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17
Aug

Getting Your 501(C)(3) Application through the IRS

“Several friends and I are setting up a local charity to help recent college graduates pay off their student loans. We also intend to lobby our state government to pass laws allowing banks to forgive student loans.

            We filed with the IRS for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, but they came back at us with all kinds of questions that will take forever to answer. If we don’t respond within 10 days, they say they will reject our application and won’t return the $850 filing fee.

            What is really going on here? Is this a sign the IRS just doesn’t like our idea and is trying to stonewall us?”

            Trying to read the IRS is almost impossible, especially when it comes to granting tax-exempt status to an organization like yours.

            When you apply to the Government for tax-exempt status, you are asking for a HUGE favor – the privilege to operate without having to pay taxes, and (if you indeed are a public charity) giving other people permission to donate to your cause AND write it off on their personal taxes.

            You can understand that the IRS doesn’t give out these “get out of jail cards” easily. Frankly, as a taxpayer, I’m glad they don’t make it easy for people to get these.

            I suspect that you didn’t have an attorney’s help when you filed for tax-exempt status. If I’m right about that, you need to find one now to avoid an endless back-and-forth pingpong match with your IRS examiner.

            Here are some things for you and your attorney to think about:

            Did You Fill In All the Blanks? When you file for tax-exempt status with the IRS, your application form (usually it’s IRS Form 1023) must be absolutely letter perfect. All blank spaces must be filled in. Even if a particular item doesn’t apply to you, the space must be filled in with “none”, “not applicable”, “n/a” or some variation so the IRS knows you just didn’t ignore it.

            An incomplete application form is the biggest reason for IRS rejection of 501(c)(3) applications.

            Did You Include All the Required Exhibits? If you plan to pay your executive director more than $50,000 a year, you must – must – adopt a compensation policy and attach it to your application. If you have more than two directors on your “executive committee”, you must – must -- adopt a conflicts of interest policy and attach it to your application. The IRS has standardized forms for these, which you should use if you don’t have a better one, but you have to attach them to your application.

            Are You Truly “Serving the Public”? This is probably the biggest sticking point for 501(c)(3) applications. A lot of well-intentioned people want to set up charitable organizations that benefit only certain individuals, not the public at large.

            To qualify for 501(c)(3) status, an organization must be formed for a purpose that is “charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, or testing for public safety.” Also, the organization “must ensure that its earnings do not inure to the benefit of any private shareholder or individual.” If the IRS even suspects that your organization will benefit only the families of people involved in your organization, it will reject your application (see IRS Publication 4220, www.irs.gov/pub/irs-pdf/p4220.pdf).

            Your application probably didn’t say enough about how your organization will decide who will (and won’t) receive grants to pay off their student loans. Will these grants be available to the general public? Or only to people living in a certain area? Or only to people who can demonstrate financial need? If the latter, how do you propose to determine “financial need”? You will need to give the IRS lots of detail here and persuade them that you truly are a “public” charity.

            Watch Out for “Political Activity.” The other reason you may be having trouble with the IRS right now is your stated goal of lobbying state and local governments to change the laws for student loans.

            Tax-exempt organizations are absolutely prohibited from engaging in “electoral” activity of any kind – they cannot support candidates for public office, or make donations to their campaigns, political action committees (PACs), or other fundraising organizations. Period.

            Public charities are also prohibited from engaging in lobbying unless it is an “insubstantial” part of their total activities. To determine if your lobbying activities are “insubstantial,” you should have attached IRS Form 5768 and elected to “cap” your lobbying expenses (for a startup organization, this cap will usually be 20% of total expenditures or $100,000).

            If lobbying is going to be a substantial activity for your organization, you may elect to qualify as a lobbying organization under Section 501(c)(6) of the Internal Revenue Code. By doing so you will be allowed to participate in a much broader range of political activity (including some support for candidates for public office), but your donors will not get a tax-deduction for contributions they make for those activities.

Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'.  This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.  To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.  COPYRIGHT 2015 CLIFFORD R. ENNICO.  DISTRIBUTED BY CREATORS SYNDICATE, INC.