Heather Comstock Connects

Helping nonprofits and other volunteer organizations develop strong relationships and a clear voice in the community.

Starting a Nonprofit Series: Let the Fun Begin-Completing your IRS Application!

This is the fourth installment in the “Starting a Nonprofit Series” about starting a tax exempt organization.

Your 1023 Application is one of the most time consuming steps to forming a nonprofit. This is the form that you file to seek approval to become recognized as a tax-exempt organization under the I.R.S. Code. Keep your main goal in sight: Will someone who has no background information on my organization know what we’re doing, how we’re going to fund it, and understand how it serves the public good? The IRS says this about exempt organizations:

An organization is more likely to operate effectively and consistently with tax law requirements if it: – Clearly articulates its purposes – Has a knowledgeable and committed governing body and management team – Has sound management practices.” 

The key to a successful application is organization and preparation. Don’t rush.

Your audience is the I.R.S.

Set up your administrative process. Get started by downloading the application form and the instructions from the IRS website. It will be a PDF document that you can fill in and save. If you’re going to be working on it as a group, I recommend using Google Docs or Dropbox. Users can modify the document in one place and you won’t be emailing different versions back and forth. It can also serve as one place to deposit completed supporting documents such as your by-laws and conflict of interest policy. Your application is not going to be completed in the order it appears in the application.

Start with your low hanging fruit. Start filling in the pieces of the application that can be easily done such as the address and web address. Take some time to read through the rest of the questions on the applications. This will give you guidance on the supporting documentation needed.

Start a To Do list. As you encounter things in the application, begin making notes on a To Do list. Brain dump here so you don’t lose anything! As you get deeper into the application, it is easy to lose track of the different pieces that need to come together.

Keep the checklist handy. At the end of the application is a checklist that you have to complete which shows all the stuff you will need to include with your application. As you complete attachments, be sure save a copy in this folder so you don’t have to dig for it when its time to send in the application.

Start An Attachment Document. As you go through the application, it will ask you questions that necessitate attaching to the application in a separate document. The primary one being “The Narrative”. This is the most important part of your application. This is the spot where you get to explain everything!

  • Open a Word Document and put your organization name and EIN number in a header. Be sure to put page numbers in the footer. Keep in mind if one piece of your application became separated from the others, would they know how to match it back up?
  • Keep the questions in order they appear on the application! List the section and then the question number as a clear header for the paragraph.
  • Play up your strengths in this section such as your Board of Directors or program plan.
  • This document will have to disseminated on-demand to anyone who requests a copy.
  • Re-use your narrative section for other purposes such as grant applications or your promotional materials.
       
Your Budget Section reinforces your Narrative. The purpose of the budget section is to backup of your narrative. If you state that you’re going to provide training to the public yet your budget doesn’t show any revenue or expenses related to hosting an event, that is going to raise some eyebrows. The IRS also wants to see that you understand your activities will come at a costs and how you plan to raise the money to conduct your activities. They are also looking for your funding sources as that could impact the KIND of nonprofit you are.

Preparing your budget is a great activity for your organization’s planning process!

Have an outsider review your complete application. After you have spent the last several months compiling the documents and writing your narrative, you need to enlist another pair of eyes to read through the application.

  • Be sure to read through for typos, grammar, and other editorial content.
  • Find a friend or family member who has no idea what you’re doing with the organization and ask them to read through your Narrative. Ask them if they have an understanding of your activities, how you’re going to fund them, and whether or not this seems to improve the community.
  • Get a professional opinion. Part of your benefits with Maryland Nonprofits is being able to utilize their consulting staff at a discounted rate. I have had their lawyer read through a couple of client applications and it was very helpful. They know how the IRS reads the applications and can identify any areas that need additional clarification. It is a dry run for submission to the IRS.

Now You’re Ready to Submit! Pull out the checklist! Put the application in order listed on the checklist. Don’t make the agent have to search for documentation. Double check your documents and ensure you have everything.  On every page should be your organization name and EIN. Include the correct User Fee with your application. Have someone else double check your application packet as well. Be sure to keep a complete copy for your files.

Now The Wait. The wait time for the application varies. By submitting a complete and well-organized application will minimize the need for the I.R.S. to request additional information and thereby minimize the time before you become a recognized charitable organization.

While you’re waiting for your letter, spend some time researching grants and other funding sources, prepare your fund-raising plans and materials, and your marketing materials. Once you get your Determination Letter, you’ll be ready to roll on the next steps!

Two fantastic resources:

Maryland Nonprofits book, “How to Start a Nonprofit” published with the Community Law Center, Inc. It goes step by step through the application and clears up some of the more confusing aspects of the application.

StayExempt.org – the IRS website for Exempt Organizations. It has some great online training with overviews of most major topics.

Next up:  After the Determination:  Next Steps and How to KEEP your Tax Exempt status!

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