5 Mistakes to Avoid When Submitting a 501(c)(3) Application 

Applying for 501(c)(3) status opens up a world of benefits for nonprofits, including valuable tax exemptions that can help you focus more on your mission. But let’s be honest — the journey to getting that status can be daunting. Many organizations just like yours face a maze of paperwork and regulations as they go through the process of filing for the IRS’ Section 501(c)(3) tax exemption status. It can sometimes feel like you’re playing a game of holding on and hoping to file correctly and avoid delays or setbacks. 

It doesn’t have to be that hard to get your organization the structure and benefits it needs to do some good in the world, though. You can experience a smooth application process with careful planning and some help. One of the easiest ways to do this is to avoid minor errors that can result in unexpected setbacks. To help you avoid these challenges, let’s run down five common mistakes that can hinder your 501(c)(3) approval — and how to steer clear of them.

Incomplete Applications 

It may seem like it goes without saying, but submitting a complete and accurate 501(c)(3) application is one of the most important aspects for your organization to avoid delays or even outright rejections. It can be easy to miss including necessary supporting documents or to provide incomplete forms according to the standards. Any misstep here can significantly slow down your approval process. 

The most important documents you should make sure are created and submitted correctly are:

IRS Form 1023 or 1023-EZ 

This is the core of your application. Form 1023 is a detailed questionnaire that helps the IRS assess whether your organization qualifies for tax-exempt status. The shorter Form 1023-EZ is available for smaller organizations but still requires careful attention to ensure accuracy. 

Double-check that: 

• All information you provide on the form is accurate, including your nonprofit’s name, Employer Identification Number (EIN), and financial details. 
• You’ve provided any relevant schedules and attached them to the application.
• You have included a narrative that details and clearly describes your organization’s purpose, the population it serves, and how it meets IRS standards. Though Form 1023-EZ does not require a narrative, you should still have a clear mission statement on file in case the IRS requests it later. 

Governing Documents 

There is specific documentation that you’ll need to have to define the structure and purpose of your organization, including: 

• Articles of Incorporation: This document legally establishes your nonprofit as a corporation in your state. It will typically outline your organization’s name, mission, purpose, and the structure of its governing body (usually a board of directors). The IRS uses this document to confirm your organization is structured properly and that your mission aligns with the qualifications for tax-exempt status. If your articles of incorporation lack the required language or are incorrectly filed, your application can be delayed or rejected. 
• Bylaws: These are your organization’s internal rules. They lay out how it will be governed and operate. Considered an organizing document, bylaws typically cover matters such as how board members are elected, the frequency of board meetings, the roles and responsibilities of officers, and procedures for managing conflicts of interest. The IRS doesn’t require specific language for bylaws as it does with articles of incorporation, nor does it ask to see bylaws in the initial 501(c)(3) application. However, your bylaws must reflect your organization will be governed in a way that supports its charitable mission and the IRS may request to see them during the review process. Make sure you have them on hand and they are up to date. 

Financial Statements 

Providing your nonprofit’s current and projected financials demonstrates how you plan to manage funds responsibly. This is incredibly important in the 501(c)(3) application process because this documentation gives the IRS a clear picture of your nonprofit’s financial health, sustainability, and the scope of its charitable activities. 

They want to see transparency about your current financial status and future plans, so they can assess whether you qualify for tax-exempt status. Some items you’ll want to be sure to include: 

• Revenue Projections: If your nonprofit is newly established and has little to no financial history, you’ll need to submit revenue projections. These projections should provide a detailed forecast of your expected income over the next three to five years. This information will help the IRS evaluate whether your nonprofit’s business model is viable and sustainable in the long term. 
• Detailed Budget Plans: Provide a detailed budget that outlines how your nonprofit plans to spend its funds to carry out its charitable mission. Your budget should categorize expected expenses, including program costs, administrative and overhead costs, fundraising expenses, and salaries (if applicable). It’s important to show that a substantial portion of your expenses will be used for charitable activities, not for profit, or for excessive administrative costs (which can disqualify you for 501(c)(3) status). 
• Current Financial Statements: If your nonprofit is already operational, you’ll need to submit actual financial statements, such as a balance sheet, income statement, and statement of cash flows, to provide a snapshot of your organization’s financial position. The IRS will use these statements to evaluate the financial health of your nonprofit and determine if your organization is using its resources effectively to further its charitable mission. 
• Fundraising Plans: In addition to projections and budget plans, nonprofits often need to provide a strategy for how they plan to raise funds to support their operations and programs. This can include a description of planned fundraising activities, expected donor contributions, grants you plan to apply for, or connections you aim to establish. With this, the IRS is looking to see that your nonprofit will have the financial resources necessary to carry out its mission. 

Unclear or Inconsistent Information 

Providing clear and consistent information is important when completing your 501(c)(3) application. The IRS needs to understand the details of the information you provide to evaluate your nonprofit’s eligibility for tax-exempt status. Unclear or inconsistent information can easily lead to confusion and potential delays.

Avoid using jargon or technical language that the IRS may not easily understand. For instance, instead of writing, “Our organization will focus on the development and implementation of synergistic, multi-faceted community engagement strategies,” try saying, “We will create programs to engage the community in meaningful ways.” This language is more straightforward, direct, and understandable. 

Thoroughly proofreading your application file is also a step you shouldn’t skip. Check your file for errors and inconsistencies to be sure all information aligns throughout your documents. Before you submit your application, this careful file review can help prevent unnecessary complications in the approval process. 

Inadequate Explanations of Activities 

Detailing your organization’s planned charitable activities for exempt purposes is important for your 501(c)(3) application. The IRS needs to see how your nonprofit intends to operate and fulfill its mission. Vague or generic descriptions can lead to questions about your purpose and effectiveness. 

Instead of broad statements like, “We will help the community,” focus on specific programs and services you offer. For example, rather than stating, “We will provide educational support,” you could say, “We will offer after-school tutoring programs for children in underserved neighborhoods to improve literacy and math skills.” This approach clarifies your activities, their intended purpose, and who they’ll help. 

Being specific about your plans helps demonstrate your organization’s commitment and capacity to make a difference. These detailed explanations strengthen your application and enhance your chances of approval. 

Private Benefit Concerns 

The IRS closely examines private benefits and inurement when reviewing 501(c)(3) applications. This scrutiny ensures that your nonprofit operates primarily for charitable purposes and that no individuals benefit disproportionately from your organization’s resources, total assets, or income. 

It’s important to carefully structure compensation for board members and staff to avoid raising concerns. Ensure salaries and benefits are reasonable and aligned with industry standards. Transparency in compensation helps demonstrate your organization prioritizes its charitable mission over personal gain. 

If your compensation structure is complex or involves significant salaries, consider consulting an attorney experienced in nonprofit law. This kind of guidance can help you navigate nonprofit regulations and eligibility requirements to ensure that your organization remains compliant, reducing the risk of issues during the application process.

Establishing clear policies regarding compensation and benefits can also bolster your nonprofit’s credibility. Documenting your decision-making process and organizing documents justifying salary levels based on market research can help protect public safety and your organization during an audit. Take control of your organization’s narrative here by proactively addressing private benefit concerns, so you can reinforce your commitment to your nonprofit’s mission and increase your chances of a smoother approval process. 

Neglecting The User Fee 

The IRS charges a user fee for processing 501(c)(3) applications. This fee is necessary for the IRS to review your application and determine your nonprofit’s eligibility for tax-exempt status. Currently, the user fee for Form 1023 is $600, while smaller organizations using Form 1023-EZ pay a reduced cost of $275. You can make this payment online through the IRS website or include it with your application. Before submitting your application, check the IRS website for current fee information and payment methods. 

Neglecting to pay this fee or miscalculating the amount can lead to delays or even rejection of your application. Double-check that you’re submitting your request for the correct fee based on your organization’s size and the form you’re using. Also keep a record of your payment, as this can serve as a form of proof of compliance if any questions arise during the review. 

Consider Working With a Nonprofit Attorney 

Working with a qualified nonprofit attorney can significantly improve your chances of submitting a successful 501(c)(3) application the first time around. Nonprofit attorneys understand the complex regulations and requirements for obtaining 501(c)(3) status and can offer invaluable support throughout the application process. 

Here are some ways a nonprofit attorney can support you: 

• Review and Draft Documents: Attorneys can thoroughly review your governing documents, bylaws, and other required paperwork to ensure they meet IRS standards. If your organization lacks certain documents, an attorney can draft them for you, ensuring everything is compliant from the start. 
• Provide Direction on Activities: A nonprofit attorney can assist in structuring your organization’s activities to align with your charitable mission while avoiding potential legal pitfalls, such as conflicts of interest. This helps ensure that your activities qualify for tax-exempt status. 
• Address Private Benefit Concerns: One of the key issues in obtaining 501(c)(3) status is avoiding private benefit or inurement. Nonprofit attorneys can help you design appropriate compensation structures for your board members and staff to minimize the risk of these issues, ensuring compliance with IRS regulations. 
• Represent Your Organization: If your 501(c)(3) application is selected for audit or additional scrutiny by the IRS, a nonprofit attorney can represent your organization and advocate on your behalf. Their experience in tax-exempt law can make a critical difference in achieving a favorable outcome. 

Even after you secure 501(c)(3) status, a nonprofit attorney can offer ongoing advice and support as your organization evolves and grows. Their experience can be invaluable in navigating the challenges and opportunities of running a business as a nonprofit corporation. 

Let Chisholm Law Work With You on Your 501(c)(3) Application 

Avoiding common mistakes in your 501(c)(3) application is key to securing tax-exempt status and ensuring the long-term success of your nonprofit organization. You can prevent unnecessary delays and complications by submitting a completed application with accurate information. 

At Chisholm Law, we understand the complexities of the application filing process and are here to help you navigate and complete it smoothly. Our experienced team can guide you through and complete each step, ensuring that your application meets all requirements and is submitted correctly. 

Don’t risk your nonprofit’s future by going it alone. Contact Chisholm Law today for a free consultation, and let us assist you in achieving your mission. 

*Past results do not determine future outcomes