New Year’s Nonprofits: Resolve to be Patient While Waiting for Tax-Exempt Status

by Farella Braun + Martel LLP

The start of a New Year brings about a flurry of charitable planning. Frequently, new nonprofits are formed to support year-end charitable gift tax planning or to prepare for a January 1 start date to begin new charitable operations. New nonprofits must factor into their timeline the IRS Exemption Application review process, which is currently so backlogged that careful attention to minor details in the Exemption Application can mean the difference between ringing in the New Year with exempt status obtained in the first quarter of 2014, or waiting until the close of 2015 for exempt status.

IRS Exemption Application Review Process
When the IRS receives an Exemption Application, it conducts an initial review and assigns the Exemption Application to one of four categories: 

  1. Can be approved immediately based on the information submitted
  2. Needs minor additional information to be approved
  3. Submitted obsolete forms or does not include the items specified on the Procedural Checklist
  4. Requires additional development

If an Exemption Application falls within one of the first three categories, the applicant nonprofit should receive a Determination Letter granting tax-exempt status, or a letter requesting additional information within 90 days of the date the Exemption Application is filed.  

However, if an Exemption Application falls within the fourth category,  there is currently a 19-month wait before the application is assigned to an agent for development.  Once assigned, there are no time estimates on how long it will take for an Exemption Application to be developed and approved, as agents have a backlog of other applications they are already working on, despite the 19-month wait.   

Exemption Applications may require “development” for any number of reasons, such as charitable activities that are not clearly described, activities that do not appear charitable, or nonprofits with activities for which the IRS does not have clearly defined policies in place, such as the recent difficulty surrounding 501(c)(4) social welfare organizations.  Additionally, Exemption Applications that only require minor additional information can be relegated to the fourth category as needing “additional development,” resulting in a 19-month wait. 

IRS Guidance on Exemption Application Review Process
On September 30, 2013, the IRS released interim guidance on initial classification of Exemption Applications.  This interim guidance does not appear likely to speed up the process; indeed the wait time has increased (up from 18 months) since this guidance was published.  Now, merely getting an Exemption Application assigned to one of the four categories described above involves both an IRS classifier and a specialty group manager, who may agree or disagree with the assignment and classification.  Once this initial classification is resolved, there is now a secondary screening by a designated specialty group (based on type of nonprofit organization) to confirm that the application meets the technical requirements of a specialty case.  This is done to insure that Exemption Applications are not reviewed by the wrong specialty group. 

Timing Considerations
When the Exemption Application is filed within 27 months of the date the new nonprofit is formed (i.e., the Articles of Incorporation are filed with the Secretary of State or the trust instrument is executed and funded), the nonprofit’s tax-exempt status is retroactive and effective as of the date of formation.  This means that nonprofits formed in December of 2013 are effectively treated as tax-exempt as of that date, even if the Determination Letter approving tax-exempt status is not issued until September of 2015 (assuming a 19-month wait).  Regardless of retroactivity, waiting almost two years for a Determination Letter causes numerous problems for most nonprofits, particularly those relying on public support or donations from donor advised funds, where a Determination Letter is generally required to demonstrate tax-exempt status.  

Currently the only way to protect against the two-year delay is careful preparation of the Exemption Application in an attempt to prevent being relegated to the dreaded fourth category of “applications requiring development.”  It is extremely important that new nonprofits spend the time and effort to make sure that the application is thorough, complete, and anticipates the types of questions the IRS is likely to ask.  If anything important is left out or overlooked, even if relatively minor, the organization will have to wait nearly two years to make the correction or fill in the missing details.  


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Farella Braun + Martel LLP | Attorney Advertising

Written by:

Farella Braun + Martel LLP

Farella Braun + Martel LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.