The IRS, Notice 1382 and Your Organization

Effective January 3, 2012, the IRS eliminated the Advance Ruling process. Now, the instructions for Form 1023 (the application form) are prefaced with this notice when you download the form from the website. However, the application instruction package still includes the entire section related to the advance ruling process. This seems to be creating confusion on the part of new organizations applying for nonprofit approval. 

Prior to Notice 1382, your organization could apply for approval, and receive an “advance ruling” that conferred conditional or preliminary approval, allowing donations to be considered tax-deductible. That is gone. Now, you must receive a formal Letter of Determination to use the statement that “donations are tax-deductible”, or whatever generic statement you are using. The upside of this is that you don’t have to contend with the five-year review.

Section IX (Financial Data) is affected by the ruling as well. Notice 1382 contains specific information on what lines of the application to ignore, and what areas not to sign.

Section IX seems to be the one that is creating the most trouble for my clients. The IRS specifically says in Notice 1382, that new organizations are required to make a “good-faith estimate” of receipts and expenses in lieu of providing specific information, going forward three years. For some reason, people contacting me seem to think that they can’t apply unless they have been in business at least one year. That is not the case. You simply have to be able to provide three years of projected financial data.

This does require some planning and forethought. Essentially, it is no different from the cash-flow projections in a standard business plan. It does require some semblance of a relationship between your mission objectives and the numbers. If you are planning to start a 25,000 sq. ft. museum and open it in three years, it probably isn’t realistic to state that your total income over three years is going to be $5,000.

Over or under-stating your income and expenses will result in a red flag that may delay your approval at best or result in an outright denial. The IRS is not requesting anything here that a lender would not require in the for-profit world. It is simply asking you to have a strategic plan that includes some reasonable goals and estimates. Because a nonprofit must be a viable business first, allowing it to achieve its charitable goals, this is planning you should be doing at the onset.