Where the &%!?# is my exemption application is a sentiment we are growing increasingly accustomed to hearing in our office.
How long does a tax exemption application take?
Just a few months ago, we were still telling clients to expect the process to take approximately one year. Now we are telling clients to prepare to wait two full years before they receive a determination letter.
It is true that there are some applicants that receive their application in as little as 90 days but those are, in our experience, increasingly few and far between. The vast majority of the applications our office prepares end up being assigned to an agent for further review.
This is, in part, because nonprofit founders with tried and true philanthropic business models don’t necessarily need to hire experienced nonprofit lawyers to file their applications for them. We get the juicy, interesting, novel and complex applications and we like it that way.
What we don’t like is the IRS standards and procedures shifting under our feet. We have around 25 pending applications in our office some of which have been waiting for over a year to be assigned to an agent.
As recently as a couple of months ago, the IRS website indicated the IRS was 11 months behind in assigning applications. Today, the IRS website indicates it is 16 months behind!
Why are these extraordinary delays happening? It appears to be a perfect storm brought about by a combination of the increased workload due to the automatic revocations, the sequester, the government shutdown and the leadership shakeup that is occurring due to the 501(c)(4) debacle.
When will it get better?
Nobody knows. But there are instances wherein expediting the process is possible.
Some Cases of Expedited Processing of 501 c 3 Application Status
- It is possible to expedite the review process if the nonprofit is being created to provide disaster relief in response to a recent disaster and time is of the essence.
- Alternatively, expedited review may be available if a grant is pending and will be lost unless the new charity sends the funder a favorable IRS determination letter by a certain date. Be prepared to substantiate a request for an expedited review with a letter from the grantor.
- Letters from members of Congress in support of an Application for Exemption can also be helpful.
Retroactivity of Exemption Status
If the organization files its Form 1023, Application for Recognition of Exemption, within 27 months of the date the entity is legally formed, and is ultimately successful in obtaining tax-exempt status, the IRS’s determination of exemption will be retroactive to the entity’s date of formation.
Until the IRS determination letter is issued, new entities should explain to potential donors that an application for tax-exempt status is pending. Donors who claim a charitable contribution deduction for their gifts before then take the risk of an adverse IRS decision.
Satisfying Donors who Require a Favorable Determination Letter
Organizations whose status is pending can either defer acceptance of the grant if the grantmaker is willing or find a fiscal sponsor. A fiscal sponsor is a recognized charitable organization that is willing to offer legal and fiscal sponsorship of the project until the organization receives its tax-exempt status. For more information see our blog post on Fiscal Sponsorship v. Fiscal Agency.
File a Declaratory Judgment Action
If the IRS has not made a determination within 270 days of filing a substantially completed Form 1023 with the appropriate office, the taxpayer has the right to file a declaratory judgment action with the Tax Court. Of course, seeking relief from the Tax Court will be outside most organizations’ budgets, but reminding the agent that they are outside the 270 days can’t hurt. Note that this option is available only for 501(c)(3)s and farmers cooperatives.
File Form 990 Even If Application for Exemption is Still Pending!
Do not forget to file Form 990. A nonprofit has a tax-filing obligation from the day it is created even if its application for exemption is still pending and even if it has zero revenue. If the organization’s application is approved but 990s have not been filed for three consecutive years, the organization’s exemption will be automatically revoked.
These are trying times for new nonprofits. Rest assured everyone is experiencing the same thing and the extraordinary wait is not indicative of a problem with the application.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.