The 27-month rule for 501(c)(3) exemption

A new nonprofit is not automatically a 501(c)(3). Under IRC 508(a), an organization formed after October 9, 1969, is not treated as a 501(c)(3) unless it notifies the IRS that it is applying for that status, and it is not treated as one for any period before the notice if the notice is late. The "notice" is your exemption application, Form 1023 or Form 1023-EZ.

The 27-month rule tells you how late is too late.

The rule

The Form 1023 instructions state it this way: if you file within 27 months after the end of the month in which you were legally formed, and the IRS approves your application, your exemption is effective from your legal date of formation. If you file after that, the effective date will generally be the date you filed. The Form 1023-EZ instructions say the same.

Publication 557 adds a condition worth knowing: the retroactive date applies if, during the period before the determination letter, your purposes and activities were consistent with exempt status.

Where the 27 months come from

Two regulations combine:

• Treas. Reg. 1.508-1(a)(2) requires a new organization to file within 15 months from the end of the month in which it was organized.
• Treas. Reg. 301.9100-2(a)(2)(iv) grants an automatic 12-month extension for "the 15-month rule for filing an exemption application for a section 501(c)(3) organization under section 508."

Fifteen plus twelve gives 27 months. You do not need to request the extension.

The regulation also offers some protection for applicants who file on time but incompletely: failing to supply all the required information within the period is not, on its own, enough to deny exemption back to formation, and if you supply information the IRS requests within the time it allows, the original filing counts as timely.

Your date of formation

The clock starts at the end of the month you were formed, so the formation date matters. The regulation treats an organization as organized on the date it becomes an organization described in 501(c)(3). Publication 557 explains that for a corporation, the IRS looks to the date the corporation came into existence under state law, typically the date the state filed your articles. The Form 1023 instructions define it by entity type:

Later nonsubstantive amendments, such as fixing a clerical error, do not change the date. The Form 1023-EZ instructions say that if you amended your documents to comply with 501(c)(3), you enter the amendment date unless the amendment was nonsubstantive. See articles of incorporation for a 501(c)(3) to get the clauses right the first time.

Calculate your deadline

Enter your formation date and the calculator shows your 27-month deadline.

The method: take the month you were formed, count forward 27 months, and the deadline is the last day of that month. Whatever day of the month you formed on, the result is the same.

If you file after 27 months

The default. Exemption is effective from the date you file. Publication 557 describes it as the postmark date or the submission date; because applications are now filed on Pay.gov, that is your electronic submission date.

Requesting an earlier date. Late filers complete Schedule E of Form 1023. Line 2 asks whether you accept your submission date or request an earlier one. The instructions say the IRS may grant an earlier date when you show you acted reasonably and in good faith, and relief will not prejudice the interests of the government. That is the standard in Treas. Reg. 301.9100-3.

The IRS may consider whether:

• You filed before the IRS discovered your failure to file.
• Intervening events beyond your control caused the failure.
• You exercised reasonable diligence but were unaware of the requirement, taking your experience and the complexity into account.
• You reasonably relied on written advice from the IRS.
• You reasonably relied on a qualified tax professional who failed to file or advise you to file.

Explain why you filed late, how you discovered it, and any advice you relied on. The instructions suggest comparing your aggregate tax liability with and without retroactive exemption, because under the regulation relief that leaves you with a lower total tax than timely filing would have prejudices the government. The regulation also says the IRS ordinarily will not grant relief if you were informed of the requirement but chose not to file, or if you use hindsight.

Form 1023-EZ filers. If you have existed more than 27 months and want an earlier date than your submission date, you must use the full Form 1023. See Form 1023 and Form 1023-EZ.

How donors are affected

Gifts during a timely, pending application. Publication 4220 says donors have no assurance their contributions are deductible until approval, but contributions made while an application is pending qualify if the application is approved.

Gifts during a gap. IRC 508(d)(2)(B) disallows a charitable deduction for a gift made to an organization during a period when it is not treated as a 501(c)(3) because of a late notice. In the example above, gifts made before August 16, 2027, would not be deductible unless the IRS granted an earlier effective date.

What to tell donors. Be accurate in your donation receipts and appeals. Do not describe gifts as deductible for a period your exemption will not cover.

Who the rule does not reach

Churches, their integrated auxiliaries, and conventions or associations of churches are not required to file. Neither are organizations that are not private foundations and whose gross receipts are normally not more than $5,000. The regulation includes a separate timing rule for an organization that outgrows the $5,000 exception. Automatic revocation for not filing annual returns is a different issue; see automatic revocation and reinstatement.

501Nonprofit.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.