501c3 Application pending

[austin3515]

But not yet approved by the IRS, although it is more or less "guaranteed" it will be approved. Can they start a 403b before the application is approved? [They receive state grants to provide services to the mentally disabled.]

Any citations appreciated. I have it on good authority that this is doable, but that individual (an ERISA attorney) couldn't recall where he had obtained this response.

[ETA Consulting LLC]

Since I don't know, I would wait to receive the determination letter of exempt status. I say this because it appears that "Filing for recognition of exempt status" is a requirement for 501©(3). Had it merely been optional, then you'd, obviously, be okay.

However, I see only where the filing for recognition is required, but nothing stating you must wait for the IRS to respond. You could argue that as a 501©(3) requirements were met by merely filing, but you're not required to wait for a response. You'd think a requirement to wait until the IRS responds would be on the application.

This should help add a little more confusion to the process

Good Luck!

[austin3515]

That's good enough for me actually. If fling is the only requirement, they have done that. In other words, you are until they tell you your not. Sort of like submitting a 401k plan for a determination letter perhaps - you're a qualified plan unless they tell you aren't. The law says what it says, and it says "filing" is required to be a 501c3. I'm sure you still need to comply with all rules relative to a 501c3, of which a filing is only one of those requirements. I assume that this is to protect people from waiting and waiting and waiting for the IRS to respond.

[austin3515]

I can't seem to track down where it says "filing" is a requirement to be a 501c3? I didn't do an exhaustive search, because I figured you might know off the top of your head,.

[PensionPro]

You are correct. From the IRS web site:

When the IRS approves a timely filed exemption application, exempt status is recognized back to the date the organization was created. Thus, while an application is pending, the organization can treat itself as exempt from federal income tax under section 501©(3). For example, it must file Form 990 (instead of an income tax return) while its application is pending.

However, if the org ultimately does not qualify for exemption you run the risk of having an employer eligibility failure.

[austin3515]

That;s awesome, but if anyone has the reg that would be perfect.

[austin3515]

http://www.irs.gov/pub/irs-pdf/p557.pdf

See page 6, Effective Date of Exemption (there was a link to this in the IRS Q&A sited above).

[PensionPro]

Also pg 12 of pub 4220, "While Your Application is Pending"

[austin3515]

http://www.irs.gov/pub/irs-pdf/p4220.pdf

While Your Application is Pending

While an organization’s Form 1023 is waiting for approval from the IRS, the organization may operate as a tax-exempt organization.

If an annual exempt organization return is due, the organization must file it, indicating that its application is pending. These returns are subject to public disclosure. If the organization has un-related business income of more than $1,000, it must also file a Form 990-T. See Publication 4221-PC or 4221-PF for more information.

Although donors have no assurance that contributions are tax-deductible for federal income tax purposes until the application is approved, contributions made while an application is pending would qualify if the application is approved. However, if the application is disallowed, contributions would not qualify. Moreover, the organization would be liable for filing federal income tax returns unless its income is otherwise excluded from federal taxation.

The EO website (www.irs.gov/eo) provides information about how to find out about the status of an application for tax-exempt status.

[Peter Gulia]

An organization organized after October 9, 1969 must file an application. See Internal Revenue Code (26 U.S.C.) sections 501(a), 508(a); 26 C.F.R. sections 1.501(a)-1(b), 1.508-1(a)(1).

Whether one feels comfortable with making or receiving, without waiting for the IRS letter, contributions intended as 403(b)contributions turns on one's evaluation of the risks and burdens, including one's sense of how likely it seems that the applied-for exemption will become recognized.

The plan fiduciaries might prefer that none of the investments bears any exit charge.

USCODE-2011-title26-subtitleA-chap1-subchapF-partI-sec501.pdf

USCODE-2011-title26-subtitleA-chap1-subchapF-partII-sec508.pdf

CFR-2012-title26-vol7-sec1-501a-1.pdf

CFR-2012-title26-vol7-sec1-508-1.pdf

[IRA]

If your application is denied, would you be "Under Examination," and thus not eligible to correct with VCP?

[ETA Consulting LLC]

No. Under examination imples that the IRS is conducting an audit. So, if anything is wrong, it would be too late to go to the IRS voluntarily.

Good Luck!

[IRA]

I wonder how often they audit you after rejecting your application, and how quickly they give you notice of the audit.

[ETA Consulting LLC]

It's a non-issue. The basic rule of thumb is that you cannot wait until you are on the verge of getting caught to come forth voluntarily. It doesn't take too long to prepare a create a VCP submission, but you shouldn't delay when you know there is an issue needing correction.

Good Luck!

[IRA]

What it the 403(b) plan gets hit with an audit while the 1023 is pending? Would the reviewer leave the audit open pending the outcome of the 1023 filing? Then, if the 1023 filing is rejected, does that mean the 403(b) plan has to go audit cap?

Also, what if the employer adopts the 403(b) before filing the Form 1023? Can they take advantage of the 27-month retroactive exemption under the 1023? If they don't file in 27 months, they will have to go VCP for prior contributions. But if they get audited before filing the 1023, would the IRS take the position that the employer is not eligible because it has not filed a Form 1023, or would the IRS hold the audit open to see if the Form 1023 gets filed in time? Of course the employer could avoid this issue by filing the 1023 as soon as possible.

My best guess, though it is only a guess, is the reviewer would hold the audit open to see if the employer files the 1023. Once it is filed, the reviewer would follow the audit guidelines and check to make sure the representations on the 1023 are accurate. Then the reviewer would hopefully close the audit before the 1023 review is completed. That way the audit would not be open when the 1023 gets rejected; I least I hope that would be the result. Audit CAP would be horrible.