Applying for IRS 501(c)(3) Exempt Status
Failure to File Within 27 Months of Incorporation

If the application is filed within 27 months of incorporation the exemption relates back to the date of incorporation.  Otherwise (unless one of the exceptions applies) it relates back ONLY to the date of the application.
  • Why is missing the deadline a problem?  All corporations (even nonprofits unless they are exempt) are required to file an annual corporate tax return (Form 1120). If the exemption does not relate back to the date of incorporation then a corporate tax return (Form 1120) should have been filed for each year of corporate existence prior to the exemption.

  • Three Possible Solutions:

    1. Go Ahead and Simply File the Missing Corporate Returns for the Prior Years:  If eligible, use the simplified Form 1023-EZ exemption application.  After the exemption is granted simply file the late corporate tax returns for each of the tax years prior to submitting the exemption application.  Once the exemption is granted there may or may not be a late filing penalty.  With each late return filed the nonprofit would be required to include a payment for any taxes that might be owed and payment for the late penalties (if any).  If there is no taxable income for a particular year the late filing penalty is $0.  If there IS taxable income for a particular year there will be a late filing penalty, generally 5% of the tax owed (it's a bit more complicated than that and, if applicable, the nonprofit should consult with a tax professional).

      • This solution might be attractive to an organization that otherwise qualifies for the simplified and less expensive Form 1023-EZ application and wants to avoid the significantly higher filing fee required with a full blown Form 1023 application when opting for solution #3 (below).  There would be little downside to this solution in situations where no back taxes or penalties would be owed upon the late filing of the returns.

    2. Start from Scratch with a New Corporation:  Another solution is to start from scratch and abandon the existing corporation and create a new one using a different name.  The filing fee with the State of Florida is only $70.  The client would then file the exemption application under the name of the new corporation within the 27 month deadline.

      • This solution might be attractive if the current non-profit owns no significant property and has no ongoing contractual obligations - AND - the organization is otherwise qualified for the simplified Form 1023-EZ application

    3. Qualify for an Exception :  Apply for the exemption using the full blown IRS From 1023 (even if otherwise qualified for simplified and less expensive Form 1023-EZ).

      • Fill out Form 1023's Schedule E to determine if the entity qualifies for an exception to the 27 month deadline.  The exceptions include:

        • churches
        • organizations "normally" having "gross receipts" of $5,000 a year or less, and
        • entities qualifying under a "group exemption".

      • If there is no exception, do as instructed on the bottom of Schedule E, that is, apply simultaneously for an exemption as a Section 501(c)(4) "social welfare organization" by filling out and including with the application packet the first page of Form 1024.  501(c)(4) exemptions always relate back to the date of incorporation (problem solved).  You would end up having both types of exemptions.

      • If successful and the exemption is made to relate back to the date of incorporation then Form 990 must be filed for each prior year.  All exempt organizations are required to file an informational return with the IRS each year using one of the varieties of Form 990.  Failure to do so for three consecutive years results in an automatic revocation of the exemption.  CLICK HERE for more information on automatic revocation.  It is sort of a "catch 22 type situation.  If you were incorporated, say, 4 years ago and you use this option to have the exemption relate back to the date of incorporation then you would need to late-file a Form 990 for each relevant year going back to the date of incorporation so as to avoid the automatic revocation.  Most small organization are eligible to use the simplified Form 990-N (the so called "postcard filing").  Thus, as soon as the exemption is granted the organization would file a separate Form 990-N for each year going back to is incorporation.  Form 990-N can be filed electronically on-line (CLICK HERE for the link).