Can a 501(c)(3) application be denied?
While the IRS actually approves the vast majority of 501(c)(3) applications, it is possible for a 501(c)(3) application to be denied.
Reasons for Denial
A 501(c)(3) application can be denied for many reasons, but several common reasons include:
- The organization is actually operating as a business. A for-profit business will not be classified as a charity by the IRS, even if profits are 100% donated to charitable causes.
- The organization should actually be applying as a different type of nonprofit organization other than 501(c)(3) organization. For example, an advocacy organization would usually be classified as a section 501(c)(4) organization, a social club should be classified under section 501(c)(7), etc.
- The organization is operating for a private benefit instead of the public good. For example, a charity planning to provide college scholarships only to members of a particular family or fund one specific person's medical bills should not be granted tax exemption. In contrast, an organization providing college scholarships to many different underprivileged children may qualify as a tax-exempt section 501(c)(3) organization.
A recent denial (Denial 201822029) likely falls into the second category listed above. In this denial, an organization proposed to support good sportsmanship among hunters and fishermen. However, the organization was unable to show the IRS that it would operate in a charitable manner. In reviewing the application, the IRS appeared to focus on the balance of charitable/educational programs offered by the organization versus recreational activities.Recreational activities do not serve a charitable purpose, and the organization was unable to show that its overall activity qualified it as a section 501(c)(3) charitable organization.
How to Minimize Risk of Denial
A section 501(c)(3) application can take a lot of time and effort to prepare, so most organizations should take the time to address any issues that might raise a possibility for a denied application. To help prevent the risk for a denial:
- Educate yourself on what types of activities qualify an organization for section 501(c)(3) exempt status. The IRS charities webpage and the IRS's StayExempt portal are good places to start, and access to these websites costs nothing.
- Consider working with an experienced nonprofit attorney to help prepare your section 501(c)(3) application. An attorney's guidance can especially be helpful if your organization is undertaking controversial activities or will conduct activities that lie on the border between business and charity. An attorney's guidance may also be useful if you have already submitted an application and the IRS has reached back out to your organization with many detailed questions about your organization's activities qualifying as charitable, as this could indicate the IRS is considering denial for your application.