DeaDly Mistakes

of filing Your irS non-Profit APPlicAtion

Learn to Avoid the Mistakes That Kill or Delay Nearly 50% of IRS Applications for Tax-Exempt Status
e Fil rm t nt Fo ou Do ur ith his Yo 3 W g T n 02 adi irst! 1 e R F

By Christian leFer
Author, Speaker, and Creator of

GetNonprofitStatus.com
and the Non Profit Launch Kit

This eBook is available for the Kindle via Amazon.com, and for the iPad and iPhone via iTunes, and makes a great gift for anyone you may know who has considered starting a non-profit organization!

Copyright 2011 WarpDrive Marketing, LLC All rights reserved except public domain material. This eBook or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations with proper attribution, or in a book review. WarpDrive Marketing Centennial, Colorado 80122

www.GetNonProfitStatus.com
This eBook is presented solely for general educational purposes. The author and publisher are not lawyers or accountants and are not offering legal or financial advice. While best efforts have been made in preparing this eBook, the author and publisher make no representations or warranties of any kind and assume no liabilities of any kind regarding the accuracy or completeness of content and specifically disclaim any implied warranties of fitness for a particular purpose. Neither the author nor the publisher shall be held liable to any person or entity with respect to any loss or incidental or consequential damages cause, or alleged to have been caused, directly or indirectly, by the information contained herein. Every organization is different, and IRS guidelines and applicable law are subject to change. The reader is responsible for determining their need to consult a lawyer or other competent professional.

7 Deadly Mistakes of Filing your iRs Non-Profit application

table of contents
About the Author Deadly Mistake #1 Failure to Clearly State Your Organizations Mission and Purpose Deadly Mistake #2 Failure to Describe How All of Your Activities Relate to Your Purpose Deadly Mistake #3 Failure to Complete and Enclose All Applicable Schedules Deadly Mistake #4 Failure to Include Your Organization Name and EIN on Each Page Deadly Mistake #5 Failure to Include Proper Addenda and Policies Deadly Mistake #6 Failure to Address Conflict of Interest Issues Deadly Mistake #7 Violating IRS Rules by Indicating Non-Exempt Purpose or Activities Closing Comments Helpful Resources 27 30 32 23 18 16 12 9 6 2

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7 Deadly Mistakes of Filing your iRs Non-Profit application

About the Author

Christian LeFer is a marketing and strategic consultant with clients across the United States. He has developed projects for charities, churches, CEOs, and congressmen. Christian and his wife Allison, who is a court-appointed special advocate (CASA), have become tireless advocates for children in need of care, through their experience as a therapeutic foster family and recently as adoptive parents. Christian previously had followed a career path across a spectrum that included construction, classic autos, issue advocacy, and marketing and communication. Ultimately, his entrepreneurial streak, coupled with a passion for creating positive change, proved too strong to resist. Over the past ten years, he has formed, run, advised, and consulted for non-profit organizations with diverse missions ranging from foster parenting to private education, church and civic organizations, and those promoting civil liberties and free-market philosophy. Now he wants to help as many other non-profit leaders as possible achieve success. Christian specializes in guiding individuals and teams to bring their world-changing mission into reality by helping crystallize their vision into an action plan, with a constant eye to seeking and harvesting new opportunities for growth. In the foreword to his forthcoming book, Compelled to Action: Voluntarisms Victory over Coercion, Christian declares: Contrary to conventional wisdom, I believe that the need for committed individuals to launch innovative non-profits and charitable ministries in the near future will be greater than at any time in our nationseven our worldshistory. But these leaders must outrun a new spirit of government compulsion. Economic crisiswhether the one weve seen or the one that many believe is loomingis not a reason to hesitate starting a non-profit. In fact, its the reason you must heed the call, if you have one, to serve others. Get started now. Political elites will never solve the worlds problems. Find me a need and Ill find you a free individual who has a vision to meet it voluntarily - and more effectively - than any bureaucrat could. True voluntarism beats coercion, even when masked as incentive, every time. When it comes to doing good unto others in a way that is compassionate, efficient, and transparent, nothing can match the independent non-profit organization or ministry. I hope youll join me in pursuing the road less traveledI will do all I can to make that path easier for you to take.
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7 Deadly Mistakes of Filing your iRs Non-Profit application

Introduction
A Special BreedThe Social Entrepreneur Do you look at the world and see injustice, preventable suffering, lack of knowledge or hopeand envision a better world? Whether you are motivated by faith or simple compassion, the fact is, anyone who wants to start a non-profit organization probably fits a certain personal profileit seems many of us are wired that way. Inspiration can come from the Bible, through classic Non-profit leaders are a particular breed. Doers rather than poetry, and from our innate wishersdistinguished not so much by compassion, though desire for community. Action it is essential, but by action. Men and women of action who are comes from our will. more concerned with contributing to the world than with getting Anything you did for even something out of it. Are you the type of person who looks at the the least of my people problems of the world and wonders: Why isnt someone dohere, you also did for me. ing something about this? There must be a solution!
The Book of Matthew

If I can stop one heart from breaking, I shall not live in vain; If I can ease one life the aching, Or cool one pain, Or help one fainting robin Up to his nest again, I shall not live in vain.
Emily Dickinson

If youre reading this eBook, you know exactly what Im talking about. Youre someone who wants to step in and make something happen simply because you dont see anyone else doing it. You aspire to be the solution. Being a social entrepreneur is often more a calling than a sober career choice, a calling driven by new ideas and a passion for creating a better world. However, it is not a decision to be taken lightly. For many years, the problem I struggled with is, How do I bring about this change while putting food on the table for my family?

Starting a non-profit organization from the ground up may at once be the hardest and the most rewarding thing youll ever do. Whoever coined the saying The Road to Hell is Paved with Good Intentions must have made an error in completing their IRS Form 1023 non-profit application! As you will see in Deadly Mistake #7, even making an honest mistake can land you in Form 1023 hell. In other words, unfortunately, passion alone does not a successful charity make. Its universal. You could be the next Michael Jordan, but that doesnt mean youll pick

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up the ball and make points on your first five shots. Weve all seen well-meaning leaders with every eartly advantage try and yet fail to improve conditions for the masses. On the other end of the spectrum, we have Mother Teresa, in possession of no wealth or high station, who changed the destiny of thousands and touched the heart of the world. It takes a special combination of spirit and spit to make it all happen. As a doer, youve already taken the first action step by reading this eBook. Will you take the next step? If youre just starting out on your non-profit effort, there are plenty of opportunities for you to learn hard lessonsdespite your good intentions. But why go through unneeded heartache in filing your IRS application for Tax-Exempt Status before you ever get off the ground? Anyone who has attempted to file the Form 1023 knows, its an exercise in frustration. So whats a non-profit leader to do to navigate the IRS Exempt Organizations minefield? Learn as much as you can from those who have already overcome the obstacles. Many serious mistakes can be avoided simply by being aware of them. The problem is, the IRS 1023 application process is fraught with traps, IRS Red FlagsTM, and few straight answers: Consider this eBook a seamans chart to mark dangerous shoals, rough waters, and the pirates who await unsuspecting explorers. For too long, the journey to non-profit success has been needlessly painful. My passion is to make the path to serving others through a non-profit mission easier and faster than it has ever been. Come on, lets get started! First, Lets Keep It SIMPLE The purpose of this eBook is not to tell you how to be a great leader, or how to build the next United Way. If youre interested in that, theres plenty of time once you get your non-profit corporation formed up, and then after you obtain IRS tax-exempt status. The journey of a thousand miles begins with one step. But thousands of people who dream of starting a non-profit never even begin because of the daunting IRS application process. The fact that youre even considering taking on this kind of effort without a lawyer says a lot about you. However, let me be clear: I have nothing against lawyers. Some of my best friends are lawyers! We are in many ways, however, the victim of our own choicesweve foolishly

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allowed experts, including attorneys, to impede our involvement with our government representatives, our kids schools, and even get between us and our fellow Americans. My purpose in creating GetNonprofitStatus.com and my Non-Profit Launch KitTM is to empower YOU to control your non-profits destiny so you can use it to change the world. You shouldnt lose sleep over the daunting application process, or be forced to bear the the expense of a lawyers or accountants services to do that. I guarantee that preparing your IRS 1023 and ancillary paperwork using my step-bystep system will increase your chances at getting non-profit status for your organizationfaster and at less expense that you might have imagined. Sure, it will require some ingenuity, perseverance and attention to detail, but in the end, you will benefit by truly owning the process. The exercises and processes to clarify and perfect your organizations mission and vision that I am offering to teach youif you are willingwill equip you to raise money, build a board and succeed for the long haul. So, without any further ado, Im going to open the curtain and share my success AND my mistakesso that you dont have to make the same ones I did. By the time youre done with this eBook, you should have a solid idea of what not to doas well as the basic elements of what you need to do. So, breathe easy, grab a highlighter and a pen for notes, and lets demystify your IRS Form 1023 Application for Recognition of Tax-Exempt Status. You can realize your goals and dreams for your organization!

(If at any time you desire additional information, tools, or consulting in starting up or obtaining IRS Tax-Exempt Status for your non-profit organization, contact me or go to www.GetNonprofitStatus.com. There I offer significant resources for free, and if you want to go to the next level, professional-level training and Non-Profit Launch Kit, with the patent-pending Turbo1023 online software, for purchase.)

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7 Deadly Mistakes of Filing your iRs Non-Profit application

Failure to Clearly State Your Organizations Mission and Purpose

You must clearly and concisely state your non-profits mission in tangible and concrete terms.
Even if your non-profit organization has a mission so important that is seems the world may stop spinning without it, you probably wont get very far with the IRS if you cant communicate your intentions to their satisfaction. Enter mission and purpose. You probably dread dealing with the IRS as much as I doits exactly the kind of non-productive, draining process that makes you daydream longingly about topics like root canal. Think about it in these terms: imagine youre a bank loan officer and someone comes into your office looking for a $50,000 business note. They may look the part, and they may seem genuinely passionate about what their organization will do. But when you ask them about the goals of their outfit, things get foggy.

One of my favorite Mark Twain quotes goes something like: I once sat down to write a short letter, but I didnt have time so I wrote a long one instead. This was his clever way of saying it takes real work and finesse to eliminate extraneous verbiage and boil something down to its essence.

Are you going to open the vault and hand over stacks of cash, based only upon the idea that they care? Not likely. So applying for non-profit status without being able to clearly explain your mission and purpose can work along those same lines: it can be an application killer. Give your budding non-profit the best chance to move forward. This segment will help you throw some ideas together that you can distill into a mission statement, and then boil it down further into one to two sentences or a brief paragraph. Mission statement formula: Problem

Solution = Tangible Results!

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You dont have to be a professional writer to do this. Just set aside some time with a pen and a piece of paper, and ask yourself the following questions about your nonprofit organization: What problems is my non-profit addressing and attempting to solve? What specific solutions will my non-profit offer? What tangible results can be expected if my solutions are implemented? Theyre penetrating questions, for sure. But thats the idea here: you need to have a brief, clearly worded mission statement that gets to the heart of what your non-profit is all about. Take all of the elements of those questions and ask yourself how they can be expressed in a few sentences. Your sentences may not be short, but they should be clean, void of grammatical mistakes, and have a well-organized flow. If youre not a writer, this may take some time. You may even want to ask a writers help with your statement. Or, at minimum, ask a friend or relative who can objectively listen to what you have written. If they do not get it in a way that is crystal clear, keep honing it!

Mastering Your Elevator Pitch

Boil down your mission using this formula: (OUR GROUP) provides (services and/or resources) to (recipient of your service or value) to get the result of (your desired outcome). Will dialing in your mission statement alone create a rosy future for you and your group? If only! But when its time to tackle your 1023 application, it will give you a clear understanding of the elements at play: the social problem you want to address and the tangible solution you want to offer. Your organizations role in providing that solution should be easily explained. If you cant put it down on paper, then youre probably not going to find yourself capable of the elevator pitcha short, condensed explanation of what your non-profit actually does.

Why is it called the elevator pitch? A business term used often in business, venture capital and fundraising circles, its based on this premise: Since every person you meet is a potential investor, donor or volunteer, if you cant lay out the essentials about your organization in the time it takes to inform someone youve met on an elevator ride, then you need to work on your message.
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This exercise might seem frivolous, but it is critically important. No matter how clear your non-profits mission is in your head, being able to explain it spontaneously and quickly will be a major advantage at many levels. Mastering the elevator pitch will help ensure that things go off smoothly. And you have bigger fish to fry; you want there to be ZERO worries about whether the IRS agent reviewing your application gets it. Thats why avoiding Deadly Mistake #1: Failure to Clearly State Your Mission and Purpose will not only prevent Form 1023 hang-ups, it will help you down the line with everything you do to further your nonprofit organization.

Immediate Action Steps:

1. Ask yourself these three essential questions: What problems is my non-profit addressing and attempting to solve? What specific solutions will my non-profit offer? What tangible results can be expected if my solutions are implemented? 2. Brainstorm core concepts to communicate in your mission statement. It may work best not to edit or try to make them short at this pointexplore. 3. Once you have those core concepts, distill them and weave them together in a span of just a few sentences. For more resources, download my IRS 1023Mission and Purpose Worksheet at www.GetNonProfitStatus.com/resources.

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7 Deadly Mistakes of Filing your iRs Non-Profit application

Failure to Describe How All of Your Activities Relate to Your Purpose

Now that you can clearly explain your organizations mission and purpose, you need to demonstrate that the various aspects of your non-profit work to support your stated goals.
A startup non-profit is a unique creature. A fledgling business has the profit motive to check against: Does it add to the bottom line? But a baby non-profit serves a cause, whose grand vision is generally harder to measure against specific day-to-day activities. Right behind your mission and purpose, the IRS is justifiably concerned about your plans to actually achieve working toward this purpose on a daily basis. Your non-profit should be able to demonstrate that it is indeed working toward that purpose with regularity and with organization-wide focus. Without that, youre not staying in tune with your purpose. You may already be able to envision the inner workings of your non-profit, but people arent mind-readers. The best term to describe the level of explanation needed for your Form 1023 application is somewhat an oxymoron: concise detail. Ill steal my guideline here by paraphrasing Goldilocks and the Three Bears: Not too much, not too little, but just enough! What activities will your non-profit organization perform to achieve your goals? What kinds of employees and specialists will it require? What kinds of duties will they perform? How do the people, animals, or communities you are helping respond to and/ or benefit from your work?

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Picture this: Somewhere in Covington, Kentuckys IRS building, a woman turns her windowless office light on at 8:30AM and sits at her desk. She checks her email, sips at a coffee, and pulls a file folder off a large pile on the bureau to her left. Inside that folder is a thick Form 1023 Application for Recognition of Exemption. The only thing remarkable about this particular day is . . . this one is YOUR application! What kind of day is she going to have? Is she going to smile as she makes checkmarks in all the right boxes, sends you the letter that says APPROVED and makes it on time for lunch with a friend? or is she going to slowly shake her head side to side, seeing the kinds of mistakes that will get you nothing but the dreaded letter that says your application is incomplete or worse yet, simply stamped DENIED?
The choice between these scenarios is up to you.

Writing your Narrative of Activities

Your Narrative of Activities provides a brief description of the problem as you see it and how your organization will address itwith a basic strategy of implementation: A series of specific methods, either bulleted or simply in a paragraphand the people, the time frame, and the location(s) in which you will perform your activities. And remember, what is true of selling a product or testifying in court is true here: Give just enough informationbut not too much. Your primary goal, as I will repeat throughout this training, is to allow the IRS agent to check off the list of items he or she needs to stamp your application APPROVED while not raising any IRS Red FlagsTM. Also, make sure you avoid activities that refer to a purpose that is prohibited (Ill expound on this later.) For example, directly or indirectly supporting or opposing candidates for public office is prohibited; therefore do not include political campaign mailings in your activities. Unless you have things to explain in further detail (such as a scholarship program that is distinct from your main activities), I like to see maximum of about two pages for your Narrative of Activities.

IRS agents are human, so try not to anger, bore, confuse or frustrate them!
Keep it Short, Sweet, and Simple! Dont rehash too much of the information you include in other parts of your application or addenda. If you find yourself getting redundant (I know its tempting to want them to understand), simply refer to your business plan, mission statement, grant applications, website or other supporting materials where the agent can find greater detail. Finally, do not bore them to death with things that go on in the background of every organization, such as banking, administrative, or other routine activities.

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To sum it up, rather than leaving any questions in the IRS Exempt Organizations agents mind as to how each of your activities relate to your tax-exempt purpose, make it crystal clear. The following exercises can really help you prepare what the IRS is looking forand avoid rejection of your application.

Immediate Action Steps:

1. Focus on answering three questions: What particular activities does your non-profit perform to achieve its mission on a day-to-day basis? Speak in terms that are tangible and specific. Why are those activities important to achieve your non-profits mission? Think delivery of the result. How do those activities manifest results? Describe what solving the problem for the community actually looks like. Paint a picture of the difference youve made. 2. Understand what kinds of operations will be essential to running your non-profit organization. Some jobs may not directly help people in a hands-on way, but they may be necessary to support your mission (e.g. a bookkeeper to keep your bills paid and deposit contributions). I like this mnemonic device called SCHEMES to make sure no major area is left out. SCHEMES stands for: SpaceWhere do you perform your activities? CashWhat money do you need and how do you spend it? HelpersWho and how many are going to perform the activities? EquipmentWhat trucks, tools, computers, etc. will you need? MaterialsWhat stuff will you use in executing your activities? ExpertiseDo you need any specialists? What kind and how many? SystemsHealthy organizations establish efficient processes. What kind of systems do you need?

Create your Narrative of Activities: For inspiration, check out my redacted samples of other organizations Narrative of Activities at www.GetNonProfitStatus.com/resources. Youll use this in Section 6.

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Failure to Complete and Enclose All Applicable Schedules

Every year, thousands of IRS Form 1023 Applications for Exemption get mired down in the offices of faraway IRS bureaucratsnot because of violations of IRS rules or poorly written applications, but because of the omission of forms and schedules required under certain conditions.
Congratulationsyouve made it through first sections of this training. Youre well on your way to achieving IRS non-profit status. But remember that this game is on the IRS home field: if you dont play by their rules, then youre going to run into trouble. So read on! Playing by IRS rules means being aware of the forms and schedules the IRS will require you to submit. The vast majority of 501(c)(3) groups will only require Schedule A, B, H, and/or perhaps E. Lets get the others out of the way first. Are you a: A College or University?You will require Schedule B. A Hospital or Medical Research Organization?You will require Schedule C. A Section 509(a)(3) Supporting Organization?You will require Schedule D. A Home for the Elderly or Handicapped?You will require Schedule F. A Low Income Housing Organization?You will require Schedule F. A Successor to a For-Profit Organization?You will require Schedule G. For any of these, the application process is significantly more complicated than a regular non-profit, and you may need additional assistance to complete your application. Send an email to Assistant@GetNonprofitStatus.com if so. But whether or not you seek assistance from our team of 501(c)(3) gurus, the information in this eBook will get you on your way, so read on!

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Schedule A: Churches
Churches are not technically required to file Form 1023 to be considered a tax exempt organization. However, filing is recommended for several reasons, a few of which are listed below. Put simply, by filing Form 1023, you will obtain the all-important Determination Letter from the IRS that is considered proof that the church is indeed a 501(c) (3) tax exempt organization. Failing to file Form 1023 has risks and costs that outweigh any benefits: 1. Chilling donors and contributors: No Form 1023, and therefore no Determination Letter from the IRS, means less opportunity to raise funds. The Determination Letter is required by many, if not most, grant-making foundations from which you may seek support. Individual donors will often ask for a copy of the letter as a condition of giving, and will certainly rely upon this document to back up any tax write-offs for their contributions. 2. Legal and financial liability for you and your donors: If you do not obtain a Determination Letter, the church and its donors risk that the IRS could later determine that the church did not qualify as a tax exempt organization. 3. Uncertainty within your organization: Failure to file Form 1023 leaves uncertainty as to whether your church organization indeed meets the IRS definition of a church. Moreover, completing your 1023 in-house is an excellent exercise to help your team really understand IRS requirements, crystallize your mission and purpose, and know where the organization is going. 4. Without a Determination Letter? You Cannot Obtain a Non-Profit U.S. Postal Mailing Permit: With postal mailing rates increasing frequently, the ability to save about 40% on postageparticularly if you intend to communicate with members and/or use direct mail to fundraiseis crucial. Any non-profit that spends more than a couple of thousand dollars per year on mail (at bulk mail rates, which are about half of first class) simply must get a non-profit mailing permit. If you want to hold open the most opportunity for your organization, file IRS Form 1023.

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Schedule B: Schools
Schedule B asks questions to ascertain that your organization meets the definition of a school under IRS rules, and that you have implemented the proper discrimination policies.

Schedule E: The 27 Month Rule

New organizations normally have only 27 months to submit a Form 1023, 501(c)(3) application to the IRS. If filed within that period, tax-exempt status and tax-deductibility for contributions date back to its inception. However, when a Form 1023 application is filed late, the IRS grants 501(c)(3) status prospectivelyeffective as of the postmark date on the application envelope. Careful consideration should be given to potential tax implications for the organization as well as donors. The 27 Month Rule is waived for churches; small, publicly supported organizations; subordinate organizations covered by a Group Ruling; and organizations created before October 1969. If more than 27 months have elapsed since founding your organization and there will not be large tax liability problems by doing so, I recommend forming a new organizationsame founders, board, mission, etc. The ease of doing so far outweighs the risks of having your 1023 mired down in the IRS bureaucratic process for months, perhaps years. If you are filing your 1023 application after the 27-month periodand there are many legitimate reasons to do soyou may need professional guidance. Shoot me an email at Assistant@GetNonProfitStatus.com and save yourself time, headaches and even money in the long run.

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Schedule H: Scholarships:
If it is part of your core mission to offer scholarships, then complete Schedule H. If not, or if you are not 100% sure you are going to do so, do not mention scholarships at all on your application. It will complicate your approval process and invite additional scrutiny. If you would like to offer scholarships after you are approved and have some funds in the bank, it is easy to amend your bylaws and statement of purpose with the IRS. Many applications are held up because the preparer simply forgot to include the proper Schedules. Even the most capable of people can find that, in the flurry of paperwork surrounding their non-profit launch, something like this can be forgotten. Forgotten? Not anymoreand certainly not by you!

Immediate Action Steps:

1. Decide what methods and activities your non-profit is going to take on, so it becomes obvious which schedules you will be required to include. (Please refer to Deadly Mistakes #1 and #2!) 2. Find out the specific schedule requirements of your type of non-profit application. There are three basic choices for making sure you are covered here: Hire an attorney or accountant at $2000-$5000 to complete your Form 1023 Wing it yourself and hope you didnt accidentally throw up an IRS Red FlagTM which could delay your approval by months or even years, as described in a highlighted story below. Order the No-Lawyer Non-Profit Launch Kit that I offer at www.GetNonProfitStatus.com/launchkitIt includes tons of bonuses worth thousands, including a one-hour coaching session to make sure your completed Form 1023 will sail through the IRS approval process.

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7 Deadly Mistakes of Filing your iRs Non-Profit application

Failure to Include Your Organization Name and EIN on Each Page

Your employer identification number (EIN) will be one of the most important numbers for you to remember. Make sure your organizations name and EIN are included on each page of your 1023 application.

What is it, why do I need it, and where do I get one?!?!

If you dont have an Employer Identification Number (EIN) number for your non-profit because you havent gotten that far yet or didnt know you needed one, youll want to get one before beginning your IRS 1023 non-profit application.

Obtaining an EIN is the first of the three essential founding actions for your enterprise:
1. Obtain an EIN from the IRS. I have created a short, simple video showing exactly how to get and EIN for a Non-Profit (the IRS recently make it a bit more tricky), available at www.GetNonProfitStatus.com/training 2. File Articles of Incorporation (or Articles of Organization) with the agency in your state that handles business entities. (See a list of every such agency in the U.S. here: www.GetNonProfitStatus.com/filingagencies.) 3. Take your IRS EIN Letter and your Articles to the bank of your choice and open an account. (TIP: Many banks have a low- or no-cost account type for non-profit organizationsbut you may have to ask for a manager to set it up, since most staff will not have experience with this designation.)

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Type or Write your EIN on Every Page BEFORE You Begin. Yes, on Every Page!
As you can imagine, IRS agents are sticklers. But since theyre in charge of granting you the non-profit status you so desire, you have to play by their rules. One of these rules of thumb is simple: include your EIN (Employer Identification Number, also commonly referred to as a Tax ID Number) on each page. Do this first. Remember the checklist I mentioned in the introduction? Thats a good place to put the reminder: include your EIN and the name of your organization on every page. Dont check that off on your list until you can confirm that you have, in fact, gone through with this step. Youd be surprised how many people can be delayed in being awarded their non-profit status for smaller mistakes like this. But when it comes to avoiding a month-long tango with a bureaucrat in a far-off ivory tower, no mistake is too small to try and avoid. Make sure that your forms and schedules are immaculate, include the proper information, and include the aforementioned EIN requirement. Youll be glad you did. A little extra work on the front end will help make things smoother both for the IRS and for you. Theres a reason this made the list of the 7 Deadly Mistakes. Dont aggravate the IRS agent tasked with reviewing your application by giving them a sloppy jobyoull end up on the bottom of a very large pile.

Immediate Action Steps:

1. Obtain your EIN. (If you need help with this, please watch my video Get an EIN for your Non-Profit Organization at www.GetNonProfitStatus.com/training) 2. Put your organization name and EIN (tax ID number) on every page of your 1023!

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Failure to Include Proper Addenda and Policies

The IRS guidelines for submitting a Form 1023 (Application for Recognition of Exemption) include several requirements for language in formative documents, and policy addenda to be included with your 1023. If you miss these, you could be in for a long, long wait.

Successful IRS Non-Profit 1023 Applications arent filled out. They are ASSEMBLED.
When the IRS examines your organizations tax-exempt description, they are not just looking for a properly formatted 50-60+ page complex set of documents - they are also looking for certain buzzwords and language. They want to see that you organized the entity exclusively for religious, charitable, scientific, literary, educational, or like purposes. Also that neither the operation nor the dissolution of the non-profit will inure to (i.e., benefit) any individual or favored group. This means the organization has the burden of proving to the IRS that its truly been created to serve a charitable purpose. Logic suggests that you should be able to include this information in the appropriate space directly on the actual application, right? Wrong. You will have to attach a series of separate addenda. If you tend to get writers block from facing a blank sheet of paper, use my handy (and free) templates and resources, or you may be interested in the Turbo1023 software Ive developed and included in the Non-Profit Launch Kit at www.GetNonProfitStatus.com/launchkit!

Non-Profits Come in All Shapes and Sizes

Oftentimes a non-profit founder will start an organization for the benefit of a small club or local cause, never intending to break above a few thousand dollars in annual revenues. Organizations that have such a low level of financial activity are not even

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required to file annual tax forms, much less a Form 1023, unless its contributors want a tax write-off for their gifts. There are many such groups across the U.S., and they comprise vibrant, important threads of our social fabric, spanning all age groups and demographics. However, small organizations like the one described above sometimes grow beyond their original intent. Along with the larger role they are able to play in bettering society, their need to obtain official 501(c)(3) status from the IRS becomes apparent. (If your situation resembles this scenario, in which case you likely filed your Articles of Incorporation/Organization without considering the requirements of IRS Form 1023, you will likely need to go back and amend your original Articles to include a Statement of Exempt Purpose and Dissolution Clause.) In other cases, charities are started by visionary social entrepreneurs who, from the outset, fully intend to get non-profit status from the IRS. These organizations typically start off with a more seasoned founder or leadership, more robust bylaws and organizational documentation, and usually have a seed funding source they can count on. These entities will have had the basics of what Ive outlined below from the original filing. Whatever the case may be, there are five requirements of additional enclosures/attachments in addition to your Form 1023 that are essential for approval. 1. In Your Articles: Statement of Exempt PurposeThis statement must be included in your Articles, and a copy of your Articles must accompany your application: The Statement of Exempt Purpose tells the IRS that the organization exists to serve a truly charitable purpose. The term charitable is used in Section 501(c)(3) in its generally accepted legal sense and includes: Relief of the poor and distressed or of the underprivileged; Advancement of religion; Advancement of education or science; Erection or maintenance of public buildings, monuments, or works; Lessening of the burdens of Government; and Promotion of social welfare by organizations designed to accomplish any of the above purposes, or to lessen neighborhood tensions, to eliminate prejudice and discrimination,

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to defend human and civil rights secured by law, or to combat community deterioration and juvenile delinquency. I recommend a broad purpose statement to include in your Articles. Why? a. To avoidplacing anexcessively restrictive constraint on the charitys mission and activities, as these may evolve over time. b. To avoid the need to amend the Articles and file amended Articles with the Secretary of State due to relatively minor changes in the statement of purpose. 2. As Addendum or in Articles: Dissolution Clause This may either be included in Articles (required in some states) or as an Addendum with Form 1023. Charitable organizations are set up in a way that assures they wont be operated for the benefit of any one person or group of people. An organizations dissolution clause is put in place to assure the IRS (and anyone else who asks) that the public interest is likewise served should the organization shut its doors. IRS rules allow assets to be turned over to another 501(c)(3) or to the government. I recommend the following clause, which allows assets to be turned over only to another charity, as opposed to the government:

Here is an example of a broad exempt purpose statement for a typical non-profit corporation: [NAME OF ORG] is a nonprofit corporation and is not organized for the private gain of any specific individual or group of individuals. It is organized under the laws of [STATE] exclusively for charitable purposes. The purpose for which this corporation is organized is exclusively for charitable (or religious) purposes under Section 501(c)(3) of the Internal Revenue Code.

In the event of the winding up and dissolution of this organization, after paying or adequately providing for the debts and the obligations of the organization, the remaining assets shall be distributed to a non-profit fund, foundation or corporation which is organized and operated exclusively for educational and charitable purposes and which has established its tax exempt status under section 501(c)(3) of the Internal Revenue Code.

3. Required Addendum: Procedure for Selecting Directors/TrusteesYou need to include this as an Addendum with Form 1023 (Form 1023, Part 2, Question 5) While most non-profit corporations created with the intent of filing for non-profit status with the IRS will include the process for selecting directors in their bylaws, the IRS does not require bylaws. At minimum, the IRS requires a method for selectCopyright 2011 20

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ing officers, directors, or trustees who have governing power over the organization. I have sample bylaws available for you to see at www.GetNonProfitStatus.com/ resources. But for purposes of your 1023 Application, you may also use the following language as an addendum to satisfy the IRS agents need to understand your process for selecting those with governing power:
Directors: Number, Selection, and Tenure.The Board shall consist of not less than [number] directors.Each director shall hold office for a term of [number] years. Vacancies existing by reason of resignation, death, incapacity or removal before the expiration of his/her term shall be filled by a majority vote of the remaining directors.In the event of a tie vote, the President shall choose the succeeding director.Successors shall be elected by outgoing directors. A director elected to fill a vacancy shall be elected for the unexpired term of that directors predecessor in office.

4. Required Addendum: Conflict of Interest Policy A Conflict of Interest Policy is a document which describes an organizations protocols when dealing with situations where, if misconstrued or abused, insiders could be accused of using the organization for personal benefit. The IRS wants to help non-profit organizations avoid, in their own words, the appearance of impropriety as well as any real private benefit to the organizations board members, officers or managers that does not serve the non-profits reason for being. Your Conflict of Interest Policy is where youll show the IRS that you have procedures in place to prevent wrongdoingor even the appearance of it in your non-profit organization. For example, when a board member or officer has a personal or financial interest in anything being considered by the board of directors, that person must disclose the interest and refrain from the discussion and vote. In addition, your meeting minutes must document the disclosure as well as the vote and reasoning for approval. See Deadly Mistake #6 for more information on general conflict issues. Having a good Conflict of Interest Policy and an active process to implement and document it will help your non-profit application breeze through to a speedy approval. When helping my clients, I typically provide a secret weapon that goes beyond a mere policyI provide them sample forms that can be used to prove they are actually complying with their self-imposed set of rules.

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A fool-proof sample Conflict of Interest Policy is available for you to see at www. GetNonProfitStatus.com/resources. 5. Required Addendum: Narrative of Activities Because it is so central to your organizations reason for being, Narrative of Activities was discussed in its own section earlier. Please review Deadly Mistake #2and take a look at the samples of other organizations Narrative of Activities at www.GetNonProfitStatus.com/resources.

Immediate Action Steps:

1. Fall into deep despair and confusion or make a list of exactly what youll need to include with your Form 1023 application! Then make sure to check off each item only when you have completed it entirelyno cheating or you may forget a small item that kills your application. 2. Oryou may want to use the comprehensive checklist I have already prepared, available at www.GetNonProfitStatus.com/resources.

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Failure to Address Conflict of Interest Issues

Dotting is and crossing ts on the application is not always enough. You need to be sure that your non-profit entitys structure or activities do not raise conflict of interest IRS Red FlagsTM.
In 2010, the IRS made substantial changes to theForm 1023Application for Recognition for Exemption. Most changes to the 2010 Form 1023 have to do with conflicts and board-oriented issues. Organizations at every stage of their developmentfrom initial application to maturityhave gone down in flames because of conflict issues. Often their founder or leadership never saw it coming.

Too Close for Comfort? Jeff Sweeneys Hearts and Homes serves poor communities by raising and spending money to contract out for home repairs. If John, his directors, or his family members own (or have a governing or employment connection with) a roofing company doing work for Hearts and Homes, theymust disclose, demonstrate and document that the potential conflict of interest was handled appropriately. In other words, there may not be a problem, but the IRS wants to make sure you have navigated the potential issue properly.

What Are Common Control and Close Connection conflicts? Why Can They Be a Problem?

Common control and close connection are IRS Red FlagsTM. Essentially, when one or more people who exercise substantial influence over your decisions and especially expenditures stand to benefit from your non-profits activities, a potential conflict exists. The IRS grants tax-exempt status to serve the public interestand they are wary of any appearance otherwise. Thats why its best to avoid common control and make sure that your directors do not have outside interests that could potentially damage your candidacy for IRS tax-exempt status.

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What the IRS is primarily concerned about is: 1. An organization or individual using a tax-exempt organization (i.e. your non-profit) to accomplish activities that are defined as impermissible for an exempt organization. 2. A non-profit may not inure benefitbringing profit or benefit in some way that may or may not have to do with moneyto a particular person or set of individuals. The IRS is also wary of a 501(c)(3) sharing board members or employees with a political organization such as a 527 political group, or with a for-profit company, in a way that unduly benefts the other organization. For example, a non-profit art gallery could lose their non-profit status by paying an administrative employee full-time, if that employee was actually spending a If you do not properly disgood part of the week volunteering for the founders for-profit close and the IRS finds out, they will perform an investiart production company. gation which relies on facts But generally, its not always easy to find enough people to be on and circumstances. your initial board of directors, or to find people who are willing to The problem? In the promake a serious commitment. Its probably more important early cess of ruling, guess who on to make sure your board is understanding and loyal to you, determines the facts and cirand respects your vision for your non-profit, than to get imporcumstances? The IRS. And, tant board members. As you bring on more experienced (and for all your good intentions, maybe even deep-pocketed!) directors, you can take the time to you do not want to be on the learn more about avoiding various kinds of conflicts. business end of that kind of IRS proceeding! Finally, understand that it is not usually a problem to have shared directors whose only connection is membership on another board of directors. If your church is starting a separate soup kitchen ministry, its probably OK to have theexactsame board makeupas long as it isdisclosed. But avoiding such a situation eliminates the need to explain. Keep It Simple!

As my friend and associate, attorney John Snow says: Rule #1 of non-profit formationif you want to be a legal tax-exempt entity, you better act like one.

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How Do I Avoid the Briar Patch of Conflicts of Interest?

5

COMPENSATION (or business dealings)

CONTROL

Heres a little graph I use to evaluate conflict of interest potential. Plot a point on the graph and add up the values along each axis. The higher the number, the more concerned you should beand the more you should consider making some changes to your structure, unless youve got a very good reason. In summary, here are some guidelines that will mean smooth sailing around the rocky shoals of the IRS and connection/control conflicts: There are no hard-and-fast rules to go by. IRS Exempt Organizations Department agents are very bureaucratic, but they arent unreasonable. For example, they understand and even expect that your initial board will likely include friends and family. Whats most important in this area is to be open. Neglecting to disclose situations can appear as intent to hide even if you had no intention or awareness of doing so. Avoiding obvious problems is easy. Use the smell test: If you try to explain a business or non-501(c)(3) connection between your key directors or staff and it takes a lot of explaining, think twice about making those arrangements. Theres nothing the IRS likes more than an independent board. In practice, non-profits of all kinds that have a good reason have been known to share the exact same board of directors its not a per se violationbut you are leaving yourself open to trouble.

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Bottom Line: Youll get faster approval if you have an independent board with little or no outside connections between directors or key paid staff. Get non-profit status firstyou can learn more about this topic as your organization grows!

Immediate Action Steps:

If you do not have a board chosen for your non-profit, do the following: 1. Write down the names of potential board members. 2. Rate them on: a. Level of trustyours in them, theirs in you b. Their availability to help you or bring needed expertise c. Their willingness and ability to support the organization financially - and/or to ask others to do so. 4. Assess any problematic close connections (family or financial relationship). 5. Starting with the best rated candidates, call and ask them if they would consider joining your board. Tell them you will let them know your decision after considering all factors. 6. Choose between three and five people to start your organization. A small board is more manageable early on to make sure the controlling body of the organization is aligned with the founders intentions.

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Violating IRS Rules by Indicating NonExempt Purpose or Activities

This innocent or honest mistake could be an application killer.
For this segment, I asked my favorite non-profit consultant, Lisa Hazlett, to chime in. She has a hair-raising story about a non-profit that is suffering a slow, agonizing death because of Deadly Mistake #7.

Paying an attorney, only to be denied after three years? Yes, it happens! Just ask my colleague Lisa H., a well-respected non-profit consultant, who related this story to me recently: After reviewing my clients 1023 application, which had been prepared by an attorney three years previous, I immediately knew the problem: the Form 1023 application reflected that his organization intended to influence legislation. This may technically be true, and perfectly legal; many 501(c)(3) orgs indirectly influence legislation through purely educational means. What his organization actually does is inform and educate policymakers and the public about sound policy solutions. His organization does not endorse candidates, offer voting recommendations, or contact the grassroots. Yet they had unintentionally pigeon-holed themselves as a potential grassroots lobbying group by checking the wrong box. This indication of intention to engage in a prohibited activity threatened their approval under IRS 501(c)(3) exemption guidelines. Since the initial application in 2008, the IRS has requested clarification on the organizations activities as it pertains to the affirmative acknowledgement that the organization does intend to influence legislation. Nearly three years hence, this organization has responded to 9 requests and over 100 pages of questions pertaining to this single red flag. An incorrect or unorthodox response to just one Form 1023 question can result in an inquiry such as this from the IRSand will most likely result in a very lengthy delay to an Approval for Exemption that should have taken only a few months.

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This organization was put in serious jeopardy, even though their mistake was honest and understandable, considering the vague wording of the question. The IRS bases their determination on the answers to questions on the 1023, not by what we meantand this clients was red-flagged by the IRS. After three years of trying to work with the IRS, the group may never fully recover from the lost opportunity and organizational momentum. Donors and directors alike were concerned, which hurts fundraising efforts. This is by no means a unique situation - so it helps to have an expert on your side!

Prohibited Activities Overview

In late 2011, with increased scrutiny of 501(c)(3) charitable organization conflicts and abuses, IRS officials covered a range of activities that can jeopardize a non-profit organizations exempt status, including: 1. Activities that benefit private interests, or private benefit of any individual or organization more than incidentally; 2. Lobbying or legislative activities; 3. Intervention in political campaigns; and 4. Failure to comply with reporting obligations. Private Benefits According to IRS tax law specialists, a 501(c)(3) non-profit organization can lose its exempt status even if the private interests served are unrelated to the organization itself. Tax-exempt organizations must primarily serve the public interest. Second, no part of the organizations net earnings may inure to the benefit of a private shareholder or individual. This means more than just directors or employees. Examples include payment of dividends, unreasonable compensation to insiders and the transfer of property to insiders for less than fair market value. Penalties for such improper benefit may be applied to both the insider and to the organizationlikely as well as whoever authorized transactions on behalf of the organization.

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Lobbying & Legislative Activity Some direct lobbying is permitted for 501(c)(3) organizations - meaning its permitted to address the legislature for purposes of testimony, i.e., education. However, if lobbying activities are found to be substantial, a 501(c)(3) puts its tax-exempt status in jeopardy. Any grassroots lobbying - which means contacting constituents and using a call to action to have them contact and influence a legislator - is strictly prohibited. The IRS wants any such activity to comprise a small percentage of its overall work. There is an important form that will protect your organization from inadvertent violation of this ruleI strongly recommend learning more about this by visiting our website at www.getnonprofitstatus.com. Political Campaigns Unlike direct lobbying, all 501(c)(3) organizations are strictly prohibited from directly or indirectly participating or intervening in any political campaign supporting or opposing candidates for public officewhether at the federal, state, or local level. Crossing the line here could result in revocation of tax-exempt status and imposition of excise taxes on what would normally be tax-deductible revenue. Not a pretty sight, especially if you begin to experience success fundraising. Unrelated Business Activities & Income Operating an unrelated trade or business is one of the most common types of nonexempt activity non-profits can engage in. If handled improperly, the conduct of such a business can put an organizations exempt status at riskor it might also generate taxable income for the organization. The rules regarding this topic are complex, but common examples include churches that run coffee shops and bookstores, or animal shelters that distribute pet products to generate revenue. As you can infer, unrelated business income does not necessarily jeopardize an organizations exempt status. It depends on how significant the unrelated income is in relation to the organizations activities and revenues overall. Some organizations choose to spin successful profitable operations off as businesses, but simply dedicate profits as contributions to the charitable organization. This gives a whole new dimension to the term social entrepreneurship, doesnt it?

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Closing Comments
While it will all be worth it in the end, theres no denying you will invest and risk certain significant resources in getting your non-profit framed up, formed, and funded: MoneyOften your own moneyestablishing skeletal framework. TimeThe one resource which you can never recover or replace. EffortA non-profit leader spends months or years pouring his/her very essence into it. Others input and supportFriends and family often go on the emotional rollercoaster ride with you as you move your vision forward. Pressing needs in your future mission fieldSomeone out there is waiting for you to lend a hand! With all of that at stake, is it worth risking a mistake? The answer is NOand this is why tens of thousands of non-profit founders every year hire an attorney at a cost of $2,000 to $5,000 or more to get their Form 1023 application right. As weve shown, even that doesnt guarantee success. But theres a better, faster, less expensive and more sure-fire solution! The fact is, no one knows your non-profit like you. And your mission is just too darn important to leave in the hands of someone who isnt invested in your success. That is why I have developed the ultimate self-checkout system for you to file for non-profit status without an attorney: the No-Lawyer Non-Profit Launch Kit. Find out more at www.getnonprofitstatus.com/launchkit Weve Only Just Begun! My mission with this eBook, and with my Non-Profit Success System, is: To help you massively transform the world through the unique mission of your non-profit. To that end, I hope youve gotten a ton of value out of my eBook. And I hope you feel equipped to avoid the biggest mistakes you (or I) would most likely make on an application for IRS non-profit status. If you like what youve seen here, check out my YouTube Channel at http://www. youtube.com/user/GetNonprofitStatus, where I host a series of short, value-packed training videos to help you succeed.

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And those videos are my gift to youno charge! Ill continue to interview top lawyers, accountants, copywriters, fundraisers, and social entrepreneurs (maybe you!) so I can help others excel in their non-profit and ministry work. If you want to get the complete value from this eBook, I highly recommend that you follow through with the Immediate Action Steps designed to help you get a taste of success NOW. I also would love to have you join our community at GetNonprofitStatus.com, where youll find more resources (including blog articles and videos) to help you along in your quest to become an official non-profit organizationespecially if you arent aware of all of the particulars yet. The fastest, most cost-effective way to get the Form 1023 done and approved is by using my No-Lawyer Non-Profit Launch Kit which you can learn more about at www.GetNonProfitStatus.com/launchkit. Once you send in a properly assembled application, its time for you to concentrate on running that non-profit and improving the world! After all, youre not only a dreameryoure a doer! Consider me and the team at GetNonProfitStatus.com as your own private non-profit Sherpa. Nowgo change the world! Best regards,

Christian LeFer - Author, Speaker, Non-Profit Leader PS: Ive provided the No-Lawyer Non-Profit Launch Kit because I truly know the power passionate leaders like you to change the world through your non-profit community or ministry organization. Keep in touch, and PLEASE give feedback on this eBook by liking us on Facebook and leaving a comment, and also be sure to follow us on Twitter (@Getanonprofit)!
For additional information and resources, or to request a speaking appearance, email Christian@GetNonProfitStatus.com or visit www.GetNonProfitStatus.com.

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Helpful Resources
Author email: Christian@GetNonProfitStatus.com Get Non-Profit Status Website: www.GetNonProfitStatus.com Non-Profit Launch Kit: www.NonProfitLaunchKit.com FREE RESOURCES: Free Training Videos: www.nonprofitlaunchkit.com/free Bylaws Samplewww.getnonprofitstatus.com/resources Conflict of Interest Policy Sampleswww.getnonprofitstatus.com/resources Corporation CreationArticles of Incorporation (or Articles of Organization): Filing Agencieswww.getnonprofitstatus.com/resources EINGetting an EIN for your Non-Profit Organization (online training video) www.getnonprofitstatus.com/training Form 1023 Checklistwww.getnonprofitstatus.com/resources Form 501(h) Electionwww.getnonprofitstatus.com/resources Facebookwww.facebook.getnonprofitstatus.com Glossary of Termswww.getnonprofitstatus.com/resources Mission and Purpose Worksheetwww.getnonprofitstatus.com/resources Narrative of Activities Samplewww.getnonprofitstatus.com/resources YouTube ChannelA warehouse of value-packed training videos www.getnonprofitstatus.com/training

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