10 Tips For Writing an Effective Form 1023

For folks that are starting a 501(c)(3) organization, preparing Form 1023 is usually a pretty daunting task. I’ve prepared a few of these, and it can take significant time and work to really prepare the form properly. Ideally, you want to get the application through on the first try, and limit the amount of follow-up and supplemental information you have to provide. There’s no guarantee or magic formula for getting your 1023 approved (and approved quickly), but there are things you can do to improve your chances:

#1: Write a complete, detailed response to Part IV, Narrative Description of Your Activities.

Here’s the most important question on the application:

Part IV

You’ll want this description to be as complete as possible; the way I like to think about it is that you want to give the IRS reasons to approve your application. Here’s what you need to work through:

  • What does your organization do–past, present, and future? If you’re a really new organization, and you haven’t done much, that’s okay, you’re just going to have an answer that is more forward-looking.
  • Use the 4 Ws & 1 H: Who performs your activities? What are the activities? When do you perform the activities? Where do you perform the activities? How do you perform the activities. The IRS suggests this approach, and I think it makes a lot of sense.
  • Align your activities with your charitable purposes. Remember, 501(c)(3) organizations have to be organized for one (or more) specific purposes: charity, education, literary, religion, science, testing for public safety, fostering national/international athletic competition, and preventing cruelty to children/animals. Your activities should be fulfilling those purposes.
  • Take the opportunity to brag about what you do. This is a great chance to tell people what you do–if you’re approved, this is public record. I don’t know that many people will look at your completed Form 1023 after approval, but to the extent people do look at it, it gives you a chance to tell the public what you do.

#2: Make sure you attach answers whenever necessary.

Most of us are used to filling out IRS forms–fill in the blanks, check the boxes, and you’re done…Form 1023 isn’t like that. Often, the form will ask you to attach answers that explain in greater detail. Here’s an example:

Attach stuff

When the form tells you to “explain” or “describe,” you’ll need to attach an answer to your application.

Extra tip: When I prepare a 1023, I answer the questions on the form, and as I answer the questions, I make a list of every additional response I have to attach. When I finish preparing the form, I use the list to make sure I didn’t miss any needed responses. This has been effective for me, and it might help you not miss anything as well.

#3: Provide supporting documentation.

If you’ve produced documents to accomplish any of your exempt purposes, include that material. Provide an annual report to your donors? Have an application for your scholarship program? The IRS often looks for these sorts of documents, and if you’ve got them, it’s helpful to include them.

That said, don’t provide anything you wouldn’t release to the public.

#4: Look up terms that the IRS defines for you.

If you look through Form 1023, you’ll notice there a lot of bolded terms. Any time you see a term in bold, that means that the IRS has a definition for that term in the Instructions for Form 1023. The instructions are a separate document from the form itself. Here’s an example:

Compensation Question

Notice that the word “compensation” is in bold. If you went into the instructions, you could find a definition for compensation. Lo and behold, here it is:

Compensation Definition

Notice that “compensation,” for our purposes here, goes way beyond salary or wages, and includes some items you might not have otherwise thought of. This is why I suggest that even if you think you know what a word means, if you’re doing your first 1023, you should look up just about every bold term, so that you understand the question you’re answering.

#5: Read the first few pages for changes or adjustments to the form.

Updating any document, I suspect, is kind of a pain for the IRS. So, instead of releasing a new form each time they make a change, they sometimes put changes to the form at the beginning of the form. Unfortunately, most people skip right over that stuff and get to the first page of the form. Don’t do that! You’re only going to guarantee yourself follow-up questions from the IRS (or other problems).

For instance, as I look at the form today, here are the changes mentioned in the first couple of pages before the form itself actually starts:

  • There’s a new mailing address to send the application to; the one listed on page 28 is not the correct address (that seems important);
  • Advance rulings are no longer available, even though the form says they are;
  • The amount of financial data you must provide has changed;
  • You should skip certain lines in Part X about public charity status; and
  • The user fees have increased.

Those changes are significant; missing something like that could cause some problems and delays for your application.

#6: Make the best financial projections you can in Part IX.

For a new organization, completing Part IX (the financial data section) can be very difficult. New organizations don’t have a lot of data, but the IRS requires them to make projections. Your projections don’t have to be perfect, but they do need to be made in good faith.

But how can you make good faith projections? First, do some research–are there similar organizations to you that might be willing to help you make projections? Second, consult with professionals that have experience with nonprofit budgeting–an accountant who works with nonprofit organizations might be particularly helpful here. Additionally, if you or others in the organization have experience with budgeting, that should help as well.

Also, doing these financial projections is a useful exercise, and you should treat it that way. You should do some financial planning as part of the startup process, and you should know how much money you need to raise to fund your work.

#7: Include your organizing documents.

There are a few different types of organizations that can apply, most commonly nonprofit corporations and trusts. For a corporation, there are two important documents to submit: your articles of incorporation (or something similar–the exact terms might vary from state to state) and your by-laws. You’ll also need to include any amendments made to these documents.

The IRS uses these documents to determine if your organization is set up in compliance with the requirements of 501(c)(3) organizations. In particular, they’ll be looking for language that limits your organization’s activity to the 501(c)(3) exempt purposes we discussed earlier and that requires the organization’s assets be given to another 501(c)(3) organization when your organization dissolves.

#8: Don’t forget the schedules.

Form 1023 contains eight different schedules that might apply to your organization. Here are the schedules:

  • Schedule A: Churches
  • Schedule B: Schools, Colleges, and Universities
  • Schedule C: Hospitals and Medical Research Organizations
  • Schedule D: Section 509(a)(3) Supporting Organizations
  • Schedule E: Organizations that Have Not Filed Form 1023 Within 27 months of Formation
  • Schedule F: Homes for the Elderly or Handicapped and Low-Income Housing
  • Schedule G: Successors to Other Organizations
  • Schedule H: Organizations Providing Scholarships, Fellowships, Educational Loans, or Other Educational Grants to Individuals and Private Foundations Requesting Advance Approval of Individual Grant Procedures

Of course, not all of these schedules will apply to your organization, and it’s entirely possible that none of these schedules will apply, but if one (or more) of these applies, make sure to complete each schedule that does.

#9: Don’t release any social security numbers in the application.

I have no idea why this is a problem–the form never asks you for a tax ID other than the nonprofit organization’s–but the IRS reports that SSNs show up fairly regularly in applications. SSNs from directors, officers, volunteers, staff, and donors have shown up in applications. They should not be in there, and they certainly shouldn’t be released publicly, so do not include them. Simple as that.

#10: Use the checklist to make sure you’ve got everything.

At the end of the application, there is a checklist reviewing everything that you need to submit. It’s there to help you–take advantage of it! You’re much better off finding anything you missed before submitting rather than having the IRS request it later.

Photo credit, Kaitlin Gentry, via Unsplash.com, licensed under CC-0

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