FAQ: Tax Compliance Before Receiving Your Determination Letter

This blog will answer five common questions we get regarding what can and should be done by an exempt organization before receiving its determination letter.

Most organizations seeking official recognition of tax-exempt status must apply to the IRS within 27 months of formation. Generally, if the organization applies within the 27-month window, recognition will be retroactive to the date of the organization’s formation. This means an exempt organization can begin operating as a § 501(c) organization prior to receiving its determination letter from the IRS. It also means that prior to receiving its determination letter, the organization is subject to the regulatory and compliance rules applicable for its exempt status.

Clients often ask about what is permitted or must be done while their exemption application is pending with the IRS. The period between forming a nonprofit and receiving a favorable determination letter is an important time for all nonprofits as it normally occurs when the nonprofit is still in its infancy. This blog will answer five common questions we get regarding what can and should be done by an exempt organization before receiving its determination letter.

Yes. Organizations that have applied for recognition of tax-exempt status but have not yet received a determination letter are required to submit a Form 990 annual information return. This is true even if the organization has no income to report.

There are multiple variations of the Form 990, but most new organizations qualify to file the Form 990-N or Form 990-EZ after their first year. Generally, Forms 990 must be filed electronically, however, the IRS has stated that it will accept paper submissions before an organization has submitted its exemption application or while its application is still pending.

Yes. Generally, when an exempt organization files its exemption application within 27 months of its formation, recognition of its tax-exempt status will be retroactive to the date of its formation. Accordingly, the organization can begin accepting donations and, for those contributions that qualify, the donations will be tax deductible for the donor after the organization receives a favorable determination letter.

However, it is important to not misrepresent the organization’s current tax-exempt status. We highly recommend that the organization discloses to potential donors that its exemption application is pending with the IRS prior to accepting any donation and noting the same on any acknowledgement given to donors.

Every state has its own rules for charitable solicitation registration so the organization will need to review the rules in each state it plans to fundraise in for a more complete answer. Generally, you need to register prior to actively soliciting donations, even if the organization has not yet received its determination letter.

However, best practice is to wait until the organization has received its determination letter before actively fundraising and soliciting donations. Alternatively, the organization might seek a fiscal sponsorship until it receives its determination letter.

Yes. As soon as your organization has established its board, developed policies and procedures, hired staff/recruited volunteers, secured appropriate insurance coverages, and otherwise satisfied all of its initial corporate formalities, you can begin your charitable work.

Be sure to keep complete and accurate records of your activities to make filing your first Form 990 as seamless as possible.

Yes. Many clients worry that making changes while their exemption application is pending will have a negative impact on their application. Generally, this is not true. The application is simply a snapshot of the organization at the time of filing. The corporation is permitted to alter the makeup of its board and staff, modify its programming, and make other decisions within its regular course of business.

Note, however, that fundamental changes, such as substantial change in the organization’s purposes, may require that the organization file a new exemption application or follow up with the IRS by requesting an affirmation letter after receiving its determination letter. If your organization is considering a fundamental change while its exemption application is pending, seek professional guidance to ensure that the organization is meeting all of the regulatory and compliance requirements for such change.

Kyler Mejia is an associate (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form

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