How Certain Organizations Can Self-Declare Tax-Exempt Status

There are dozens of tax-exempt organizations under the Internal Revenue Code; the IRS has a list of these on its website, along with the application form that each one files (usually Form 1023 or Form 1024). However, most of these organizations are not actually required to submit an exemption application to the IRS: "[Certain] organizations may self-declare their tax exempt status by operating within the requirements of the applicable code section and filing the required annual returns or notices." In other words, the tax-exempt status of a new organization can often be established simply by filing its first tax return.

Self-declaration is available to cooperative associations, social and recreation clubs, and business leagues, to name a few of the more popular ones. A 501(c)(9) and 501(c)(17) organization may not self-declare. While a 501(c)(4) organization is still not required to file an application (historically with Form 1024 but now with Form 1024-A), a 501(c)(4) can no longer simply self-declare by filing the first tax return. In a future post, I will describe how to form a 501(c)(4) organization. Finally, some 501(c)(3) organizations do not need to file an application or self-declare, whereas all others with gross receipts in excess of $5,000 generally may not self-declare and must apply for exemption.

Self-declaring tax-exempt status has its downsides, most notably that the organization will not receive a determination letter from the IRS. This means that, among other things, the organization will not be publicly recognized as tax-exempt and may not be able to qualify as exempt from certain state taxes. If a self-declared tax-exempt organization does not operate within the requirements of the applicable section of the Internal Revenue Code, it could be vulnerable to an audit by the IRS. Thus, another significant benefit of formally applying for tax-exempt status is giving the IRS notice of how the organization intends to operate and providing an opportunity for the IRS to notify the organization that it is not operating as required by the Code.

Establishing tax-exempt status by self-declaration is generally only advisable for small organizations, such as those eligible to file the Form 990-N (e-Postcard) version of the Form 990. After forming a nonprofit entity under state law and obtaining an EIN from the IRS, a representative of the organization must call the IRS at 877-829-5500 and ask that the organization be allowed to file Form 990-N and then file the form. This is all that is required for a small, eligible organization to be classified as tax-exempt.

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