparently established in the spring of 2008 and incorporated in September 2009 with nine board members comprising “seasoned professionals in the field.” According to the announcement, ParaNexus investigates haunting-type phenomena, UFO sightings, alien abductions, unknown creatures, and other types of mysterious events with a focus on the impact such events have on the human condition. The group is based in Punta Gorda, Fla., and also offers training and paranormal certification courses though something called ParaNexusAcademy.org.

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Charitable Deduction of Parochial School Tuition

September 9, 2010 Charitable Contribution, Child Tax, Education Expense, Family, Student Loan, Tax Deductible Expenses, Tax Problems & Requests, Tax Relief

Meir Katz (J.D. 2010, Georgetown) has posted The Economics of § 170: A Case for the Charitable Deduction of Parochial School Tuition on SSRN. It is fascinating.

Here is the abstract:

That payments for parochial school tuition are not deductible under § 170 is a foregone conclusion in the eyes of many tax policy scholars. Tuition provides an easy case because the donor receives something of great value in return for his donation: the education of his children. This Article questions that conclusion. By taking a close look at the economics behind these tuition payments in the context of a discrete population, the religious Jewish community, I show that traditional economic assumptions are inappropriate for analysis of those payments. Rather than a traditional economic exchange for economically valuable services, tuition payments should be characterized as payments made for unique and vital religious services-payments in exchange for an intangible religious benefit. The benefit of education, so characterized, is not different from many other intangible religious benefits for which corresponding payments are fully deductible. With that observation, I apply traditional tax policy analysis and the policy justifications for § 170 to payments for parochial school tuition and present an argument for the deduction of tuition payments.

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Charitable Donations – Tax Tips

August 25, 2010 Charitable Contribution

Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization and most will be able to tell you.

  • Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

  • You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.

  • If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.

  • Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you must maintain a record of the contribution such as a bank record – including a cancelled check or a bank or credit card statement – a written record from the charity containing the date and amount of the contribution and the name of the organization, or a payroll deduction record.

  • Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your deduction would be $200.

  • Include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

  • For any contribution of $250 or more, you must have written acknowledgment from the organization to substantiate your donation. This written proof must include the amount of cash and a description and good faith estimate of value of any property you contributed, and whether the organization provided any goods or services in exchange for the gift.

  • To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.

  • An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.

  • Links:

    Publication 78, Cumulative List of Organizations

    Publication 526, Charitable Contributions ( PDF)

    Publication 561, Determining the Value of Donated Property ( PDF)

John R. Dundon, EA – 720-234-1177 – www.1040.com/jd – jddundon@comcast.net – Enrolled with the United States Department of Treasury to Practice before the IRS – Enrolled Agent # 85353. Under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent – I am a Federally Authorized Tax Practitioner (USC 31 Section 330 + IRC 7525a.3.A) regulated under US Treasury Cir. 230.

http://prep.1040.com/jd

http://johndundon.taxtutor.com

jddundon@comcast.net
720-234-1177

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Cost Basis

May 20, 2010 1031 Exchange, Cancelled Debt, Capital Gain, Capital Loss, Charitable Contribution, Cost Basis, Cost Segregation, Deductible Expense, Depreciation, Estate Tax, Like/Kind Exchange, Passive Activity, Rental Real Estate, Tax Guidance & Preparation, Tax Problems & Requests

On October 3, 2008, President George W. Bush signed the Emergency Economic Stabilization Act of 2008. Tucked away in the Act is a provision that moves the responsibility of basis determination from the shoulders of the taxpayer to the shoulders of the securities industry. After December 31, 2010, every broker that is required to file an information return reporting the gross proceeds of a ‘covered security’ must include in the return the customer’s adjusted basis in the security and whether any gain or loss with respect to the security is short term or long term under Code Sec. 1222, Sec. 403(3)(1)DivB, PL 110-343, 10/3/2008.

There is a three-stage phase-in with the first effective date of January 1, 2011, as follows: Stock acquired on or after January 1, 2011; Mutual fund and dividend investment plan (DRIP) shares acquired on or after January 1, 2012; and Other specified securities [principally debt securities (bonds) and options] acquired on or after January 1, 2013. Because cost basis reporting only applies to securities acquired on or after the applicable effective date, brokers must sort and separate post-effective-date acquired securities from the pre-effective date securities. As customers sell their positions, brokers must have the ability to identify whether pre-effective-date or post-effective-date securities were sold in order to determine whether cost basis reporting is required. The software and accounting system mechanics of such an exercise could be difficult. Similarly, because of the three-stage phase-in of effective dates, brokers’ systems must correctly sort securities into the various categories in order to apply the proper basis rules to each and to determine correctly whether a security is a pre-effective or post-effective-date acquisition.

This effort began with the National Taxpayer Advocate’s report about the tax gap based on the 2001 filing season. The report stated that the tax gap was $345 billion. Of this amount, individual taxpayers accounted for $197 billion, mostly unreported or under reported income rather than overstated deductions or improperly claimed credits. Of that $197 billion, under reported capital gains accounted for $11 billion.

In 2006, the investigative arm of Congress, the General Accounting Office (GAO), estimated that 38 percent of all reported capital gains are erroneous. This was also verified by the work of the IRS in conjunction where 46,000 random taxpayers were audited. Net Basis was used to verify reported cost basis information on the Schedules D for the 2001 National Research Program Random Study. Hundreds of thousands of investment transactions were processed through the NetBasis system. NetBasis not only identified a significant number of Schedules D that yielded improper reporting, but it also identified $11 billion dollars in under reported capital gains taxes, which was then included in the 2006 Tax Gap Report.

Since 2005, a renewed effort has been underway to change the rules to shift this responsibility from the taxpayer to the broker. At the heart of the matter is that cost basis of securities, real estate, or other items sold was not required to be reported to the IRS by anyone except the taxpayer. According to Nina Olson, the National Taxpayer Advocate, “When information is reported to the IRS, the compliance rate is 90 percent. When it’s not reported, only 50 percent shows up on a tax return. In another statement, Olson said, “Where taxable payments are not reported to the IRS by third parties, compliance drops precipitously to a range from about 20 percent to about 68 percent depending on the type of transaction.”

Congress decided to take the responsibility from the shoulders of the individual taxpayer and place the responsibility upon the securities industry primarily brokerage firms which was spelled out in the 2008 Emergency Economic Stabilization Act.

In early 2009, the IRS released Notice 2009-17, Information Reporting of Customer’s Basis in Securities Transaction, requesting comments for guidance with respect to the reporting of a customer’s basis in securities transactions. The notice contained 36 specific issues under 8 categories. The categories included:

1. Applicability for reporting requirements. The IRS addresses concerns about who is a “middleman” subject to the broker reporting and transfer reporting statement requirements and how to minimize duplication of reporting by multiple brokers.

2. Basis method election. There are many basis method elections
(FIFO, specific identification, single-category and double-category averaging for mutual funds, and dividend reinvestment plans (DRIPs) for determining the basis of securities sold. How will these methods be applied uniformly? Will the taxpayer retain the various elections or will the brokers force a single method to simplify their reporting?

3. Dividend reinvestment plans. Can the average cost basis frequently used by mutual funds be expanded to include DRIPs? How will shares of stock acquired prior to the effective date for DRIPs (January 1, 2012) be melded into a suitable report after the effective date of basis reporting for stocks (January 1, 2011)?

4. Reconciliation with customer reporting. How will the taxpayer’s
Form 1040 Schedule D be reconciled by a broker’s basis reporting if the basis method elections are different? If a workable solution is not found, the objectives of taxpayer help and audit administration could be defeated.

5. Special rules and mechanical issues. This category deals with the variety of issues associated with wash sales, options, changes in timing for reporting proceeds from short sales, adjustments to basis for original issue discount (OID), market premium, discount and additional special basis adjustment rules.

6. Transfer reporting. When a taxpayer transfers his or her account from one broker to another, what information is required to be in the customer account transfer (ACAT) reporting? Due to the staggered effective dates, what will be the cost basis computation and reporting obligations for brokers under the law? What is the proper period for furnishing transfer reporting statements? How soon will the transfer information be required to be available to the successor broker?

7. Issuer reporting. When a corporation merges, splits, spins off, etc., there is generally a notice advising the taxpayer of any taxable consequences of the corporate action. Now that brokers are responsible for cost basis information, who will ultimately be responsible for providing the taxpayer with a tax opinion or a tax disclosure statement? How soon?

8. Broker practices and procedures. The cost basis reporting law presents some additional obligations and potential penalties to brokers. What responsibility does a brokerage firm or mutual fund have to make sure that the cost basis numbers they send are as accurate as possible? When does a broker have to start correcting numbers or looking for more information?

What initially appeared to be a simple solution to provide cost basis following the sale of a security really isn’t because the effective dates of the new law are staggered, the fact that acquisitions prior to the effective dates are not part of the solution, and that mutual funds, stocks, and bonds are only a part of the assets that can be acquired or sold.

John R. Dundon, EA – 720-234-1177

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Deducting Charitable Contributions

April 5, 2010 Charitable Contribution

When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. If you made qualified donations last year, you may be able to take a tax deduction if you itemize on IRS Form 1040, Schedule A. The IRS has put together the following 10 tips to help ensure your contributions pay off on your tax return.

  1. Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.

    You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.

  2. If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

  3. Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles.

  4. Clothing and household items donated must generally be in good used condition or better to be deductible.

  5. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution, and the amount given.

  6. To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.

  7. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.

  8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.

  9. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.

  10. For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining value, refer to Publication 561, Determining the Value of Donated Property.

Links:
Search for Charities or download Publication 78, Cumulative List of Organizations
Publication 526, Charitable Contributions (PDF 178K)
Publication 561, Determining the Value of Donated Property (PDF 101K)
Form 1040, U.S. Individual Income Tax Return (PDF 176K)
Schedule A, Itemized Deductions (PDF)
Form 8283, Noncash Charitable Contributions (PDF)
Instructions for Form 8283, Noncash Charitable Contributions (PDF)

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501(c)3 Tax Exempt Entity creation

March 22, 2010 Charitable Contribution

Just as with all other types of business organizations, a certificate of incorporation must be drafted and filed with the secretary of state. In this document the organizers must come to a mutual agreement as to the purpose(s) of forming a tax exempt organization. This includes:

  • The activities it will conduct;

  • Who are the intended beneficiaries and how they will be selected;

  • How the funds will be raised;

  • Who will be managing the organization;

  • The appropriate section of the tax law the organization will be formed under;

  • The location or general area(s) the organization will be operating from; and

  • The plan in the event dissolution takes place.

Assuming the certificate of incorporation is approved and a receipt from the secretary of state is received, you need to obtain a stamped copy of the certificate of incorporation—one with the state’s stamped code number on it to submit with the application to IRS.

One of the first reasons for IRS rejecting an application is not submitting that stamped copy with the application. The IRS does not want the stamped corporation filing receipt which is merely a receipt for paying the filing fee. Although commercial incorporation kits are available and can be done on a do-it-yourself basis, it is strongly advised to consult with an attorney or enrolled agent with the US Treasury in the preparation of the certificate of incorporation as he or she has the knowledge and/or experience in knowing how to prepare such a document for incorporation acceptance by the secretary of state.

Once you have received approval by the secretary of state, the next step is obtaining the employer identification number (EIN) from the IRS and all other state-required application forms. This includes obtaining knowledge of the state filing requirements with the state’s office of the attorney general.

A word of caution: While tax exempt status refers to not having to pay income taxes, it has a different connotation when referring to “tax exempt” for state purposes. The reason for it is because, although still recognized as tax exempt for income tax purposes, it normally, in reference to state purposes, means exempt from having to be subject to state sales and use taxes. Here again, it is advised that once recognized as tax exempt by the IRS, you need to find out how to obtain the state exemption number for sales and use tax purposes. In most instances, it is not the same as the EIN.

Application to IRS

Sec. 501(c)(3) organizations complete Form 1023, while all others complete Form 1024. Both of these forms can be downloaded from IRS’ website. Form 1023 was last revised in June 2006 with some changes made in January 2009.

Notice 1382, which comes printed with the form, notes the changes in the various sections that need to be made in answering certain questions. When submitting either form, an application user fee must be submitted as well as Form 8718 (User Fee for Exempt Organization Determination Letter Request). User fees for applications are:
• $400 for organizations whose gross receipts are $10,000 or less annually over a 4-year period;
• $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period;
• $3,000 for a group exemption letter.

Cyber Assistant, which is a web-based software program designed to help 501(c)(3) applicants prepare Form 1023, will become available sometime in 2010. If using Cyber Assistant, the fee is reduced to $200 for organizations using it (regardless of size) and $850 for all other organizations not using Cyber Assistant to prepare Form 1023.

Content of Forms 1023 and 1024

As stated before, Form 1023 is used exclusively for organizations wishing to obtain their tax exemption under Sec. 501(c)(3). The form is twenty-six pages long; however, not all sections are required to be completed, as certain sections pertain to specific types of 501(c)(3)s. For example, there is a special section pertaining only to schools. The majority of the questions are of the yes/no checkoff type. However, there are many questions that require detailed descriptive information depending on your answer.

It is important when answering and providing information that you submit with the application copies of the organization’s bylaws, procedure manuals, membership newsletters, program promotional brochures, program application information and procedures, and any other literature that would prove and verify the existence of a well-organized, well-planned, well thought-out business operation.

Overall, the main sections request answers to organizational structure, compensation arrangements with officers, directors, employees and independent contractors, any non arm’s length business arrangement either for or from the organization, conflicts of interest, fundraising activities (especially if there are joint ventures involved), policies regarding discrimination in operating, and any business relationships with other tax exempt organizations, etc.

There are only two sections that ask for financial data. One section requests estimates of revenues and expenses for at least three years. Depending upon how long the organization is in existence will determine how many years’ data is requested. The reason for this is that not all organizations file an application for exemption immediately. There is a 27-month time frame starting from the earlier of the postmark date of the application or from the date of incorporation or formation to determine eligibility for tax exemption under Sec. 501(c)(3).

A word of caution: While tax exempt status refers to not having to pay income taxes, it has a different connotation when referring to “tax exempt” for state purposes. But the most critical section is Part X which determines how the organization is classified—either as a private foundation or as a public charity. And if a private foundation, is it a private operating foundation? In other words, from what source(s) does the organization obtain the bulk of its funding—the general public with possibly some government grants or private donors who comprise the majority of the funding source? How you answer these critical questions determines how the IRS will classify your organization.

The last page of Form 1023 provides a checklist of instructions to guide you in the proper filing of the application.

Form 1024 (last revised in September 1998) is nineteen pages in length. Just as on Form 1023, not all sections pertain to every type of exempt organization, as certain types of organizations have special requirements so no entity must complete every section. The questions still focus on identifying the nature of the organization’s purpose, administrative setup, the sources of support, administrative structure, and so forth.

The financial information requested is the same as in Form 1023. However, the major difference between the two forms is that Form 1024 requires more narrative descriptions and provides ample space to provide extensive detailed answers. This is where having a person well-versed in providing complete written explanations to questions would be helpful. Just as with Form 1023, at the end there is a checklist of instructions to provide guidance in filing.

IRS Review

Once the application, all attachments, and the appropriate user fee have been submitted to IRS, you now have to wait for the IRS to assign your application to a case worker, called an exempt organizations specialist, who will scrutinize the application and review all documents submitted.

If there are any deficiencies in answering any of the questions, you will be sent a detailed reply specifying which questions need further detail and/or what was insufficient. As with all other IRS correspondence, you will be given a specified time in which to respond. There is no specified time in which the IRS is required to respond. Applications can take as short as a couple of months.

Once the IRS is satisfied that the organization meets the criteria for becoming a recognized tax exempt organization, the organization will receive the Letter 1045 which states in the first sentence:

“Dear Applicant: We are pleased to inform you that upon review of your application for tax exempt status we have determined that you are exempt from Federal income tax under Section
501(c)…” Thus, a tax exempt organization has been formed.

IRC Code Sec. 501 permits entities that are organized for the purpose of providing specific types of activities for society’s needs to obtain tax exempt status. However, in order to obtain that status, an organization is required to establish organization papers, known as articles of incorporation, as well as complete an extensive, fully-comprehensive application to assure the IRS it is worthy of receiving tax exempt status.

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