Q&A #118 – What happens if an organization misses the 27-month deadline to submit the Form 1023?

Question: I serve on the Board of a nonprofit organization was formed about two years ago. During this time, we developed a few pilot programs to determine if the organization would be viable. The pilot programs were successful, so we now want to file a Form 1023 application for 501(c)(3) status. We heard there is a 27-month deadline for the Form 1023. What happens if we miss this deadline?

Answer: The IRS generally will not approve retroactive 501(c)(3) status back to the date of the organization’s formation if the organization fails to file the Form 1023 (or Form 1023-EZ) within 27 months from the end of the month in which it was organized. In most cases, filing late means that 501(c)(3) status, if approved, will apply as of the date the application was submitted to the IRS. However, there are some important nuances in these rules to keep in mind.

First, it is important to know exactly when the clock starts on the 27-month deadline. The clock does not start when employer identification number (EIN) was obtained, or when the organization’s founders first started holding exploratory meetings. Rather, for a nonprofit corporation the date of organization will be the date the Articles of Incorporation were certified by the state government in which the organization was incorporated. For an “unincorporated association,” this will be the date the organization’s governing document (for example, its constitution) were adopted by the signatures of at least two individuals. For other entity types, refer to the explanation of Part II, Line 2 in the Form 1023 instructions.

Second, IRS may grant requests for an earlier effective date if there is “evidence to establish you acted reasonably and in good faith, and the grant of relief won’t prejudice the interests of the government.” See the explanation of Schedule E, Lines 2 and 2a in the Form 1023 Instructions, which also include a detailed description of the factors the IRS will consider when evaluating these requests.

Planning Tip – While submitting a Form 1023 prior to the 27-month deadline is highly recommended, deciding exactly when to submit the Form 1023 within this window can be a somewhat difficult decision that requires balancing the information gained from starting operations against the benefit of obtaining the 501(c)(3) approval as soon as possible. The Form 1023 accurately and comprehensively reflect an organization’s current and planned operations. Do not wait too long before submitting the application, but take the time needed to develop sufficient clarity about the organization’s mission, programs, and structure to provide full and detailed answers to the Form 1023 questions.

Lastly, you will need to consider what the late filing means for the years prior to the filing of the Form 1023. If 501(c)(3) status is not approved retroactively back to the date of the organization’s formation, the organization will generally be considered a taxable corporation for each tax year since it was incorporated. This means the organization will typically be responsible for filing Form 1120 (and any applicable state corporate income tax returns) and paying corporate income tax (if any is payable).

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