How to Get a Tax Exempt Letter
Obtaining a tax exempt letter is a crucial step for organizations that want to operate without paying taxes on certain income or donations. This letter, also known as a determination letter, is issued by the Internal Revenue Service (IRS) in the United States and serves as proof that an organization qualifies for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Here’s a step-by-step guide on how to get a tax exempt letter.
1. Determine Eligibility
Before applying for tax-exempt status, it’s essential to ensure that your organization meets the criteria set by the IRS. Generally, organizations must be organized and operated exclusively for religious, charitable, scientific, literary, educational, or other purposes that benefit the public. Additionally, they must not be an organization operated for the benefit of private interests.
2. Choose a Name and File Articles of Incorporation
Select a unique name for your organization and file articles of incorporation with the appropriate state government. This legal document establishes your organization as a separate entity and is required for tax-exempt status.
3. Draft Bylaws and Adopt a Mission Statement
Develop bylaws that outline the organization’s structure, governance, and operation. Also, create a mission statement that clearly defines the organization’s purpose and goals.
4. Apply for an Employer Identification Number (EIN)
The IRS assigns an Employer Identification Number (EIN) to your organization, which is a unique nine-digit number used for tax purposes. You can apply for an EIN online, by phone, or by mail.
5. Complete and File Form 1023 or 1023-EZ
Form 1023 is the standard application for tax-exempt status, while Form 1023-EZ is a simplified version for small organizations with less than $50,000 in gross receipts. Determine which form is appropriate for your organization and complete it accurately. Be prepared to provide detailed information about your organization, its activities, and its financials.
6. Pay the Application Fee
As of 2021, the filing fee for Form 1023 is $850, while Form 1023-EZ is $300. You may be eligible for a fee waiver if your organization meets certain criteria, such as having low operating costs or being a start-up organization.
7. Submit Required Documents
In addition to the application forms, you may need to submit additional documents, such as a copy of your organization’s articles of incorporation, bylaws, and mission statement. The IRS may also request financial statements, a conflict of interest policy, and other relevant information.
8. Wait for Approval
After submitting your application, the IRS will review it and may request additional information. The processing time for Form 1023 can take several months, while Form 1023-EZ typically takes less time. Once your application is approved, the IRS will issue a determination letter confirming your organization’s tax-exempt status.
9. Maintain Compliance
Once you receive your tax-exempt letter, it’s crucial to maintain compliance with the IRS’s requirements. This includes filing annual returns, maintaining records, and adhering to the organization’s mission and purpose.
By following these steps, your organization can successfully obtain a tax-exempt letter and enjoy the benefits of tax-exempt status. Remember to consult with a tax professional or legal advisor for personalized guidance throughout the process.
