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02. IRS Form 1023 Schedule Cheat Sheet


How to Get 501(c)3 Tax-Exempt Status: Overview of the 1023 “Long Form” Application

Organizations with assets of more than $250,000 or revenues over $50K per year, or whose mission/purpose and activities are incompatible with the 1023-EZ, must use the long-form 1023 Application process.

The IRS average for approving these files averages 4-6 times longer (9-15 months as of late 2019, versus 6 weeks for 1023-EZ) to approve.

There are ways to cut the approval time down dramatically for the IRS Form 1023 Long Form process, but they are complex and require specialized help.

If you do NOT have a plan in place to generate over $50K in your first three years of operation, and if you could possibly serve your mission at some level for less than $50,000, we generally recommend taking the faster and less expensive path by using the 1023-EZ.

Every year, thousands of long-form IRS Form 1023 Applications for Tax Exempt Status get mired down in the offices of faraway bureaucrats—not because the applicants violate any IRS rules or are poorly written, but because they omit key addenda and/or fail to submit the proper Schedules with the Form 1023 application package.

While we hope the information we provide here will help you navigate the process, this game is played on the IRS “home field” - and if you don’t play by their rules, you’re going to run into trouble.

Playing by IRS rules means being aware of the addenda (including the challenging “Narrative of Activities”) and Form 1023 Schedules the IRS will require you to submit.

Successful IRS Nonprofit 501(c)3 Applications aren’t “filled out.” They’re ASSEMBLED.

IRS guidelines for submitting a Form 1023, (Application for Recognition of Exemption & part of your 501(c)3 application) include several requirements for language in formative documents and policy addenda to be included with your application.

If you miss these, you could be in for a long wait.

When the IRS examines your organization’s tax-exempt description, they don’t look only for a properly formatted 50-70+ page set of printed documents - they also look for certain buzzwords and language.

They want to see that you organized the entity exclusively for religious, charitable, scientific, literary, educational, or similar purposes - with the proper level of articulation around WHY (your mission)  the WHAT (your activities) and the HOW (your operations).

The IRS also has an official duty to see that neither the operation of the nonprofit, nor the dissolution (if it fails to stay “in business”) will not unduly benefit any person or corporation.  

The legal term for this prohibited favor or benefit is “inurement”.

This means the organization has the burden of proving that it haas been created to serve a charitable purpose.

Logic suggests that you should be able to include this information in the appropriate space on the actual application, right?

Wrong.

You’ll have to attach a series of separate addenda.

LONG FORM 1023 ADDENDA AND ATTACHMENTS

There are six (6) types of addenda and/or attachments to your long-form 1023 to be included with your 501(c)3 application.

The first four (4) are required for both the Streamlined 1023-EZ and the Long Form 1023 - the last two (2) apply to only the latter:

1. Articles of Incorporation: 

 You’ll need the approved and stamped articles from your state - not just a certificate of filing or receipt.

2. As Addendum to Articles: Statement of Exempt Purpose

 This statement must be included in your Articles, and a copy of your Articles must accompany your application

The Statement of Exempt Purpose tells the IRS that the organization exists to serve a truly charitable purpose.

To avoid the need to file amended Articles with the Secretary of State you’ll need to append an “exempt purpose” statement for a typical nonprofit corporation.

3. As Addendum to Articles: Dissolution Clause

 This is included when organizations are set up in a way that assures they won’t be operated for the benefit of any one person or group of people.

An organization’s “dissolution clause” is put in place to assure the IRS (and anyone else who asks) that the public interest will be served should the organization shut its doors.

IRS rules allow assets to be turned over to another 501(c)3 or to the government.

4. Bylaws, including Procedure for Selecting Directors/Trustees: 

Most nonprofit corporations created with the intent of filing for Tax-Exempt status with the IRS address selection of directors in their bylaws.

If not, the IRS requires a separate disclosure of the method your nonprofit will use to select officers, directors, and/or trustees who have governing power over the organization.

For purposes of your 1023 Application, you may also use the following language as an addendum to satisfy the IRS agent’s need to understand your process for selecting those with governing power:

“Directors: Number, Selection, and Tenure. The Board shall consist of not less than [insert odd number above three] directors. Each director shall hold office for a term of [insert number] years. Vacancies existing by reason of resignation, death, incapacity or removal before the expiration of his/her term shall be filled by a majority vote of the remaining directors. In the event of a tie vote, the President shall choose the succeeding director. Successors shall be elected by the remaining and outgoing directors. A director elected to fill a vacancy shall be elected for the unexpired term of that director’s predecessor in office, or a term declared by the voting body.”

5. Required Addendum: Conflict of Interest Policy

A “Conflict of Interest Policy” is a document which describes an organization’s protocol for situations where, if misconstrued or abused, “insiders” could be accused of using the organization for personal benefit.

The IRS wants to help nonprofit organizations avoid, in their own words, “the appearance of impropriety” as well as any real private benefit to the organization’s board members, officers or managers that does not serve the nonprofit’s reason for being.

Your Conflict of Interest Policy is where you’ll show the IRS that you have procedures in place to prevent wrongdoing—or even the appearance of it—in your nonprofit organization.

For example, when a board member or officer has a personal or financial interest in anything being considered by the board of directors, that person must disclose the interest and refrain from the discussion and vote.

In addition, your meeting minutes must document the disclosure as well as the vote and reasoning for approval.

Having a good Conflict of Interest Policy and an active process to implement and document it will help your nonprofit application breeze through to a speedy approval.

When helping our clients, we provide a “secret weapons” that goes beyond a mere policy— sample forms that can be used to prove they are actually complying with their self-imposed set of rule

6. Required Addendum: Narrative of Activities

Your Narrative of Activities provides a brief description of the problem your nonprofit addresses and the steps you will take to solve it.

This is the place to explain your implementation strategy:

A series of specific methods by which you intend to fulfill your mission - either bulleted or simply in paragraph form - and a description of the people, time frame, and location(s) in which you will perform your activities.

Remember what is true of selling a product or testifying in court is true here: Give just enough information—but not too much.

Your primary goal, as we will repeat throughout this training, is to allow the IRS agent to check off the list of items he or she needs to stamp your application “APPROVED” while not raising any IRS Red Flags™.

Avoid mentioning activities that refer to a purpose that is prohibited (I’ll expound on this later.)

For example, directly or indirectly supporting or opposing candidates for public office is prohibited; therefore do not include “political campaign mailings” in your activities.

Unless you have things to explain in further detail (such as a scholarship program that is distinct from your main activities), we like to see two pages maximum  explaining your “Narrative of Activities.”

[REMEMBER: IRS agents are human, so try not to anger, bore, confuse or frustrate them! Keep it Short, Sweet, and Simple!]

7. Required Addendum: Any and All Schedules that may apply

 The vast majority of 501(c)3 groups require no schedules, and of those that do, the most common are Schedules A, B, H, and occasionally E.

To cover all bases, we’ve listed other categories below, which are used less often.

If You’re a...then…

  • Church...include Schedule A
  • College or University...include Schedule B
  • Hospital or Medical Research Organization...include Schedule C
  • Section 509(a)(3) Supporting Organization...include Schedule D
  • Home for the Elderly or Handicapped...include Schedule F
  • Low Income Housing Organization...include Schedule F
  • The successor to a For-Profit Entity/Company...include Schedule G

Questions can arise here, so to help with that we've provided a 1023 Schedules cheat sheet that you can download here.  

If you’d like to discuss your options, you’re welcome to book a complimentary consult call with one of our nonprofit specialists here and grab some piece of mind. 

Also, if you'd prefer to not deal with any of this paperwork and have the piece of mind of professionals doing it for you, then check out our Nonprofit 501(c)3 plans here

-Christian LeFer, Overview of the Nonprofit 1023 Long Form  501(c)3 Application, InstantNonprofit

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