IRS Makes changes to EO Determination Letters for 501(c)(3)s by Adam Cohen, CPA
Posted on May 14, 2024
by
Adam Cohen
Earlier this year, the IRS introduced Rev. Proc. 2024-5, which requires public charities organized as 501(c)(3)s to follow new procedures when requesting IRS reclassification as a different tax-exempt entity.
Nonprofit entities seeking tax-exempt status generally must file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, within 27 months of their formation. In return, the IRS will issue a determination letter indicating whether the entity meets the requirements of an exempt organization (EO) and can receive the tax benefits that come with a favorable determination. Not only does a favorable EO determination letter validate an organization’s eligibility for tax benefits, but it also gives credibility to its mission and helps support its critical fundraising efforts.
However, there are times when a 501(c)(3) may prefer recognition under a different paragraph of Section 501(c), such as when it seeks to engage in lobbying activities or make contributions to a particular political candidate or campaign. Under these circumstances, the entity must file with the IRS Form 1024, Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code, or Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code. It must also meet the following criteria before filing an application with the IRS:
- distribute their assets to another Section 501(c)(3) organization or government entity and provide a description of the assets distributed, the date of distribution and the name, EIN, and address of the recipient; and
- otherwise meet and agree to the requirements for the requested Section 501(c) status.
These procedures also apply to organizations seeking reinstatement of tax-exempt status that was previously revoked due to a failure to timely file Form 990, Return of Organization Exempt from Income Tax, or other applicable series 990 forms for three consecutive years. The filing deadline for Forms 990, 990-EZ, 990-N and 990-PF is generally May 15 for calendar-year taxpayers or the 15th day of the fifth month following the end of an organization’s accounting period.
Organizations seeking recognition as a Section 501(c)(4) that promotes social welfare have an additional requirement to file Form 8976 within 60 days of its formation. However, Rev Proc 2024-5 recognizes that some organizations may have reasonable cause for failure to file Form 8976 within 60 days of formation and instead offers the option to submit the within 60 days of seeking a status change.
Rev. Proc. 2024-5 also calls for the user fees associated with a request for reclassification under a different paragraph of section 501(c) to increase from $500 to $600 on July 1, 2024. The higher fees also apply to requests for reclassification of private foundation status and Section 507 terminations.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency while complying with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.
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