Your organization can indeed be a nonprofit organization within your state but not be tax-exempt with the IRS. The only way to obtain FEDERAL 501(c)(3) tax-exempt status is to file IRS Form 1023. I've done this many times and felt compelled to blog about it today because the general confusion in these regards is astounding and the fees some charge to help organizations obtain this status can be shameful.

Before filing IRS Form 1023 the first step in forming a nonprofit is to comply with all state laws governing nonprofit organizations. State laws vary, some states require the State's Attorney General get involved. For the most part you will file Articles of Incorporation or a similar document with the Secretary of State. You may also be required to include a set of bylaws for the organization along with an assortment of other documents and fees. Each individual state has subtle differences. Know your state laws first!

Next you should apply for an Employer Identification Number (EIN) by completing and filing IRS Form SS-4. This can be done online through the IRS website or on the phone or via fax. The IRS has proven to be remarkably efficient in issuing EIN's.

Next form a board of directors and establish bylaws. The board of directors must meet to elect officers, adopt the bylaws and conduct any other foundation type business. It may be necessary to submit some of these foundation documents as part of the organization’s Form 1023 filing. Keep minutes of all board meetings and other formal or informal business meetings.

Now you are ready to file IRS Form 1023. It is an elaborate and time-consuming 30 pages long . In order for the IRS to accurately determine tax-exempt eligibility, the form must include a great deal of information. This form usually takes a lot of communication with the IRS before a final determination is made. Once a determination letter is received from the IRS, keep this very important document with your organization’s permanent files to be referred to for various reasons in the future. BELIEVE ME!

Organizations with annual gross receipts that do not exceed

$10,000 over a four-year period will need to submit a $400 user fee with IRS Form 1023. Organizations with annual gross receipts that exceed $10,000 over a four-year period must submit an $850 user fee. Some nonprofits neglect to pay this fee when they file Form 1023 which substantially delays the process.

Also certain policies need to be in place to obtain tax-exempt status for the organization. If these policies are not adopted, attachments to the Form 1023 must explain why. 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

• Whistle Blower Policy

Once 501(c)(3) status is obtained, the organization becomes liable for filing an annual information return known as the IRS Form 990 series. All tax-exempt nonprofit organizations are required to file this form every year, although a few exceptions (i.e., churches) apply. Form 990 is another complicated form, which was most recently revised, and is due annually by the fifteenth day of the fifth month following the end of the organization’s tax year which is usually May 15th. I strongly recommend reading the instructions to the IRS Form 990 series.

Another misunderstood aspect of a nonprofit’s required filings is in the area of employment taxes. Although a tax-exempt organization does not report and pay income taxes, it may be liable to report and submit employee payroll taxes if it has employees. This is done on IRS Form 941.

A newly formed 501(c)(3) organization will be classified as a publicly supported charity as opposed to a private foundation if it can show that it reasonably can be expected to be publicly supported when it applies for tax-exempt status. Beginning with the organization’s sixth taxable year however it must establish that it meets the public support test by showing that it is publicly supported on its Schedule A to Form 990, Return of Organization Exempt From Income Tax.

Just like every business, all nonprofit organizations should maintain a proper set of books that accurately reflects its fund balance account. The fund balance account is essentially the equivalent of a business owner’s equity account. It shows the net balance of equity for the organization. This account differs from a business account in that your organization’s net balance accumulates and is used for the mission of the organization.