Operator Greetings, welcome to the IRS Webinar when Applying for Exemption. I'll now turn the conference over to Susan, IRS representative. Thank you. You may begin. Susan - IRS Representative Hello, I'm Susan. Sean - IRS Representative And I'm Sean. Susan and I are Determination Specialists with the IRS Exempt Organizations, also known as EO, Determinations Office. We're here to provide an overview of how to apply for tax exempt status. Susan - IRS Representative Our first objective is to explain what steps to take before applying to the IRS for tax-exempt status. Next, we'll briefly discuss the various types of tax-exempt status available under the Internal Revenue Code and which forms are used to request them. And finally, you'll learn how to apply for tax-exempt status, including tips to shorten the application process. Sean - IRS Representative Before we get started, here's a reminder, tax exemption under the Internal Revenue Code is a matter of federal law. Although most federal tax-exempt organizations are non-profit organizations, organizing as a non-profit organization at the state level, doesn't mean an organization is automatically exempt from income tax at the federal level. Susan - IRS Representative Yes, non-profits and tax-exempt organizations are not the same things. To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code, or IRC. However, the organization may also wish to seek exemption from state taxes. The National Association of State Charity Officials maintains a website that provides informational links to the various states for these purposes. It can be accessed at nasconet.org. Sean - IRS Representative Let's get started on the process of applying to the IRS for tax exempt status. Before you apply, you must take a few steps. First, create a corporation limited liability company, unincorporated association or trust. Let's talk about those. Susan - IRS Representative In general, a corporation is formed under state law by filing articles of incorporation with the state. The states decide which agency or office is responsible for handling this process in their state. In Kentucky, for example, articles of incorporation are filed with the Secretary of State. A limited liability company or LLC, is a hybrid structure that generally shields its members from personal liability for the debts and liabilities of the LLC. It's allowed by state statute, and each state has its own requirements. For our purposes, an LLC that files for recognition of exemption is treated for federal tax purposes as a corporation rather than a partnership or a disregarded entity. Sean - IRS Representative In general, an unincorporated association is a group of persons banded together for a specific purpose. To qualify as exempt under federal law, the association must have a written document, such as articles of association or constitution, showing its creation. At least two persons must sign the document which must be dated. Susan - IRS Representative And the trust is a three-party arrangement where the founder of the trust, usually referred to as the grantor, donor, or settler, transfers legal title of the trust property to a trustee to hold and manage for a third-party (the trust beneficiary) in accordance with the grantor's intent. Sean - IRS Representative The two common types of trusts submitted by organizations seeking exemption are testamentary trusts, which are created by a will that takes effect at the grantor's death, and inter vivos trusts which are created during the lifetime of the grantor. For our purposes, the trust must be irrevocable, which is to say the grantor can't have the power to modify, amend or terminate the trust for any use. Also, the trust document must be executed by the grantor. Susan - IRS Representative After legally forming, gather your organizing documents, including any amendments. Most applications for exemption must include an exact copy of the organizing document. The Form 1023-EZ is one exception here. Common organizing documents include articles of incorporation for a corporation, articles of organization for limited liability company, articles of association or other similar document for an association or trust agreement or declaration of trust for a trust. If your organization doesn't have an organizing document, it won't qualify for exempt status. Sean - IRS Representative Like we discussed earlier, confirm your state's registration requirements when you form your organization. You may be required to take other action. Susan - IRS Representative The last step to take before applying to the IRS for tax-exempt status is to obtain an employer identification number or EIN for your organization.

To learn more about applying for an EIN, visit irs.gov/ein. The IRS uses EINs as a unique identifier, similar to a social security number for an individual, but does not issue tax exempt numbers. Those are issued by certain states to organizations exempt from state sales taxes.

Again, that's a matter of state rather than federal law. Sean - IRS Representative That's an important distinction. Once you follow the steps we talked about, you'll need to determine the type of tax-exempt status you want. Most applications we received involve request for exemption under IRC Section 501(c)(3), which describes organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. Susan - IRS Representative Unless an exception applies, a prospective charity must file Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, or Form 1023-EZ if eligible, to obtain recognition of exemption from federal income tax under Section 501(c)(3). Form 1023-EZ is the streamlined version of Form 1023 and will be referred to as the EZ hereafter. Any organization may file Form 1023 to apply for recognition of exemption from federal income tax under Section 501(c)(3).

However, only certain organizations are eligible to file the EZ, we'll talk a little more about those requirements later. Sean - IRS Representative Susan mentioned exceptions for filing Form 1023. The following types of organizations may be considered tax-exempt under 501(c)(3) without filing an application, searches including synagogues, temples and mosques, integrated auxiliaries of churches and conventions or associations of churches, and public charities that have gross receipts in each tax year of normally not more than $5,000. For more information on gross receipts exceptions, go to irs.gov/charities and search "gross receipts test." Susan - IRS Representative Even though those organizations aren't required to apply for recognition of exemption, they may choose to request that recognition, and if the IRS reviews and approves the application, the organization will receive a determination letter stating they're recognized as exempt under Section 501(c)(3). The determination letter will also state whether the organization must file annual information returns or notices and will specify whether contributions to that organization are tax deductible. Sean - IRS Representative An organization seeking 501(c)(3)

status must be organized and operated exclusively for a Section 501(c)(3) purpose and none of its net earnings can inure to any private shareholder or individual. The organizing document of a Section 501(c)(3) organization must address these requirements in order to qualify. You should review the application instructions and Pub 557 for details about how to limit your purposes and meet what is commonly referred to as the "organizational test" of Section 501(c)(3). Section 501(c)(3) organizations are also restricted in how much legislative or lobbying activities they may conduct and may not engage in any political campaign intervention activity. That means it cannot directly or indirectly participate or intervene in any political campaign on behalf of or in opposition to any candidate for elected public office. Susan - IRS Representative Basically, among other requirements, a Section 501(c)(3) organization can't operate for the benefit of designated individuals or people who created the organization. While a detailed discussion of the exemption requirements for each subsection is beyond the scope of this webinar, a variety of IRS resources are available in the Charities and Nonprofits section of irs.gov that can help you learn more. You can use the web address irs.gov/charities to directly access the resources. Sean - IRS Representative If you meet the general requirements under Section 501(c)(3), we encourage you to consider using the Form 1023-EZ if you're eligible. Not every organization can apply using the EZ. It's a streamlined application for smaller organizations. For instance, organizations seeking recognition as churches, schools, hospitals are not eligible to use the EZ and must instead file Form 1023. Organizations determine their eligibility for the EZ by completing the EZ eligibility worksheet found in the instructions. Susan - IRS Representative It's very important that you complete the eligibility worksheet which consists of 30 questions before starting the EZ application. If you answer yes to any of the EZ worksheet questions, you can't use the EZ, but you can still apply using the Form 1023. Sean - IRS Representative Keep in mind that, like with any other application submitted to the IRS, submitting the Form 1023-EZ application doesn't guarantee exemption will be recognized. If your application is incomplete or not completed correctly, it may be rejected. A completed application is reviewed to determine whether the organization has demonstrated it meets the requirements to be exempt under Section 501(c)(3). You may be contacted for additional information to support your request, and the IRS also select a statistically valid random sample of applications for pre-determination reviews, which may also result in requests for additional information. If the application demonstrates the organization meets 501(c)(3) requirements, you'll receive a letter recognizing you as exempt. If the application doesn't demonstrate the organization meets 501(c)(3) requirements, the IRS would issue a determination denying the request for recognition of tax-exempt status under Section 501(c)(3). Susan - IRS Representative Moving on, Form 1024-A, Application for Recognition of Exemption under Section 501(c)(4) of the Internal Revenue Code, is used by organizations to apply for recognition of exemption under Section 501(c)(4), which provides for exemption of two types of organization. The first is social welfare organizations, which are civic leagues or organizations not organized for profit, but operated exclusively for the promotion of social welfare. Sean - IRS Representative The other type of Section (c)(4) organization is local associations of employees, which are organizations whose membership is limited to the employees of a designated person or persons in a particular municipality, and whose net earnings are devoted exclusively to charitable, educational or recreational purposes. Susan - IRS Representative An organization is operated exclusively for the promotion of social welfare, if it's primarily engaged in promoting in some way, the common good and general welfare of the people of the community. An organization described within this section is one that's operated primarily for the purpose of bringing about civic betterments and social improvements. Sean - IRS Representative A local association of employees can be exempt if the membership of such an association is limited to the employees of a designated person or persons in a particular municipality. And the net earnings of the association are devoted exclusively to charitable, educational, or recreational purposes. Susan - IRS Representative Section 501(c)(4) organizations generally aren't required to file Form 1024-A to be tax-exempt. These organizations may self-declare their tax-exempt status by operating within the requirements of the applicable code section and filing the required annual Form 990 Series information return or notice. However, organizations may wish to file Form 1024-A to receive a determination letter from the IRS recognizing their Section 501(c)(4) status in order to obtain certain incidental benefits, including public recognition of tax-exempt status. Sean - IRS Representative While Section 501(c)(4) organizations generally aren't required to file Form 1024-A to be tax exempt, they must notify the service that they're operating under Section 501(c)(4) by submitting a completed Form 8976, Notice of Intent to Operate under Section 501(c)(4) and accompanying user fee.

Notification is due no later than 60 days after the organization is established, and if the organization does not submit the notification within 60 days, a penalty may be assessed of $20 per day for each day the failure continues up to a maximum of $5,000. Susan - IRS Representative Yes, and the form must be submitted electronically, go to irs.gov and search "Form 8976" for details. Sean - IRS Representative Next, we'll discuss Form 1024, Application for Recognition of Exemption under Section 501(a), which is used to apply for recognition of exemption by organizations described in most other paragraphs of subsection 501(c). Organizations described in Section 501(c)(9) or (17) must apply on Form 1024 if they wish to be exempt. The other organizations we'll discuss may, but aren't required to, file an application to be recognized as exempt. Like 501(c)(4) organizations, these organizations can self-declare exempt status by operating as required and filing required annual Form 990 series information returns or notices.

But unlike 501(c)(4), they aren't required to file Form 8976. Let's briefly discuss the types of organizations that use Form 1024. Again, we don't have the ability to discuss these organizations and requirements for exemption in detail You can visit the Charities and Nonprofits page of irs.gov and review Publication 557, Tax-Exempt Status for your Organization, to learn more about these types of organizations and requirements for exemption. The first is title holding corporations under Section 501(c)(2).Section 501(c)(2) describes corporations organized for the exclusive purpose of holding title to property, collecting income from it, and turning over the entire amount less expenses to an organization exempt under Section 501(a). Susan - IRS Representative Section 501(c)(5) describes labor, agricultural or horticultural organizations.

Section 501(c)(5) organizations are those focused on the betterment of the conditions of persons engaged in the pursuits of labor and agriculture or horticulture. The improvement of the grade of their products and the development of a higher degree of efficiency in their respective occupations. Sean - IRS Representative Business leagues, chamber of commerce and other similar organizations are included under Section 501(c)(6). These organizations must be associations of persons with common business interests, with the purpose of promoting that common business interest. Susan - IRS Representative Section 501(c)(7) describes social and recreational clubs.

These clubs are organized for pleasure, recreation, and other non-profitable purposes. In addition to being taxed on unrelated income, a social club may lose its exempt status if it receives too much unrelated income, which includes income from non-members. Sean - IRS Representative Section 501(c)(8) and (10) describe fraternal societies, orders and associations.

Section 501(c)(8) fraternal organizations must either operate under the lodge system, or for the exclusive benefit of the members of a fraternity itself (operating under the lodge system) and provide for the payment of life, sick, accident or other benefits to members. Section 501(c)(10)

describes domestic fraternal organizations. These organizations must operate under the lodge system and cannot provide for the payment of life, sick, accident or other benefits to members.

Susan - IRS Representative Section 501(c)(9) describes voluntary employees beneficiary associations (also known as VEBAs). VEBAs are funding vehicles for certain employee welfare benefit plans. VEBAs pay life, sick, accident or other benefits to members or their dependents or designated beneficiaries. Benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone companies or like organizations fall under Section 501(c)(12). To qualify for and maintain exemption under Section 501(c)(12), a cooperative must receive 85% or more of its income each year from members. The income must be collected to meet the cooperative's losses and expenses. Sean - IRS Representative Section 501(c)(13) describes cemeteries, crematoria and like corporations. These are self-explanatory, however, note that they're distinguishable from commercial operations because their activities are limited and their net earnings can't be distributed to private shareholders or individuals. Susan - IRS Representative Small insurance other than life insurance companies or associations are contemplated under Section 501(c)(15). These organizations are subject to limitations on the amount of gross receipts they may have and also premiums must make up certain minimum percentages of those gross receipts. Sean - IRS Representative Section 501(c)(17) describes trusts providing for the payment of supplemental unemployment compensation benefits. A supplemental unemployment benefits plan must provide for supplemental unemployment benefits paid only because of an employee's involuntary separation from employment, whether temporary or permanent, resulting directly from a reduction in workforce, discontinuance of a plan or operation or other similar conditions. As we noted before, 501(c)(17), along with 501(c)(9) VEBAs, must apply to the IRS using Form 1024 in order to be exempt. Susan - IRS Representative A post, organization, auxiliary unit, et cetera of past or present members of the U.S. Armed Forces may apply to operate under Section 501(c)(19). These entities are commonly referred to as veterans organizations. At least 75% of a veterans organization's members must be past or present members of the U.S. Armed Forces and substantially all other members must be cadets or spouses, widows, widowers, ancestors or lineal descendants of past or present members of the U.S. Armed Forces or cadets. You can see Publication 3386, Tax Guide for Veterans Organizations, for more details on these organizations, including additional details on contribution deductibility and qualification of auxiliary organizations. Sean - IRS Representative Section 501(c)(25) describes title holding corporations or trusts. Among other requirements, a Section 501(c)(25)

organization must be organized for the exclusive purpose of acquiring, holding title to and collecting income from real property, and it must remit the entire amount of such income, less expenses to one or more organizations described in Section 501(c)(25). Visit the Charities and Nonprofits section of irs.gov for more information on any of these subsections. Susan - IRS Representative So we've covered that 501(c)(3) organizations apply on Form 1023 or 1023-EZ.

501(c)(4) organizations apply on Form 1024-A and the numerous other types of 501(c) organizations that apply on Form 1024. For some other types of organizations though, no application form is specified. These organizations make their request for exemption via letter. Revenue Procedure 2021-5, which is updated annually, describes what information must be included in a letter application. Like we did with Form 1024, we'll discuss some of the subsections that use a paper application. Sean - IRS Representative State-chartered credit unions without capital stock, organized and operated under state law for mutual purposes and without profit, are described in Section 501(c)(14). Susan - IRS Representative Section 501(c)(16) describes corporations organized to finance crop operations. Section 501(c)(16) provides exemption from federal income tax for corporations organized by farmer's cooperative marketing or purchasing association, exempt under Section 521, or the members thereof, to finance the ordinary crop operations of such members or producers. Sean - IRS Representative Black lung benefit trusts are contemplated under Section 501(c)(21). A Section 501(c)(21) organization must be a trust created and funded by coal mine operators to pay black lung benefits to miners or their survivors. Susan - IRS Representative Section 501(c)(26) describes qualified state-sponsored high-risk insurance organization. To qualify for exemption under Section 501(c)(26) as a state-sponsored high-risk organization, an organization must be a membership organization established by a state exclusively to provide coverage for medical care, as defined in Section 213(b) on a non-profit basis to high-risk individuals who are state residents. It can provide coverage either by issuing insurance itself, or by entering into an arrangement with a health maintenance organization. Sean - IRS Representative Qualified state-sponsored workers compensation organizations are contemplated under IRC 501(c)(27), which provides for exemption from federal income tax for qualified workers compensation reinsurance organizations. Again, please visit the Charities and Nonprofits section on irs.gov to learn more about the specific requirements and characteristics of a particular subsection. Before we move on, we also want to note that there currently is a Form 1028 that is used by farmers' cooperative to apply for recognition of exempt status under Section 521 of the Code. A farmer's cooperative is an association of farmers, fruit growers or persons with similar occupations that is organized and operated on a cooperative basis. Search "521" on irs.gov for more information about these tax-exempt organizations. Susan - IRS Representative The last step we'll talk about is applying for exempt status. Form 1023, Form 1023-EZ and Form 1024-A can only be filed electronically. To file one of these three forms, go to pay.gov and enter the term "Form 1023," "Form 1023-EZ," or "Form 1024-A" in the search box. We won't accept printed copy submissions of these applications. You'll complete and submit the application along with the applicable user fee on the pay.gov platform. For the Form 1023 or 1024-A, you'll need to upload your organizing document, which we mentioned earlier is a required part of those applications.

Sean - IRS Representative The current user fees for Form 1023, Form 1023-EZ, Form 1024, Form 1024-A, and Form 1028 are listed here per Revenue Procedure 2021-5, updated annually. All fees are subject to change under the annual revenue procedure. Susan - IRS Representative Form 1023-EZ is designed for small organizations and, as we mentioned before, is available only to organizations that cannot answer "yes" to any questions on the eligibility worksheet in the instructions. Because the 1023-EZ is a streamlined application, it is generally processed more quickly than the 1023. After submitting the EZ, or any of the applications for tax exempt status on pay.gov, you'll receive an acknowledgement notice which means the IRS has received your application. If additional information is needed, the case will be assigned to an exempt organization specialist who will contact you if necessary. Sean - IRS Representative While applications are processed as quickly as possible, the process can be delayed, however, for reasons ranging from simple errors on the application, to issues concerning the qualification of the organization for exemption, to issues outside of our control. We'll give tips later to help avoid delays in processing. If you want to check on our current application processing timeframes, go to irs.gov and search for "Where's My Application." Susan - IRS Representative Form 1024 is currently accepted only in paper form, though we plan to convert it to an electronic form as has been done with the other form applications. Like Form 1023 and Form 1024-A, a complete application includes copies of organizing documents, financial information, a detailed description of activities and more. Form 1028 is also currently accepted only in paper form. Sean - IRS Representative Organizations seeking exemption under any of the subsections that don't have a specific application, such as section 501(c)(14) credit unions, must submit a letter application to the IRS requesting exempt status along with Form 8718, User Fee for Exempt Organization Determination Letter Request, the applicable user fee and any other necessary information. You can review section 5 of Revenue Procedure 2021-5 (updated annually) which explains the specific procedures for requesting a determination letter or letter application for more details. Susan - IRS Representative Before we give you some tips that can save you time and effort, let's talk briefly about requesting expedited processing. In general, applications are processed in the order received by the IRS. Sometimes, however, the IRS will work an application outside the regular order. But for expedited processing to be granted, there must be a compelling reason to process the case ahead of others. Sean - IRS Representative Compelling reasons include the following: a pending grant where failure to secure the grant will have an adverse impact on the organization's ability to continue operating, a newly created organization providing disaster relief to victims of emergencies, and IRS errors have caused undue delays and issuing a determination letter. Susan - IRS Representative A request for expedited processing must be made in writing and must fully explain the compelling reason. Most organizations simply submit their request with their application. Granting expedited processing is at the discretion of the IRS. Sean - IRS Representative You should know though that an organization may not request expedited handling of the Form 1023-EZ. Now the tips on the application process we mentioned earlier. The number one tip to reduce delays in processing applications is to include the correct user fee. Pay the correct user fee for electronic forms, including Forms 1023, 1023-EZ and Form 1024-A, on pay.gov using a bank account, debit card or credit card. For paper forms, such as Form 1024 or letter applications, attach a check or money order made payable to the United States Treasury for the appropriate user fee. Our second tip is to attach a complete copy of the organizing document and all amendments were necessary. The exception to this rule, and some of the others that follow, is Form 1023-EZ. Susan - IRS Representative The third tip is to provide enough information about the organization's activities to show the IRS how it will achieve the exempt purpose. Don't just restate the purpose. Consider a "who, what, when, where, why and how" approach to describe past, present, and planned activities. Sean - IRS Representative Remember to complete all required pages. The information contained on each page and schedule is necessary for the IRS to make a determination about your tax-exempt status. While pay.gov will direct you to complete the required pages and schedules for electronic forms, it's up to you to complete all required pages for paper forms. Susan - IRS Representative Also, attach all required schedules and itemized lists. Some lines require supporting schedules, and financial statements sometimes demand itemized list for a particular line. Sean - IRS Representative Our sixth tip is to include the month the organization's annual accounting period ends. Generally, the accounting period ending date on the application should match the date stated in your bylaws, and on financial statements. Susan - IRS Representative Another tip is to include all the necessary financial data. See the instructions to the application to determine how much information you need to provide. And our eighth tip is to provide a copy of adopted bylaws, code of regulations, or any other document that sets out the organization's rules of operation if required. Sean - IRS Representative And ensure a director, trustee, officer, or other authorized individual signs the application. Generally, an officer is the president, vice president, secretary or treasurer. The person signing the application must indicate his or her title or other authority to sign. For the electronically submitted forms, the signer must be one of the first five officers or directors the applicant lists earlier in the application. A taxpayer's representative authorized by a Power of Attorney may sign Form 1024, but may not sign Form 1023, Form 1023-EZ or Form 1024-A. Susan - IRS Representative Our final tip is to not enter social security numbers on any forms or attachments. The IRS is required to disclose approved exempt applications and information returns. While we attempt to redact social security numbers, it delays processing of your application. Sean - IRS Representative All of these 10 tips can help shorten the time it takes to process an application for tax-exempt status. A correctly completed application sent with all required documents and schedules has a better chance of being accepted with no further contact. If contact is necessary, however, the IRS agent can address the technical issues that need resolution without taking up time to obtain a completed application.

Susan - IRS Representative In closing, we'd like to remind you to visit the Charities and Nonprofits website atirs.gov/charities to see a wealth of information about tax-exempt organizations. It can help you with applying for exempt status, annual reporting requirements, how to stay exempt, educational resources and guides, forms and instructions and a host of other topics. Sean - IRS Representative Remember that you can also use Tax Exempt Organization Search, also known as "TEOS," to identify organizations eligible to receive tax deductible contributions, automatically revoked organizations, determination letters after January 1, 2014, Form 990 series returns and organizations that have filed the Form 990 and e-postcard. Check it out at irs.gov/teos. Susan - IRS Representative Finally, Section 501(c)(3) organizations may also wish to visit the educational website at stay exempt.irs.gov. It has information for both new and existing organizations and will help you understand the benefits, limitations and expectations for exempt organizations. The course content includes subjects such as "Applying for Section 501(c)(3) Status," Maintaining Section 501(c)(3) Tax-Exempt Status," "Form 990 Overview," "Required Disclosures," "Foundation Classification," and more. For a workshop experience, go to stayexempt.irs.gov/workshop. That's all, we have for today. For more information as always visit irs.gov. Thanks for attending the webinar on "Applying for Exemption" and good luck with your organization.