Tax exemption is not automatic — your organization must register with the IRS and meet specific requirements based on its type and mission

Tax exemption means your organization does not pay federal income tax and may not pay state or local taxes either. But the IRS does not grant this status to every organization that asks. You must file Form 1023 or Form 1023-EZ with the IRS, prove your organization meets the legal definition of a tax-exempt entity, and maintain that status by filing annual reports and following rules about how you spend money and operate.

The path depends on what your organization does. A charitable nonprofit follows a different process than a religious organization, which follows a different path than a political action committee or social club. Each type has its own form, its own rules about what activities are allowed, and its own reporting requirements.

Key Takeaways

  • Most nonprofits file Form 1023 (full process) or Form 1023-EZ (simplified version) with the IRS to request tax-exempt status under Section 501(c)(3).
  • Your organization must be incorporated as a nonprofit in your state before you can file with the IRS, and you need an Employer Identification Number (EIN) from the IRS first.
  • The IRS reviews your bylaws, conflict-of-interest policy, and financial projections to confirm your organization will operate for a charitable, educational, religious, or scientific purpose and not benefit private individuals.
  • After approval, you must file Form 990-N, 990-EZ, or Form 990 every year, depending on your revenue, or you risk losing tax-exempt status.
  • State and local tax exemption is separate from federal exemption and requires filing with your state tax authority and sometimes your city or county assessor.

The difference between 501(c)(3) and other tax-exempt categories

The IRS recognizes 29 categories of tax-exempt organizations, each under a different section of the tax code. The most common is 501(c)(3), which covers charitable, educational, religious, scientific, and literary organizations. Donors can deduct contributions to 501(c)(3) organizations on their tax returns, which is why most nonprofits pursue this status.

Other categories include 501(c)(4) social welfare organizations, 501(c)(5) labor unions, 501(c)(6) business leagues and chambers of commerce, and 501(c)(7) social and recreational clubs. These organizations are tax-exempt but donors cannot deduct contributions. Each category has different rules about lobbying, political activity, and what counts as unrelated business income.

Religious organizations have a special position. Churches, synagogues, mosques, and some religious nonprofits do not have to file Form 1023 at all — they are automatically tax-exempt if they meet the IRS definition of a church. Other religious organizations (like religious schools or charities run by a faith community) typically file Form 1023 like any other nonprofit.

Steps to file for federal tax exemption

Before you contact the IRS, your organization must be incorporated as a nonprofit corporation in your state. This is a state-level process, not a federal one. You file articles of incorporation with your state's secretary of state or equivalent office, and the state issues a certificate of incorporation. This step is required — the IRS will not consider your process without proof of state incorporation.

Next, obtain an Employer Identification Number (EIN) from the IRS. You can explore online at irs.gov using Form SS-4, by phone, by fax, or by mail. The EIN is a nine-digit number that identifies your organization to the IRS, similar to a Social Security number for a person. You need this number before you file Form 1023.

Then decide whether to file Form 1023 or Form 1023-EZ. Form 1023-EZ is shorter and has a lower filing fee, but you can only use it if your organization expects less than $50,000 in annual revenue, has been in existence for fewer than four years, and meets other specific conditions. Most organizations file the full Form 1023, which requires detailed information about your mission, governance, finances, and how you will operate.

On Form 1023, you describe your organization's purpose, list your board members and officers, explain your conflict-of-interest policy, and project your revenue and expenses for the next four years. You also attach your bylaws, a conflict-of-interest policy, and documentation of your nonprofit incorporation. The IRS uses this information to determine whether your organization truly operates for a charitable purpose and whether any private individual or shareholder will benefit from its income or assets.

File your completed Form 1023 or 1023-EZ with the IRS at the address listed on the form, along with the filing fee. As of 2024, the fee for Form 1023 is $275 and for Form 1023-EZ is $75. Processing typically takes 2 to 4 weeks for Form 1023-EZ and 2 to 6 months for Form 1023, though times vary.

What the IRS looks for when reviewing your process

The IRS examines your bylaws to confirm your organization has a board of directors, holds meetings, and makes decisions as a group rather than under the control of one person. Your bylaws must state that if the organization dissolves, its remaining assets go to another tax-exempt organization, not to individual members or founders.

Your conflict-of-interest policy must show that the organization has a process for identifying situations where a board member, officer, or staff member has a financial interest in a decision the organization is making, and a process for that person to recuse themselves from voting. The IRS wants evidence that the organization is not structured to benefit insiders.

The IRS also reviews your financial projections. If you project that you will spend 90 percent of revenue on executive salaries and 5 percent on your stated charitable mission, the IRS will likely deny your process. The organization must show that it will spend a reasonable portion of its money on the activities it describes in its mission.

Finally, the IRS confirms that your stated purpose falls within one of the tax-exempt categories. If your organization's bylaws say it exists to operate a for-profit business or to promote a political candidate, it will not receive 501(c)(3) status. The organization's primary purpose must be charitable, educational, religious, scientific, or literary.

Annual reporting requirements after approval

Once you receive your tax-exempt information letter from the IRS, you must file a report every year. The form you file depends on your annual revenue. Organizations with less than $50,000 in annual gross receipts file Form 990-N (e-postcard), a straightforward online form that takes about 15 minutes. Organizations with $50,000 to $200,000 in revenue file Form 990-EZ. Organizations with more than $200,000 in revenue file the full Form 990.

All three forms are due by the 15th day of the fifth month after your fiscal year ends. If your fiscal year is the calendar year (January through December), your return is due May 15. You can request an automatic extension, which gives you until November 15.

Form 990 and Form 990-EZ ask for detailed information about your revenue sources, how you spent money, your board and staff compensation, and your programs. The IRS uses this information to monitor whether you are still operating as a tax-exempt organization. If you stop filing, the IRS will revoke your tax-exempt status.

State and local tax exemption is a separate process

Federal tax exemption does not automatically grant you state income tax exemption or property tax exemption. Each state has its own rules and its own process process. Some states automatically recognize federal 501(c)(3) status; others require you to file a separate state process.

Property tax exemption — which removes your real estate from the local property tax roll — is handled by your city or county assessor, not by your state. You typically file a form with the assessor's office and provide proof of your federal tax-exempt status. Some jurisdictions require you to show that your property is actually used for your charitable mission; others have stricter rules about what types of organizations may have access to.

Sales tax exemption, if your state offers it, usually requires a separate process to your state's department of revenue. Some states exempt nonprofits from sales tax on purchases; others do not. You may need to register with the state and provide documentation of your tax-exempt status.

Contact your state's nonprofit division or department of revenue to learn what forms to file and what documentation they require. Processing times and requirements vary widely by state.

Common reasons the IRS denies tax-exempt status

The IRS denies applications when the organization's bylaws do not clearly state a charitable purpose, when the bylaws allow private individuals to benefit from the organization's income, or when the organization is controlled by a single person rather than a board. If your bylaws say the organization exists to benefit its members financially, or if they do not include a dissolution clause requiring assets to go to another tax-exempt organization, expect a denial.

The IRS also denies applications when the organization's activities do not match its stated purpose. If you describe yourself as an educational nonprofit but your financial projections show you will spend 80 percent of revenue on lobbying, the IRS will question whether education is truly your primary purpose.

Applications are sometimes denied because the organization has not actually incorporated at the state level, or because the incorporation documents do not meet state requirements for a nonprofit. Before you file with the IRS, confirm that your state has issued a certificate of incorporation and that your bylaws comply with your state's nonprofit corporation law.

If the IRS denies your process, you receive a letter explaining the reason. You can request reconsideration by submitting additional information, or you can appeal to the IRS Appeals Office. Many organizations work with a tax attorney or nonprofit consultant to address the IRS's concerns and reapply.

Frequently Asked Questions

Do I have to incorporate in my state before I explore to the IRS?

Yes. The IRS requires proof that your organization is incorporated as a nonprofit corporation under state law. You must file articles of incorporation with your state's secretary of state and receive a certificate of incorporation before you file Form 1023 with the IRS. This is a separate process from federal tax exemption.

Can a religious organization skip the IRS process?

Churches and certain religious organizations are automatically tax-exempt under federal law and do not have to file Form 1023. However, they still need an EIN and must file annual reports if they have employees or meet certain other conditions. Other religious organizations, like religious schools or faith-based charities, typically file Form 1023 like any other nonprofit.

What happens if I stop filing Form 990 every year?

If you fail to file Form 990, Form 990-EZ, or Form 990-N for three consecutive years, the IRS will automatically revoke your tax-exempt status. You will then owe federal income tax on your organization's income. You can reapply for tax-exempt status, but you will have to pay back taxes and penalties.

Does federal tax exemption mean I do not pay property taxes?

No. Federal tax exemption and property tax exemption are separate. You must file a separate process with your city or county assessor to remove your property from the property tax roll. Requirements vary by location, and some jurisdictions deny property tax exemption even to federally tax-exempt organizations.

How long does it take to get tax-exempt status?

Form 1023-EZ typically takes 2 to 4 weeks. Form 1023 typically takes 2 to 6 months, though processing times vary and can be longer during busy periods. You can operate as a nonprofit while your process is pending, but you will not receive tax-exempt status until the IRS approves your process and issues a information letter.