Filing the Tax-Exemption Application for a 501(c)(3) - Defending Equity Initiative’s Form 1023
Continuing our series of launching a new nonprofit, and our own work to launch Defending Equity Initiative (“DEI”), this post will cover the basic process for preparing and submitting a Form 1023, and how we thought through some of the key questions. This is often the part of 501(c)(3) formation that new charities are either intimidated by or blow past without enough thought, sometimes leading to complications down the road. And, in general, I do encourage new nonprofits to get legal support as they go through it because, as you’ll see, some of these questions feel a bit complicated or reflect concepts that new charities should really be educated on before jumping into the fray.
But sometimes organizations need to do it themselves, and this is at least one example of how to do it and a discussion of things to think about. That’s not to say that you should just take the 1023 we filed (copy here) and imitate it mindlessly. In fact, please do NOT do that — none of this is legal advice, every submission is different, and you are submitting this form under penalty of perjury. There are many things we said ‘no’ to that you should say ‘yes’ to and vice versa. But we submit a lot of these, and this is the approach we did when doing our own self-help, so hopefully you find it helpful.
We will have more posts in the future breaking down the Form 1023 into more pieces, tackling some of the questions that did not come up for this application, and providing more self-help resources. For now, we wanted to get this out to commemorate this exciting step for our new nonprofit, and get the clock ticking on the IRS to respond and issue tax-exempt status so this organization will have an enhanced ability to support the charities under attack in the current environment.
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An important first note: there is no paper Form 1023, you have to go to the IRS website. It’s an online form to fill in with its own eccentricities. For example, you need to establish an account on “www.pay.gov” which includes 2-factor authentication through either id.me or login.gov (my personal opinion: support the public option and choose login.gov). Use the search option once you’re logged in and type in “1023”.
Choosing the Right Form
You will then find two options: the Form 1023 and the Form 1023-EZ (the “streamlined” application). The Form 1023-EZ is comically lacking in detail and has been the cause of many patently non-charitable organizations getting 501(c)(3) status, then either later being revoked or just continually abusing our woefully underfunded tax system. Still, if you qualify for the 1023-EZ, it does get you the application faster and for cheaper, so it makes sense to at least consider it, especially if you’re obviously a charitable organization and have nothing you’re worried about getting “blessed” by the IRS in the more detailed sound.
As fun as a streamlined application might sound, there is a VERY good chance you don’t actually qualify. The IRS has issued a 9 page worksheet consisting of 34 questions and if you answer ANY of them ‘yes’ you can NOT file the Form 1023-EZ, and you need to do the full form.
Some of the questions are capturing things that are obviously disqualifying for a 501(c)(3) (e.g. being incorporated as a for-profit), but most are just situations where the IRS wants the benefit of the full Form 1023 before approving.
The question that knocks out a significant majority of potential applicants is whether you have received more than $50k in any year, or if you expect to receive more than $50k in any of your first three years. If so, you need to do the full form. In my experience, it is rare that it makes sense to start your own nonprofit organization if you never expect to receive more than that. Having a nonprofit corporation requires upkeep and attention, and it’s rarely worth it if it’s only unlocking that much revenue, particularly when you consider that working with a fiscal sponsor is much more cost-effective for organizations at that size.
Even if you can make a good-faith determination that you do not expect to go over $50k in that year, you would still be disqualified if you fall into any of the other excluding categories, including if:
You have been revoked and are seeking reinstatement — see our post on this here.
Your classification is going to be a school, hospital, medical research organization, supporting organization or private operating foundation — these are complicated categories that are almost never attempted under $50k.
You are going to be a church — churches, if you’re actually a church (you’re probably not) do not actually NEED to file a Form 1023, but if they do, they have to do the full form — being a church comes with a lot of advantages (e.g. no Form 990s) but it’s a narrow category and not something they’re going to confirm you have without a full Form 1023.
You are going to be a donor-advised fund sponsor — same, no one is doing this for under $50k, and there are rules you should know about.
You are going to create or disseminate digital assets (e.g. cryptocurrency) — like me, the IRS is skeptical that you have a charitable activity in mind and wants to hear more.
More than 5% of your assets are in privately held securities or funds.
You are a successor to a for-profit.
You already have assets of more than $250,000.
You were formed in a foreign country or have your mailing address in a foreign country.
We briefly considered whether DEI would qualify for Form 1023-EZ. Fundraising is not a major part of the plan — we already have many people reaching out to volunteer and do not yet have a matter where we expect to hire paid support. But, as we filled out the budget (p. 13 of the application we submitted) based on how we hope/expect this thing to grow, being over $50,000 by the end of year 3 felt realistic and reasonable.
On top of that, a Form 1023-EZ would not help our goals of (1) educating our blog’s readers on how to submit a Form 1023, and (2) demonstrating that DEI’s work is still charitable and educational, and doesn’t need to hidden from the IRS — a lesson that we hope more charities and the foundations that support them take to heart.
So, we did the full Form 1023.
Filling Out the Form 1023:
If you count schedules (none of which we had to fill in thankfully), the Form 1023 adds up to 40 pages. More to come in the future, but in the spirit of getting this post out, let’s skip the question-by-question review, and start with a high-level overview of our approach and some key decisions we made along the way.
Addresses. One of the early questions is to list the names of all of your directors and officers, and their addresses. Note that we used (and strongly encourage other applicants to use) the organization’s address as the address for directors and officers. The IRS is fine with it and it protects the privacy of your directors and officers’ home address.
Narrative. The heart of the application is at Part IV, Question 1 — what are you going to do and how are you going to do it. For this question, in particular, we use a supplemental response (at the end of the PDF) to provide detailed responses to the question. It lets us go beyond the space permitted, and also just lets us write and edit the doc in Word (particularly helpful when sharing it with clients). There are specific questions the IRS asks and we try to cover them all through our narrative explanation of the mission and the activities we carry it out, paying specific attention to calling out who will carry out the work and how it will be funded.
As we wrote the narrative, you’ll see that we focus on two categories: (1) free legal and ancillary services for charities and (2) producing educational publication. We don’t always do this, but in this case it felt appropriate to give some legal citation to why these are charitable and educational activities. Legal services are not inherently charitable but can be if conducted to “secure rights under law” (e.g. a legal aid or public defender’s office). And any kind of services that support a 501(c)(3)’s work can become charitable if they are provided exclusively to 501(c)(3)’s “substantially below cost”. Note that substantially below cost is harder to satisfy than substantially below market — the nonprofit has to be aggressively losing money on the activity in order to call it a charitable activity. Since we’re providing it for free, and paying any costs out of donated funds, we think we satisfy that standard easily. Similarly, there are kinds of publishing activities that harder to qualify under 501(c)3, but creating resources and publishing them for free makes this pretty easy.
Lobbying. We checked ‘no’ for influencing legislation at Part IV, Question 6, but want to be very clear that 501(c)(3)’s ARE allowed to check yes and often SHOULD, at least if they are going to be classified as a public charity (more later). While candidate activity is off-limits (Part IV, Question 5), public charities can influence legislation (i.e. lobby) as long as they stay under the applicable limits. And filing Form 5768 can help establish a favorable and trackable limit under Section 501(h)— more on that here.
So why didn’t we? At this point, we want DEI to be a very focused organization: a pro bono legal services provider that also produces educational resources. While I could imagine resources that constitute grassroots lobbying (e.g. include a ‘call to action’ that encourages readers to call a legislator), none of the resources we have in mind right now meet that definition. So the correct answer is ‘no’. If we change our mind later, we could always make the 501(h) election. An important point: what you put in the Form 1023 does not limit what you can do later. You CAN change your mind and you don’t need to re-do it. You can provide updates on new activities in the Form 990. Think of your Form 1023 as a snapshot of current plans, but not an exhaustive recounting of everything you might theoretically do in the future.Contracts with Related Entities. We checked ‘yes’ at Part V, Question 5, because (1) it was an opportunity to explain the relationship between our law firm and DEI (our law firm provides stuff for free to it) and (2) it is realistic that we could have an agreement with a director in the future if we add directors that are also service providers, and it makes sense to hire that provider on a paid basis (e.g. if there’s litigation that goes beyond what could realistically be done pro bono). It gives us a chance to signal that we understand what the rules are in that situation, and will follow them.
Projected Financials. The financial information at Part VI is our best estimate of what will happen in the first three years. Clients often get hung up on this, but the form just asks for a reasonable, good-faith estimate of what we expect for the next 3 years. If we are wrong and we get a lot more or a lot less or spend it on different things, our tax-exempt status won’t go away. We should just be providing a financial projection that is reasonable and consistent with our narrative explanation. For us, we’re expecting (1) modest donations that will grow over time, (2) that there will be situations where we need to hire professionals for services (e.g. litigators to provide paid services for extended matters or paid expert witnesses in a litigation, and (3) there will be some spent on hard costs (e.g. filing fees).
Public Charity Status. A key question that often gets filled out wrong: Part VII, Question 1 “Foundation Classification”. This question is intended to capture whether you are a public charity and, if so, on what basis. If there is no basis for being a public charity, you are a private foundation, maybe a private operating foundation if you meet that test. A full discussion of that distinction is beyond the scope of what we can do here, but we selected the first and most common category: that we should be classified as a public charity because we expect to pass the public support test under Internal Revenue Code Section 170(b)(1)(a)(vi), which is the public support test easiest to pass for organizations that rely on donations.
Now, whether we actually pass that test will only be answered in years 5 and 6. To continue being a public charity in year 6, we need to pass the public support test (with either 33 1/3% public support or 10% public support with sufficiently positive facts and circumstances) based on years 1-5 or years 2-6. If all of the funding were coming from a particular person or organization (e.g. our law firm), we’d fail and would probably be a private foundation. While we are providing the initial seed funding in year 1 and will likely continue to fund, we are doing enough outreach that we think it’s very likely that our support will be a mix of our own funding, individual funding, foundation grants, and support from our law firms that we’ll pass a test. If we’re all still here and engaged in the practice of law in 2030, we’ll put up a blog post and see how that all went. But for now, very comfortable with this answer.
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Submitting the Form 1023
To submit the Form 1023, an officer needs to sign the signature page of the Form 1023. (Yes, you do have to print it out and sign under your name the way I did it, even though there’s no place to sign — the IRS does not respect electronic signatures).
You will also need to upload all of the required attachments — for us, that was the signature page, followed by the Articles of Incorporation, Bylaws, and Supplemental Responses.
You will then pay the IRS $600 and get a confirmation page, which we recommend printing and saving as a PDF, and downloading what you submitted to the IRS, both the form and attachment, and save them together.
Then, you wait… typically in the 5-8 months range, though there are random outcomes on either side of that. There are situations where you could try to expedite and submit an expedited request, but that generally requires a grant with a ticking clock (e.g. we lose this grant, as evidenced by this grant letter, if we don’t have a determination letter by X date) or something else that will have a significant adverse effect on the organization if the determination letter is not issued in time. Remember: you’re signing and submitting under penalties of perjury here.
When the determination letter comes, it will be retroactive to the date you incorporated, as long as you filed within 27 months.
So we expect to get a 501(c)(3) determination letter issued with an effective date of April 9, 2025 — I think we straightforwardly meet the requirements and there is no good reason for the IRS to deny or any unanswered questions. If the IRS asks questions, we will both answer them and share the exchange here.
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We look forward to keeping our readers (if you’ve somehow made it this far) informed on the progress of this application. And we’re even more excited about providing updates on the work of Defending Equity Intiative, and strongly encourage you to use the forms on the website to either volunteer or ask for help.
