It\’s no secret the IRS is painfully behind on reviewing 501c3 nonprofit applications for tax exemption. According to the IRS website, they are currently reviewing applications submitted in March 2012; almost a year in arrears. While the IRS imposes steep penalties if you were to pay your taxes a year late, unfortunately, there is little recourse for organizations that have been waiting… and waiting… and waiting.
It can seem like the process of receiving tax exemption is shrouded in mystery. Very few IRS representatives are willing (or able) to explain the documents or the forms. Most will only point you to the IRS EO website which displays the current month\’s applications being processed. It\’s a nice big box in the middle of the page – reminding you just how far behind they are.
Often, the strict documentation requirements and intense waiting are enough to dissuade even the most intelligent and organized executive director. Add on top of that the recent automatic tax exempt status revocations the IRS sent out in response to more than 275,000 nonprofits which did not file the required annual reports, many of which are now re-applying for the exempt status and clogging the pipeline of new submissions. The process is further complicated when you consider the frequency with which the forms become obsolete.
But, believe it or not, the review process is actually a simple one.
The following image is taken directly from the IRS EO website, and shows the path your documents take through the halls of the IRS on its way to becoming an approved application (hopefully!).
For those who get bleary-eyed staring at process charts, here\’s the basic flow in summary form:
Step 1: 501c3 Application Submission
Your organization submits the application to the Covington, Kentucky office where it is entered into the system and your fee is processed. This is also where a notice is generated, and sent to you, acknowledging the application has been received.
It\’s important to note here that the IRS can kick back your application if it isn\’t submitted on the right version of the form, wasting even more time – in some cases – up to a year. It\’s worth getting the paperwork right the first time. Use a professional.
Step 2: Get on the Train
After processing, your application is then sent to the Exempt Organization (EO) office in Cincinnati, Ohio.
It\’s then assigned to a determination specialist to be screened – and that\’s when the fun begins!
Step 3: IRS Specialist Review
At this point, the IRS specialist cracks open your application and runs it through a series of quick test. He checks to first make sure it wasn\’t submitted on an obsolete form. If so, it\’s sent back to you to be completed once again on the correct form.
Approval No Contact
If the form is correct, the specialist can then determine if the information passes muster. In these cases, you will not be contacted. The form is simply approved and a letter is mailed to you stating that. Congrats, you\’re done. Now go raise some funds!
Needs Clarification, Specialist Contact
If the application needs minor changes or simple clarification, you will be contacted by the specialist, either by mail or phone. He or she will attempt to get clarification, and if able to do so, your application will be approved and the nice letter gets sent to you. If he or she is unable to get the necessary clarification sought, the application is assigned to a technical group for further development.
Needs Substantial Development, Specialist Contact
This prompts another contact from the specialist, once again trying to collect that clarification documentation. At this point, it is basically a make-or-break proposition. The IRS is now trying to close the file and move on.
Closing the File
Files can be closed in one of three ways:
- Exemption Approved – You submit the required clarification documents, the specialist approves the application and sends you the determination letter for your files.
- FTE / Withdrawal – If the applicant fails to respond or requests to withdraw her application it is removed from the queue and no longer up for tax exempt status consideration.
- Denial – If you fail to meet requirements, or your clarification documents don\’t actually clarify the IRS questions your application is denied, and you receive a letter to that effect.
If you suffer a denial, you can appeal the decision, but plan for an even longer battle.
The point is, get it right the first time, and use a pro – not only for the application itself, but also for any questioning you might encounter during the clarification process.
The money you spend engaging a nonprofit tax specialist will pay off in the long run. That money pales in comparison to the money you can\’t raise while having to wait months (or years) for your application to be processed.
If you don\’t mind reading boring process charts, you can download the official IRS tax exempt application workflow document directly from the IRS.
The IRS is saying the lag is currently 10 months, but we suspect it is even longer than that. If you\’re currently waiting for your 501c3 determination letter, or if you recently received it, please leave us a comment and let us know when you applied and when you finally got word.