IRS addresses nonprofit scandal with Q&A

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The IRS released a press release addressing common questions asked about the scandal involving the tax exempt application by several nonprofit organizations.

As a CPA who helps nonprofit organizations apply for tax exempt status, I have followed this scandal with a lot of interest.

You can read the entire IRS press release here: http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-501%28c%29-Organizations

Here are some highlights:

“Section 501(c)(3) organizations are required to get IRS approval. Others, including section 501(c)(4) organizations, are not required to get IRS approval, but often seek it.”

The nonprofits applying for 501(c)(4) status did not need to apply; tax exempt status can be “self declared” by 501(c)(4) organizations. These groups went above and beyond what was required of them and were subject to long delays and inappropriate questioning.

“This office receives approximately 70,000 applications for tax-exempt status of all kinds each year. This includes applications from section 501(c)(3) and section 501(c)(4) organizations. This office, which includes fewer than 200 people working directly on applications…”

70,000 applications for 200 workers is 350 applications per worker per year or about 1.4 applications per work day. I can review a tax exempt application in about 4 hours or 2 applications per work day. So although the workload is heavy, it is not impossible to manage. Yet IRS has a current wait time of about 13 months for processing tax exempt applications. See http://www.irs.gov/Charities-&-Non-Profits/Where-Is-My-Exemption-Application

“12. Did mistakes occur in working the centralized cases?

Yes. Applicants whose cases were centralized unfortunately experienced inappropriate delays and over-expansive information requests in some cases. This was caused by ineffective processes and not related to the selection criteria used for the centralization of a case.”

The IRS blames “ineffective processes” for the delays and over-expansive information requests. It is unclear what they mean by “ineffective processes.”

 

Let’s hope this scandal means the IRS tax exempt organization will have more efficient and effective processes in the future.

Carol Topp, CPA

 

Can we start running our homeschool co-op before we apply for tax exempt status?

I am working with three friends to start a homeschool co-op this fall. I purchased your book and read over your website. I can see we may need your services in the near future. For now, however, I just have one question that I couldn’t seem to find an answer to in your material:

I applied for and received an EIN number. I would like to apply for non-profit status with my state and the IRS. However, the $125 and $850 fees are discouraging right now.

My question is this: Can we just start running our co-op before we apply and then save money to apply for non-profit?

And then if the answer is yes, what are we until then for tax purposes…do we have to file taxes in 2013 just as a business and just show $0 profit and $0 taxes owed?

Lynne D in PA

 

 

Lynne,

Great question!

Yes, you can organize and operate as a nonprofit for a while and save up some money to apply for tax exempt status.

The IRS expects nonprofit organizations to apply within 27 months of formation. If you file for nonprofit corporation status in your state, then the day you become incorporated is the date of formation. It is sort of like the organization’s official birth date.

The IRS will grant you tax exempt status from the date you incorporate. It’s kind of like “back dating” your tax exempt status.

You should not consider yourselves as a for-profit business if you are organized (meaning have a board and bylaws) and operate (no profit motive, no one pocketing the profits) as a nonprofit. You can call yourself an “unincorporated nonprofit.” You do not need to file a business tax return.

So, the bottom line is that you can start and run your co-op for about a year, maybe close to two years, and then apply for tax exempt status with the IRS.

I hope that helps!

 

Carol Topp, CPA

Not ready for 501c3 status. What’s an intermediate step?

Hi-

We are in the process of moving toward becoming a 501c3 group but we don’t have enough financial history or the resources to accomplish it right now so we would like to do the intermediate step of becoming a corporation.

We are based in Pennsylvania but I’m not sure what type of corporation we should be, LLC or something else.

We would like to keep it as simple as possible so we can easily transition to a 501c3 down the road. What do you recommend?

Thanks for your help.

Delia in PA

 

Delia,

Your homeschool group sounds like many others that become a nonprofit corporation. Be sure you read my articles before filing for nonprofit corporation status

There is some very specific language that the IRS will expect to see in your nonprofit paperwork (called your Articles of Incorporation) in order for you to receive 501c3 tax exempt status in the future.
See my sample Articles of Incorporation here: http://homeschoolcpa.com/leader-tools/sample-documents/

Don’t delay too long between becoming a nonprofit and filing for 501c3 status. The IRS expects you to file for 501c3 within 27 months of your date of formation (i.e. the date you became a nonprofit corporation)

As for being an LLC, it’s not very common for nonprofits. This blog post will help: http://homeschoolcpa.com/should-my-homeschool-group-file-as-an-llc/

I hope that helps!

Carol Topp, CPA


 

Can a homeschool group self-declare 501c7 Social Club status?

I am the new treasurer of a homeschool group in TX. We have about 100 members (dues are $30).  Last year our board reviewed our status with reference to your website and decided 501c(7) fit us best.

You say that you can self declare 501c(7) status.  On the IRS website I found an application(form 1024) and I could find no reference to self declaration.

Can you point me to some documentation that shows we are allowed to self declare?  I am just trying to make sure everything is in order.

Roy in TX

 

Roy,
I could not find any information on “self proclaiming” 501c7 status on the IRS website either. I attended an on-line webinar on February 24, 2011 hosted by the IRS called “Starting Off Right: What New Non-501c (3) Organizations Need to Know.”

I asked a question, “I’ve heard that organizations such as the ones you are discussing today – 501(c) 4s, 5s, 6s, 7s, 8s, and 10s – are not actually required to complete and submit Form 1024, Application for Recognition of Exemption Under Section 501(a). In other words, an organization that believes it qualifies for exemption under one of these subsections can simply say it does and start to operate. Is that true?”

The IRS’s reply was :

It is true the Tax Reform Act of 1969 requirement to “give notice,” (to apply for recognition of tax-exempt status) applies only to organizations wanting section 501(c)(3) status.
So, although other types of organizations are not required to file Form 1024, they may still wish to do so in order to receive a determination letter of IRS recognition of their status. Having the determination letter ensures public recognition of their status and may enable exemption from some state taxes.
Also, even though an organization may “self-proclaim” its tax-exempt status, it is still subject to the rules governing its particular sub-section. It is also subject to IRS examination to determine whether it meets the requirements for the exemption it is claiming.

 

You can view the slides from the webinar here:
http://www.irsvideos.gov/StartingOffRightNON501c3/player/frame-wm.htm

I hope that helps!

 

Carol Topp

Group over the $5K limit. What to do?

Hi Carol,

tn_texas2b I’m part of a homeschool organization that is considered an Unincorporated Non-Profit Association in the state of TX which by Texas law can not take in more than $5000. What should we do?

Thank you,

Sandy in TX

Dear Sandy,

I visited the State of Texas website to read about the Unincorporated Non-Profit Association laws. I could not find any restriction on the amount of money your organization can make.

I think I understand where you got the $5,000 threshold. The IRS does state in the instructions to Form 1023 (Application for Recognition of Exemption under 501c3) that:

The following organizations are excepted from the exemption application requirement: Churches, their integrated auxiliaries, and conventions or associations of churches; and an organization that is not a private foundation and the gross receipts of which in each taxable year are normally not more than $5,000.

So as long as your organization stays very small, you are tax exempt. If you make more than $5,000 gross revenues in a year, you need to file the Form 1023 to remain tax exempt with the IRS. So this is really an IRS/federal tax requirement, not a Texas requirement.

So you have several years over the $5,000 threshold. Your group has three choices:

  1. file IRS Form 1023 and become tax exempt
  2. pay income taxes
  3. restructure your group to stay under the $5,000 income limit.

Any of the options are workable. There are costs and benefits to all three options. Without knowing a lot more about your group, I cannot tell you which option is best for you.

Your group is not unique. Like many homeschool groups, you are finding that your organization is growing and doing more for homeschooling families. That’s wonderful, but then you can run into road blocks like the $5,000 income limits.

Carol Topp, CPA

Can we “self proclaim” tax exempt status?

Carol,
I’m pretty sure that we meet all of the requirements to be a 501c 7 social club—your website talks about the ability to “self proclaim” their tax exempt status and the fact that a tax return is not necessarily required—I’ve searched the IRS website but cannot find that mentioned.

-Bill in FL

 

Bill,

I found two sources where the IRS explains that 501(c)(7) social clubs do not have to file an application to be considered tax exempt:

1. From the IRS manual Section 7.25.1.1 http://www.irs.gov/irm/part7/irm_07-025-001.html (Accessed 8/20/2012. Emphasis added)

IRS Manual 7.25.1.1  (11-01-2003) Overview

The Service will recognize qualified organizations as exempt from federal income tax in response to requests submitted by the organizations. Except for most organizations described in paragraphs (3), (9), or (17) of section 501(c), the Internal Revenue Code does not require organizations to apply for recognition of exemption. An organization qualifies for exemption if it meets the requirements of the Code. However, an organization is subject to tax until it establishes that it qualifies for exemption, and most organizations find that filing an application for recognition of exemption is the least burdensome way to establish that they qualify.

2. The IRS hosted a webinar titled: Starting off right- what new non 501(c)(3) organizations need to know. You can view it here: http://www.irsvideos.gov/StartingOffRightNON501c3/

In the transcript of the webinar (page 39) they addressed a question I had emailed:

“I’ve heard that organizations such as the ones you are discussing today – 501(c) 4s, 5s, 6s, 7s, 8s, and 10s – are not actually required to complete and submit Form 1024, Application for Recognition of Exemption Under Section 501(a). In other words, an organization that believes it qualifies for exemption under one of these subsections can simply say it does and start to operate. Is that true?”

It is true the Tax Reform Act of 1969 requirement to “give notice,” (to apply for recognition of tax-exempt status) applies only to organizations wanting section 501(c)(3) status. So, although other types of organizations are not required to file Form 1024, they may still wish to do so in order to receive a determination letter of IRS recognition of their status. Having the determination letter ensures public recognition of their status and may enable exemption from some state taxes.

Also, even though an organization may “self-proclaim” its tax-exempt status, it is still subject to the rules governing its particular sub-section. It is also subject to IRS examination to determine whether it meets the requirements for the exemption it is claiming.

Source:http://www.irsvideos.gov/StartingOffRightNON501c3/files/Powerpoint_Slide_Presentation_with_Transcript.pdf (page 39) accessed August 20, 2012

I hope that helps!

Carol Topp, CPA

Congratulations to BCHE on 501(c)(3) status!

Congratulations to Bradley County Home Educators from Tennessee on receiving 501(c)(3) tax exempt status form the IRS!

I was happy to help this group become tax exempt and continue serving homeschoolers in TN!

 

Carol Topp, CPA

 

Do you know the pros and cons of 501(c)(3 status?

Do you know what 501(c)(3 status could mean for your homeschool group?

My book The IRS and Your Homeschool Organization could help your group as well.

A 120 page book explaining the pros and cons of tax exempt 501(c)(3 status. Is it needed? Is it worth it?

 

Table of Contents
Sample pages

Price: $9.95

BuyPaperbackButton

Ebook version $3.99 (pdf format)

Kindle version $3.99

Smashwords version $3.99 (multiple e-reader formats for Kindle, Nook, Sony, etc)

Can my family’s homeschool be a nonprofit?

I see several articles (on your website www.HomeschoolCPA.com) on setting up as a not-for-profit for homeschool organizations (e.g. homeschool co-ops), but I wonder if I could set my own family’s homeschool up as a non-profit. We’re in Texas, so we are considered a private school.
-Lauren in TX

Lauren,
You asked a good question and I’ve been asked it before in different ways. Nonprofit organizations have a lot of benefits including tax free income, discounts, and sometimes pay no sales tax!
I’m not a lawyer, nor familiar with Texas private school laws, but I’ll try to explain how I see things.

Briefly, a nonprofit organization exists to serve a group, not an individual. The IRS will not grant “recognized charity” 501(c)(3) tax exempt status to a group that is formed solely to benefit the founder’s family. A tax exempt organization must serve a public good.

The IRS forbids private “inurement” in 501(c)(3) tax exempt organizations. Inurement means to be beneficial or advantageous. Inurement occurs when an organization is formed or operates with an incorrect charitable purpose that allows individuals in control to profit from the organization. 501(c)(3) organizations can lose their tax exempt status for practicing inurement.

Inurement/Private Benefit – Charitable Organizations

A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
From the IRS website at https://www.irs.gov/charities-non-profits/charitable-organizations/inurement-private-benefit-charitable-organizations

So, in short the answer is no, your family homeschool cannot be set up as a nonprofit organization, even if your state classifies a homeschool as a private school. That’s how I see it.

Carol Topp, CPA

Now, here are my “lawyer words…”
Any tax advice contained in this communication was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Can a homeschool be tax exempt and obtain grants?

Dear Carol:
I am interested in writing proposals for grants for my family’s home school. As an individual home school, not as a home school support group, I want to apply to receive small amounts of money for travel, museum entry, art gallery entry, books, posters, etc. More often than not, I find this statement :

“All applicant organizations or sponsoring agencies must be exempt from federal taxation under the Internal Revenue Code Section 501, in order to be eligible for funding.”

What do I have to do to have our home school be exempt from federal taxation?

Thanks.

Nancy H., Mississippi

Nancy,

You asked an excellent question. You are correct that many fund raising organizations now require 501c3 tax exempt status. Some homeschool groups want to become 501c3 tax exempt organization just so that they can participate in some fund raisers. I have a homeschool co-op as a client right now applying for 501c3 status.

A private individual or family cannot be a 501c3 tax exempt organization. The reason is that the IRS does not allow tax exempt organizations to offer private benefits or what they call “inurement” (meaning to become beneficial or advantageous) to individuals. Tax exempt organizations must benefit a group, preferably the general public.

I have been asked your question before so I wrote about it on my blog. Here’s the link: Can my family’s homeschool be a nonprofit?

You might also read my blog entry on doing a family fund raiser: Can my individual homeschool have a fundraiser?

I hope that helps!

Carol Topp, CPA

Another homeschool group awarded 501c3 tax exempt status!

 
Congratulations to Hartsville Home Educators of South Carolina on receiving 501(c)(3) tax exempt status for the IRS!!

 

Hi Carol,

 

We wanted to share our excitement in that Hartsville Home Educators, Inc. of Hartsville SC has been granted their 501(c)(3) status.

You have been a great help to our organization as we have developed by-laws and our co-op. We purchased your book and submitted our IRS application in May and was awarded our status in November.

Thanks for all you do for the home school organizations throughout the country.  We could not have done this without your guidance.

Terri King

Hartsville Home Educators

 

 

Do you know the pros and cons of 501c3 status?

Do you know what 501c3 status could mean for your homeschool group?

My book The IRS and Your Homeschool Organization could help your group as well.

A 120 page book explaining the pros and cons of tax exempt 501c3 status. Is it needed? Is it worth it?

 

Table of Contents
Sample pages

Price: $9.95

BuyPaperbackButton

Ebook version $3.99 (pdf format)

Kindle version $3.99

Smashwords version $3.99 (multiple e-reader formats for Kindle, Nook, Sony, etc)