Form 1023 for Return Preparers Anticipating Compliance Challenges When 501(c)(3) Organizations Apply for a Tax Exemption
TUESDAY, DECEMBER 11, 2012, 1:00-2:50 pm Eastern
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Form 1023 for Return Preparers Seminar
James Skyles, Skyles Law Group
Dec. 11, 2012
Jim Ritts, RubinBrown
Today’s Program
Overview Of Form 1023 And Its Individual Parts
[Jim Ritts]
Review Of The Form 1023 Schedules
[Jim Ritts]
Form 1023 Compliance Issues Confronting Preparers
[James Skyles]
Current IRS Process For Reviewing Form 1023 Applications
[Jim Ritts]
Slide 7 – Slide 9
Slide 47 – Slide 54
Slide 10 – Slide 29
Slide 30 – Slide 46
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
6
OVERVIEW OF FORM 1023 AND ITS INDIVIDUAL PARTS
Jim Ritts, RubinBrown
General Information
Purpose:
Show that the organization meets IRS requirements for
exemption
Address IRS emphasis on good governance and describe
safeguards in place, so that operations will fulfill the exemption
requirements
8
General Information (Cont.)
Purpose (Cont.):
Determine provisional classification of private foundation status
or provisional determination of public charity status
9
REVIEW OF THE FORM 1023 SCHEDULES
Jim Ritts, RubinBrown
Part I
Line 8, paid advisors
Line 10, no Form 990 filing requirement
Church
Church auxiliary
Certain governmental organizations
11
Slide Intentionally Left Blank
Part II
LLC valid only if elect to be treated as a corporation
Organizing documents
Articles of Incorporation
Evidence filed with state of incorporation
By-laws
13
Part III
Required clauses
Purpose: Charitable, educational, religious, etc.
Termination: Assets go to a qualifying 501(c)(3) organization.
Indicate where IRS can find wording
14
Part IV
Describe each significant activity
What, who, when, where, how, time involved, how funded
Reliance on determination letter may only be as good as the
completeness of the descriptions.
Consider your future 990 filings
15
Part V
Definitions
Director, trustee
Officer
Include all forms of compensation
16
Part V
Line 1a – Any compensation of officers or directors
Line 1b – Five highest-paid employees, if more than $50,000
Line 1c – Five highest-paid independent contractors, if more than
$50,000
Include businesses?
17
Part V (Cont.)
Line 2a – Business or family relationships among officers/directors
Line 2b – Business relationships between the organization and
officers/directors
Line 2c – Officers/directors related to employees/contractors
18
Part V (Cont.)
Line 3a - Add supplemental table with name, qualifications, average
hours, duties
Line 3b - Any payments to directors/officers/highest-paid
employees/highest-paid contractors by a related entity
19
Part V (Cont.)
Line 4 – Policies/process to determine compensation
None required for exemption, but must explain if any “no”
answers
Line 5 - Conflict of interest policy
Line 6 – Non-fixed compensation
Lines 7-9 – Transactions with officers/directors
20
Part VI
Line 1 - Benefits to individuals and organizations – May want to refer
to Part IV discussions
Line 2 – Programs with a limited number of potential beneficiaries
may get additional scrutiny.
Line 3 – Benefits to officers/directors or related parties
21
Part VIII
Line 1 – Intervention in political campaigns prohibited
Line 2 – Limited lobbying permitted
Line 3 – Gaming is broadly defined.
Line 4 – Fundraising
State registration (4d)
Donor-advised funds (4e)
22
Part IX
Income data – New instructions
Organization has existed for five or more years; the most recent
five years should be completed.
Organization has existed for between one and five years;
provide five years of data (include projected if necessary).
Organization has existed for less than one year; provide three
years of data.
23
Part X
Lines 1-4 apply to private foundations.
Line 5 – Select public charity status
Line 6a – New instructions; do not complete (replaced by Schedule
A of Form 990/990 EZ)
Lines 6b and 7 only apply organization has been in existence for
more than five years.
24
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Supplemental Schedules
Schedule A – Churches
Schedule B – Schools, colleges, universities
Schedule D – Supporting organizations
Schedule C - Hospitals
26
Supplemental Schedules (Cont.)
Schedule E – Form 1023 filed more than 27 months from formation.
Schedule F – Homes for elderly or handicapped, and low-income
housing
Schedule G – Successor organizations
Schedule H – Organizations providing scholarships
27
Resources
www.IRS.gov
IRS instructions to Form 1023
IRS Publication 4220, Applying for 501(c)(3) Tax-Exempt Status
IRS Publication 557, Tax-Exempt Status for Your Organization
www.stayexempt.irs.org
28
Resources (Cont.)
EO update
TE/GE Customer Service – (877) 829-5500
National Association of State Charity Officials – www.nasconet.org
29
FORM 1023 COMPLIANCE ISSUES CONFRONTING PREPARERS
James Skyles, Skyles Law Group
Disclaimer
Unless you have a signed retainer with Skyles Law Group, LLC, you
do not have an attorney client relationship. As a result, there is no
attorney-client privilege created through this presentation. Any
information exchanged will be kept confidential, but is still subject to
testimony in a court of law.
Although this presentation is on a topic related to legal issues, and
given by a licensed attorney, none of the information contained in this
presentation should be construed in any way as legal advice. If you
have an issue which needs legal attention, please contact an
attorney who can handle your case.
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
31
General Information
Spectrum of the 501(c)3 non-profit world
Small charities to giant charitable organizations
No outside funding - funded by a single person - funded by the
public at-large/government grants
Operations solely towards charitable mission - operates almost
like a for-profit
Single entity - giant network of related entities, i.e.
501(c)3s/(c)4s/(c)6s working together
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
32
General Information (Cont.)
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
What type of organization (corporation, LLC, trust)
What type of 501(c)3
Private foundation
Public charity
What type of public charity
Charity vs. support organization
Form of the charity
State compliance
Corporation model compliance
State registration
33
General Information (Cont.)
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
IRS compliance
Executive compensation
Foreign entities
Financial information
34
Type Of Organization
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
Type of organization - the corporate, business or institutional
structure of an organization
Corporation
The vast majority of 501(c)3 organizations
Limited liability for directors and officers
Regulated largely by state law
Limited liability corporation
In order to qualify as a 501(c)3 organization, must be structured
as a corporation
Charitable trusts
Trust law can be complicated; amending trusts can be difficult.
35
Type Of Charitable Organization
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
Public charity
Most common type
Publically supported (generally)
Private foundation
Generally a single or very small number of donors
Often organized as charitable foundations, but not always
Many organizations believe they are private foundations when they
are actually public charities.
Look to the funding source
36
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Types Of Public Charities
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
509(a)1- most public charities fall under this category.
Churches and church associations
Certain educational organizations
Hospitals and medical research organizations
College and university endowments
Public supported charities
Another umbrella category
Complicated tests to determine whether organization qualifies
509(a)2- a publicly supported organization for which most of the
funding comes from internal activities
Also has a complicated tests to determine qualification
38
Types Of Public Charities (Cont.)
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
509(a)3 charity support organization
Organizations formed for the financial support of an existing
charitable organization
Must file Form 1023, Schedule D
39
State Issues
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
State compliance
Corporate compliance
Corporations must incorporate in a state.
Corporations must file annual reports.
Solicitation for funds
40 states and D.C. require registration if you are going to solicit for
funds.
States are more and more often requiring registration for online
solicitation.
37 states and D.C. use a uniform registration statement (URS).
Many states require an annual financial audit.
40
IRS Compliance
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
1023 checklist for initial
Five-year test for public support organizations 509(a)1 and (a)2
Form 990
41
Executive Compensation Example
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
Who benefits from the organization???
Organization has three directors.
One director is also the president, secretary and treasurer.
Organization qualifies as publicly supported under 509(a)1.
President is also an employee, and salary is 50% of the budget.
STRONG IRS SCRUTINY
Is the purpose of the organization the support of one individual?
42
Media Organization Example
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
Cir. 2007: Print media are dying, online media are growing.
Organizations want to form as a public charity, for tax purposes.
Several organizations successfully organize and receive a positive
determination from the IRS.
March 2009: IRS approval comes to a screeching halt.
IRS scrutinizes organizations for media bias.
All pending organizations are put into limbo.
43
Foreign Organizations
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
Foreign entities can obtain 501(c)(3) status.
Must have U.S. entity for U.S. donors, to obtain charitable
contribution deduction
Homeland Security regulations can apply to U.S. charities operating
in foreign locations.
44
Financial Information
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
CPAs can assist the development of historical and future financial
information.
Need assistance from the organization, especially for projections
How solid is the business (mission) plan?
45
Additional Resources
Skyles Law Group ● 200 E. Evergreen #121,
Mount Prospect ● SkylesLaw.com
Citizen Media Project, Berkman Center, Harvard University
http://www.citmedialaw.org/
Lawyers for the Creative Arts, http://www.law-arts.org/
Internal Revenue Service, www.irs.gov
Unified registration statement kit, http://www.multistatefiling.org/
(Note: This site has not been updated in two years.)
46
CURRENT IRS PROCESS FOR REVIEWING FORM 1023 APPLICATIONS
Jim Ritts, RubinBrown
General Information
Who must file
501(c)(3) organizations, except for:
Churches
Church auxiliary
Organizations with less than $5,000 in gross receipts
Public disclosure
48
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General Information (Cont.)
Be clear, concise, well labeled and well organized
Application effective back to date of formation if submitted within 27
months of formation
Otherwise, effective date of filing
50
General Information (Cont.)
User fees
$400 if gross receipts less than $10,000 (four-year average)
$850 for all others
Cyber Assistant – Not yet available
User fees will change.
$200 if use Cyber Assistant
$850 if use paper application
51
Form 1023 Checklist
Required schedule
First schedule in application package to be filed
Last step in completing the application
52
IRS Processing
More than 60,000 Form 1023 filings per year
Former process
Assigned to review on a FIFO basis
Consistently takes six months or more to get an approval
53
New IRS Process
Screening of filings
No issues, no or minor questions
75-day process
Key issues, larger questions
May still take the six-month time frame
54