When we incorporated and filed our 1023, our PTO was 5 years old and had lots of money in the bank. We just used our onhand balance as the starting point for our newly formed (incorporated) PTO. No biggy. We also opened a new bank account just to be clean. I think the IRS understands that you will have money on hand when you form, if you've been buidling up to the $5k threshhold for a while. I don't remember there being any issue with this.

I think the bottom line is, if your group takes in more than $5,000 a year the IRS WANTS you to be a 501c3. There seems to be no other way around it.

The good thing is that when you are a 501c3, you can go after grants in a big way!

We are definitely looking forward.

It will be some work, but we will be closing the door on the "Music Parents" and come up with a more appropriate name to welcome community, alumni, students and those who are interested in supporting our high school music programs.

I have already contacted a nonprofit in our city who has their 501c3 pending, and will seek coaching from them.

My only concern is when we finally run the money to the new entity from the old Music Parents, what kind of paper trail will that leave? and will those start up funds itself create an audit?

####

I'm a proponent of the "clean sweep" approach. Rather than looking backwards at what leaders before you did or didn't do and possibly spending months working with the IRS to have them waive penalties assessed, I'd simply start work on a new organization.

It's probably a good time to revamp everything. Dust off your bylaws, make appropriate changes, and adopt new ones. Check into incorporating (before your file with IRS) and start a new organization with information you know and control. It doesn't matter that the name is the same or practically the same. It doesn't matter that it plans to serve the same purpose. You are not intending to defraud anyone. The IRS never expected to collect funds from you. You are creating a brand new organization that conforms to all current regulations. Think of it as phoenix rising from the ashes of the old if you like to wax poetic.

If you're committed to seeing 501c3 through, then go ahead and file the 990EZ. Otherwise, when you finally do file the 990EZ, it will be late, and you'll get a penalty notice, which you'll then have to appeal. Although, I guess if you've never incorporated, then when you do, you'll become a "new" organization in the eyes of the IRS and perhaps not liable for the "old" group's 990EZ.

We had an old EIN, bank still had that one; a previous treasurer had actually requested a new EIN but it was never communicated to the bank. I filed 1023 and 3 years of 990EZs in the spring and was assessed $11k in penalties for late filing; last month I got the determination letter and written confirmation of the waiver of penalties. It was a good month.

Yup, after holding for 30 minutes, I had a very helpful agent.

My group is not formalized, nor recognized by the IRS - although we have been around since the 1970's. If we file our 990-EZ - we will have to apply for a new Tax EIN, and then start the 501c3 process (and list on the 990-EZ that we are in progress).

My understanding is:

If your group has an old Tax EIN # (ours was issued in 1984) and you have NOT filed any tax notices in the last 5 years, your number will be considered "inactive" and NOT be recognized by the IRS.

Your group's banker may not catch this inactive Tax EIN either - possibly if you get an interest income statement (1099) this inactive # status could be caught - but it isn't guaranteed.

If your group's gross receipts are less than $5,000, you do not necessarily have to file papers to become a tax exempt org. The drawback is that you will not have the coveted IRS Determination "blessing letter" stating that you are an official nonprofit.

If your receipts are over $5,000 it is STRONGLY recommend your group file papers to become a 501c3. This is a lengthy process, requires quite a bit of paperwork and can take 6 months to a year.

Bottom line: If you do not apply for tax exempt status, the organization is considered a taxable organization.

Outcome: this is almost a blessing in disguise for our booster group, because I have wanted to change the focus of this group to include alumni and have the ability to apply for grants.

However, what to do right now is an ethical problem. Do we continue to operate under the radar screen and quietly re-organize? or file a return and open a can of worms?

####

Be sure you are calling the Tax Exempt department. They are a separate branch and have traditionally been very helpful people. Not the IRS stereotype at all.

Telephone Assistance for Exempt Organizations, Retirement Plan Administrators, and Government Entities
Toll-Free, 1-877-829-5500.

However, I've also heard they have been hit with increasing amounts of applications in the last year or so and have a huge backlog. That kind of relentless strain on people can obviously affect phone wait times and perhaps attitudes.

Used to be I rarely had to wait more than moment or two to speak to a live person. When a group filed their 1023 application, they often were talking to a rep within a couple weeks. Might get full approval within 6 weeks. Now, they've got about a 6 month backlog.