How Complex is Getting Tax Exempt Status

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By Roberto Neuberger

If you plan to submit an application to the IRS for tax exempt status, you better do your homework. Because the application is long, complex, and could be delayed (and often is) if not done properly.

First you must determine if your business is eligible for tax-exempt status. In most cases, the IRS allows for tax exemption if your business falls within the government guidelines for a charitable organization. Entities that are eligible for tax exempt status include chambers of commerce, sports organizations, educational and charitable organizations, veterans organizations, among others.

There is a subtle difference between non-profit status and tax-exempt status. State law governs which entities are considered non-profit. While most non-profit groups are also federally recognized as tax exempt, there are exceptions and the classification is not automatic.

According to the IRS, for a business to be recognized as a tax exempt business, they are required to apply to the IRS for recognition. The application can be complicated and delayed for several reasons. For that reason, applications for tax exempt status have to be extremely thorough, or obtaining acceptance can be significantly delayed.

The IRS has listed some of the top reasons applications are stalled:

– The applicant did not submit enough financial data about the organization;

– The fiscal year should remain the same throughout the application;

– The applicant did not submit enough detail about the officers of the organization

– Many applications are not processed simply because whoever filed them did not fully explain precise information on the activities to show how the tax exempt purpose is achieved. Detailed plans about the organization must be submitted so the IRS has a clear understanding of how the entity will operate.

– Small things, like not submitting all the information, not filling in every line, not including specific schedules that are required, all delay the application. Forms can be delayed simply because someone does not include their official title within the organization or use stamped a signature instead of writing it.

– The application must be submitted with official by-laws, regulations, or any other document that sets out the organization’s rules of operation. Failure to have this paperwork will delay the application.

– The number one reason the IRS cannot complete an application, is, believe it or not, the applicant fails to send in the proper user fee.

While the IRS can be an extremely helpful organization in itself, it’s rules are complicated, lengthy and are better off in the hands of people who truly care about crossing all their T’s and dotting their i’s.

Don’t believe it? Check out the IRS website: irs.gov/publications/p557/index.html. It’s a lengthy, detailed document that no doubt answers every question you might have about forming a tax exempt organization. But it might be a good idea to find a company that does such filings for a living.

Hiring an attorney, which can be costly, or paying an online service to do the filing for you might be your best bet to weed through the IRS mire.

More about Nonprofit Corporations

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501(c)(3) – Tax Exempt Status Service

FAQs about Nonprofit Corporations