Many thanks to Steph Gentile and Buff Miller for their review and contributions to this article.
Groups ranging from small neighborhood projects to large national initiatives sometimes want to mobilize quickly to meet a community need or other charitable purpose. Many of these groups are considering forming a not-for-profit organization, that is, forming a new entity that qualifies as a tax-exempt charitable organization under section 501(c)(3) of the United States Tax Code. Aspiring American nonprofit founders often wonder how to start a nonprofit and how to speed up the process.
Baseline: The Regular Process
Under normal circumstances, forming a new entity and obtaining a tax-exempt determination letter from the IRS takes anywhere from a few weeks to 10 months or more, depending on a variety of circumstances, including the current volume of IRS requests. After forming a legal entity (usually, a nonprofit corporation under state law), the organization will complete and submit a tax exemption application on IRS Form 1023. A typical application package is 50 to 100 pages, including both a long application form and dozens of pages of attachments. The organization must then pay a $600 filing fee and can expect to be contacted by the IRS within 180 days of submission with acknowledgment of receipt.
Donations received before the entity’s application receives IRS approval will generally be treated retroactively as tax-deductible contributions if the entity’s application is approved. These donations will not be tax deductible if the entity’s claim is denied by the IRS. As a result, many potential donors will insist that the entity receive a favorable ruling letter from the IRS before contributing to the entity.
Some faster alternatives
In the face of natural disasters, public health or humanitarian crises, and other pressing needs, many would-be founders of tax-exempt entities wonder how they can expedite this process.
Fast-track option 1: Partner with an existing tax-exempt entity
Often the fastest way to get up and running is to partner with an existing tax-exempt entity that is already working on a similar or complementary mission. In such a partnership, the founders, volunteers and donors of the new project do everything they would otherwise do with a new entity, but under the umbrella of the existing tax-exempt entity. In addition to the obvious overhead savings, name recognition of the existing tax-exempt entity will frequently open doors that would not be available to a brand new startup entity.
Accelerated option 2: Set up tax sponsorship with an existing tax-exempt entity
In this alternative, the founders create a not-for-profit entity. But rather than wait to receive a determination letter from the IRS, the new nonprofit enters into a tax sponsorship agreement so it can immediately begin collecting tax-deductible donations. Fiscal sponsorship is an arrangement whereby an existing tax-exempt entity (the sponsor) supports a new project through a contract called a fiscal sponsorship agreement. The purpose of the project must serve the tax-exempt mission of the sponsor. Typically, the project is responsible for raising its own funds, which are donated by the donors to the sponsor and then granted by the sponsor to the project so that the project can achieve the tax-exempt purpose of the donation. A fiscal sponsor usually keeps a percentage of the funds raised by the sponsored project. Sometimes fiscal sponsorship is temporary, either because the project is waiting for its own IRS Form 1023 request to be processed, or because the project itself is temporary (disaster relief may be a good candidate for a project). temporary). Other times the fiscal sponsorship is long-term. Since the tax sponsorship agreement is an over-the-counter contract, it can be put in place quickly. The set-up time depends on how quickly the project can get a fiscal sponsor and how long the parties take to reach a negotiated agreement. It could be as little as a week, but three to four weeks is more typical.
Any existing 501(c)(3) tax-exempt entity can serve as a fiscal sponsor, but there may be some advantages to using an experienced fiscal sponsor who already has the infrastructure in place to support newly launched projects. This can be especially true for organizations that need to act quickly and focus their attention on real-time developments of current events. The San Francisco Study Center provides a nationwide directory of fiscal sponsors that can be filtered by geography or topic, including disaster relief. Since the sponsoring organization will control the funds raised by the new project, it is important that any new organization choose a sponsor who has a good reputation and good alignment with the work of the new project. New projects should ask to speak to other projects the sponsor has supported in the past as a reference check.
Fiscal sponsorships come in different models, the details of which are beyond the scope of this article. Projects seeking fiscal sponsorship should carefully review the terms of the agreement and consult with an attorney if necessary.
Expedited Option 3: Request an expedited review from the IRS
The IRS allows organizations to request expedited processing of a Form 1023 request for certain compelling reasons, including disaster relief. It is probably not enough that the organization’s activities benefit victims or front-line responders. The organization must demonstrate that it is organized to provide critical relief and that the organization’s ability to meet those needs will be materially and adversely affected unless the request is reviewed promptly.
Applicants requesting an expedited review must use standard IRS Form 1023 and must attach a written statement that details the compelling reason for the expedited review. It is often useful to include:
- A brief description of the disaster, immediate need and details of how the organization will provide relief
- An explanation of the immediate need for the specific disaster relief services provided by the organization
Financial circumstances may also provide a compelling reason for expedited review. A newly created initiative with a large fundraiser planned or a commitment for a large grant that is dependent on the organization achieving tax-exempt status by a certain date may have a compelling reason for expedited review. In these cases, the organization’s written request for expedited review should include, to the extent applicable:
- A description of all pending grants, including donor information and amount or assets to be received
- An explanation of how the loss of the grant(s) could impact the organization’s ability to operate and provide assistance (and the relative value of this grant as a percentage of annual funding)
- A statement explaining any other expected consequences of refusing expedited processing
- The date an exemption letter is required, if applicable
The IRS does not guarantee an expedited review for all applicants who request it. If the applicant does not provide a compelling reason for the request or if the IRS chooses, at its discretion, not to grant expedited review, the IRS will review the request in accordance with its normal procedures.
Expedited Option 4: Use Form EZ
Organizations with projected gross revenue of less than $50,000 per year for the first three years and total assets of less than $250,000 may be eligible to file the Short Form 501(c)(3) , called IRS Form 1023-EZ. The EZ form is much shorter than the standard form. In our experience, the processing time for an EZ request is typically four to six weeks instead of eight to ten months. The filing fee is $275 for the EZ request instead of the $600 fee for the standard request. Applicants should file IRS Form 1023-EZ online at pay.gov. An organization using the EZ application cannot request an expedited review, since all EZ applications are already expedited.
Organizations considering applying for grants should check with potential donors in advance about policies regarding the eligibility of grant recipients who have used the EZ app. Some foundations may have policies or preferences against making grants to organizations that have filed using IRS Form 1023-EZ, as the EZ application requires significantly less information and transparency than the regular form .
Please note that newly created charities must comply with requirements beyond the steps referenced in this article, including registration with relevant state attorneys general offices, filing annual returns, and filing tax returns. in right time. For more information about requirements for charities, see the resources available on the IRS Charities and Nonprofits webpage.
Last revised: September 9, 2022