Financial transparency is important to the IRS. Form 1023 is a long and detailed document. It often asks for the same information more than once, but each time, in a slightly different way. The goal, of course, is to make sure that applicants honestly qualify for tax exempt status and that potential problems are immediately identified. Please note, all tax exempt organizations must make their application for tax exemption and its annual information tax returns available for public inspection.

The following list of information indicates how the IRS analyzes the money you earn and the expenses you pay to help them determine whether your organization deserves tax exempt status.

• Exempt organizations cannot simultaneously operate as a tax exempt organization and a for profit business. The IRS will review any information concerning an organization’s gross investment income and any unrelated business income. Should an organization have assets, the IRS will at look how they are depreciated and depleted. They will review the net gain or loss on any organizational sale of capital assets.
• Exempt organizations cannot grant a financial benefit to individuals or entities at the expense of its tax exempt purpose. In other words, an exempt organization’s assets and income cannot be used for private gain. The IRS will review an organization’s (1) compensation of officers and directors, (2) salaries and wages of key staff, (3) occupancy expenses, and (4) any professional fees paid.
• Exempt organizations cannot operate for the benefit specific people or entities. All organizational programs must benefit an indefinite class of individuals. If applicable, the IRS will look at an organization’s membership fees and any disbursements it makes to members. For example, an exempt organization cannot create a financial aid program which only benefits students enrolled at a particular university on a particular date. The IRS would question the program because it benefits a class of beneficiaries who are part of a closed group of identifiable individuals.