How to Apply for Tax-Exempt Status

Tax-exempt organizations do not have to pay income taxes. Section 501(c) of the tax code details the approximately 20 types of organizations that may be approved for tax exemption. Here's how to know if your organization qualifies and how to apply to the IRS.

Instructions

Difficulty: Moderate

Things You’ll Need:

• IRS-mandated supplementary documentation
• IRS Form 1023 or 1024 for tax exemption

1. Determine whether your company qualifies for tax exemption under the 501(a) or 501(c)(3) rules. Included under 501 (c)(3) are religious organizations, charities, scientific organizations, groups that test for public safety, groups that promote literary or educational purposes, or groups that advocate against cruelty to children or animals. Organizations that can be exempt under 501(a) include universities with special government-approved programs.
2. You must have an Employer Identification Number (EIN), even if your organization has only has one employee. The IRS form number is SS-4 (see Resources below).
3. Fill out the appropriate form based on your 501(a) or 501(c)(3) status. 501(a) status requires IRS Form 1024. 503(c)(3) status requires Form 1023. You may want to have a corporate or tax attorney look over your application or help you fill it out.
4. Gather the supporting documents that must be submitted along with Form 1023 or 1024. You'll need copies of your organization's articles of incorporation (or other organizing documents), as well as evidence of incorporation. You can also include your bylaws, although bylaws can't replace the articles of incorporation.
5. Attach the relevant financial data. You'll need your current balance sheet, and four years' worth of financial data (the current year and three prior years). The prior data needs to include all receipts and expenditures, with explanatory statements. For more information on how to document this, read IRS publication 557 (see Resources below).
6. Every included document must list your organization name, address, Employer Identification Number and the line item number of the form associated with that document.
7. Submit copies only of any document. The IRS will keep the copies; you will not get them back. However, all copies must contain original signatures, from the same people who signed the original document.
8. Wait for the IRS judgment on your tax exempt status, which should arrive within 270 days. You are allowed to contact the IRS and ask for updates, and they are allowed to contact you and ask questions or request supporting documentation.

Tips & Warnings

• Your articles of incorporation should offer a full description of your organization's activities. If they don't, you'll need to prepare a supplementary document describing your organization and append it to your application for tax-exempt status.
• When you gain tax-exempt status, your expenditures and tax documents will be heavily scrutinized by the IRS to ensure compliance.