You filed your Form 1023 application for tax exemption months ago. When the IRS finally writes back, it is not always with a determination. Often it is a letter asking for more information, with a strict deadline attached.
The first thing to know is that this is normal. It is not a rejection, and it does not mean your application is in trouble. Applications are assigned to an IRS specialist who reviews them and asks questions when something is unclear or incomplete.
The second thing to know is that the deadline is real, and missing it can be costly.
What the letter actually is
When the IRS needs more information to make a determination, it sends a letter requesting that information by a specified date. The letter will identify the specialist assigned to your application, list specific questions, and state a due date.
The number of questions varies, and they will sometimes ask for copies of documents, such as your Articles, Bylaws, and similar records.
What happens if you do not respond
This is the part to take seriously.
If you do not respond by the due date, the IRS may close your case without making a determination. This does not mean that you can never obtain 501(c)(3) status in the future, or that it was denied on the merits, but it does mean you have to reapply.
Reapplying costs additional fees and time. The IRS does not push your application to the top of the queue.
Given what you already paid in user fees and waiting time, that is an expensive way to lose. And it usually happens for an ordinary reason: the letter went to an address nobody checks, or to a founder who has moved on, or it arrived during a busy month and slipped.
What the questions are usually about
In our experience the letters usually focus on a handful of areas.
The narrative was too vague. By far the most common. A description of activities that reads like a mission statement rather than an account of what the organization actually does, for whom, how often, and with what money. The specialist cannot tell whether the activity fits an exempt purpose, so they ask for more detail in order to make that determination. They may also ask for more specifics about each program and activity.
Compensation. Who is paid, how much, and how the amount was decided. Founder compensation with no independent approval process reliably draws a question.
Board composition. Related parties on the board. While this does not disqualify the application, it can prompt questions about board independence and control.
Insider transactions. Renting space from a director, contracting with a board member's company, loans in either direction. These need to look arm's length and be explained.
The organizing document. Missing or defective purpose and dissolution language. This one is common, and it requires you to fix your articles by filing an amendment with the state, which carries its own filing fees. It is worth making sure your articles are correct from the beginning.
Schedule-specific questions. If a schedule applied to you — churches, schools, hospitals, successor organizations, and so on — it is common for the specialist to have questions specific to that schedule.
Financial projections. Numbers that do not match the narrative, or growth with no explanation behind it.
How to respond well
Read the whole letter first, and note the date. Calendar it immediately, and calendar a working deadline a week earlier. Designate one person who is responsible for making sure it is filed on time.
Answer every question, in the order asked. Number your responses to match theirs. A specialist working through a stack of files should be able to see at a glance that each item is addressed.
Answer the question fully. Do not simply reiterate what you already put on the application. For example, if they ask how the nonprofit determined compensation, you do not want to just list the amount someone is paid. Instead, describe how compensation was determined, who voted on it, and who recused themselves from the vote.
Be specific. If you are vague, you will likely receive a second request for more information.
Attach documents that support your answers. This can include meeting minutes, resolutions, amended articles, and contracts.
Do not volunteer unrelated material. Stay focused and keep to the questions asked. Providing extra information may lead to additional questions.
Do not hide the awkward fact. A disclosed insider transaction with a sensible explanation is a normal part of many approved applications. The same transaction discovered later is a much bigger problem, and specialists are good at spotting a non-answer.
Keep a copy of everything, including proof of when you sent it.
If you cannot make the deadline
If you are unable to meet the deadline, do not simply ignore it and try to send your response later. You can often contact the specialist named in the letter and request an extension. The letter will include their name and contact information.
How to make this letter less likely next time
Requests, and follow-up requests, can often be avoided by properly preparing the initial application. Filing it correctly does not guarantee you will not receive one, but it does lessen the likelihood.
So make sure the narrative reads like an honest account of real activities, the numbers match the narrative, the organizing documents already contain the required language, and anything unusual was disclosed and explained before anyone had to ask.
If you have a letter in hand
Two questions decide what to do next. When is it due, and what are they actually asking?
If the deadline is close, that is the priority. If the questions touch compensation, board control, insider transactions, or your organizing documents, those are the ones where the wording of your answer genuinely matters.
We respond to these regularly, including for applications we did not prepare. If you have a letter and would like help, get in touch and we will tell you what is due and what it involves.
This article is general information, not legal advice, and reading it does not create an attorney-client relationship. Rules differ by state and change over time. Please speak with a licensed attorney about your own situation.