The First Challenge: Part IV, the Narrative
The first three parts of Form 1023 are straightforward. If you have been working through each element of establishing your organization, you will be in a good position to complete this form. The first three parts are self-explanatory. If you have been working through the start-up process for your organization, the answers will be remarkably easy.
The first challenge for every group applying for tax exemption is Part IV, the narrative. The narrative does not need to be lengthy, but it does need to cover a number of essential points and avoid a few common mistakes. Begin with a few short paragraphs explaining what your organization is and what it does. Let the reader know in the first or second sentence that the group was formed “for exclusively charitable and educational purposes.”
Offer a brief history of the organization, focusing on activities that clearly point to the requirements of a 501(c)(3) organization. If you are applying as an educational organization, identify activities that support that application. Only discuss projects that are actually taking place or are planned.
Under no circumstances can you discuss projects that are merely speculative and that have no concrete planning or identification in your budget. Ideas that came out of a brainstorm session might be terrific, but do not include them until they are part of your real plans and you can provide documentation supporting them.
You can certainly quote portions of the IRS code in your narrative and then explain precisely how your organization complies not only with the spirit of the law but also with the precise language. The audience for this narrative is the IRS. The personnel who read this want you to succeed, but they must be certain that your organization complies with every element of a precise law.
Avoid any mention of restricted activities. Your entire focus must be to show how your organization adheres to the narrow definitions in the Internal Revenue Service code. Also, avoid any suggestion of lobbying. If your organization's mission is to offer after-school tutoring to inner-city kids, stay with that discussion; do not drift into any suggestion about proposed changes in the federal or state budget that may affect your program. The narrative is the time to detail how you will follow the exact language of the law. It is not a time to convince anyone of anything except your understanding of the IRS application. While individual members of your organization may be directly involved in lobbying one side or the other, as an organization you must stay clear of any such activities; and you certainly do not want to bring them up here. Similarly, do not suggest that your work will help the members of your organization.
The organization must help the community. Your members are a part of the community, but the focus cannot be on them. If you put in language to the effect that the membership is going to be a primary beneficiary of the group's work, you probably won't qualify for tax exemption.
A nonprofit organization may not participate to any substantial extent in business activity unrelated to its purpose and mission. As you describe your business activities, show how those activities directly relate to your purpose and exist only to support your charitable goals.Refer to Attachments
Every activity or program you identify in the narrative must have some form of supporting documentation. Each time you refer to an event, consider what resources you can use as supporting attachments. If you have a schedule of ongoing events, include a copy of your monthly calendar. If you have press clippings, include copies. If you maintain a monthly newsletter detailing current and planned activities, send a representative sample as part of your narrative.
The point here is to explain clearly what your organization is doing, provide documentary evidence of your activities, and show precisely how your program complies with the letter of the IRS code. By showing why and how you will follow any reasonable interpretation of that code, you make your case for why you should qualify for tax-exempt status.