A to Z of Becoming Tax-Exempt

You’ve formed a non-profit group and now you want to become tax-exempt in the eyes of the IRS.  Lucky for you, there’s an easy and free way to do this, in spite of what you may hear from third-party companies offering to “help” you become tax exempt.  They charge a “small fee” of course, and that’s absolutely not necessary.  IRS form 1023 is all you need, plus a little bit o’ internet guidance from me!

IRS Form 1023 Looks Intimidating But Don’t Let That Stop You!

But before we get Form 1023, which is the application for tax-exempt status, let’s start at the very beginning…

Step One: Get an EIN

Obtain an EIN (Employer Identification Number) for your organization.  That can be done in minutes over the phone, on the IRS website here, or by mail if you insist on being old-fashioned.

Step Two:  Make Sure Your Organization is Structured Properly

Your organization must be a corporation or a trust.  It can also be something called an unincorporated association, which means a group of people who volunteer to come together for the same purpose…like a trade union or an environmental group.
Partnerships are NOT eligible to become tax-exempt under Section 501(3)(c).

Your organization must also have a mission statement or other such organizing document that limits its activities to furthering only its stated exempt purpose.

Step Three:  Fill Our IRS Form 1023

Yes it’s a long form so just take your time and step by step you’ll make it through.  Here are the things you’ll be asked about on the form:

  • who are the members
  • what is the history of your group?
  • do the officers/directors/key players get compensated?  if so, how and how much?
  • does anyone get benefits?  who and what are the benefits?
  • what are the activities of your group?
  • supply detailed financial records of your group
  • is your group a public charity?
Step Four:  Use the IRS Website as a Resource

Go here for an online tutorial on becoming tax-exempt under Section 501(3)(c).  There are also FAQs and publications you can read here.  And just remember: you don’t have to pay somebody to help you apply to become tax-exempt.  You can do it!






Own Stuff Abroad? Do This or Face More than $10,000 in Fines!

If you own something outside the United States then you must file IRS Form 8938 and report it on your tax return.  The penalties for failure to file this form are particularly horrendous…$10,000 is just the beginning!

Statement of Specified Foreign Financial Assets

IRS Form 8938 is called Statement of Specified Foreign Financial Assets.  OK we got the statement part…you must report to the IRS on your tax return, stuff you own in foreign countries.  They need to know about it.  But what are specified foreign assets?  Here are a few examples:

  • a savings account in a foreign country
  • stocks issued by a foreign corporation, but not maintained by a brokerage company
  • your interest in a trust fund, which is held/maintained in a foreign country
  • your interest in a partnership or corporation that’s in a foreign country
  • bonds issued in a foreign country
  • a foreign pension plan

If your foreign financial assets total more than $100,000 then you must file IRS Form 8938.  If not, then you don’t have to file this form.  If you file your taxes married filing jointly, then the total of you and your spouse’s foreign financial assets must meet the $100,000 threshold in order to require filing of form 8938.

File 8938 or Pay HUGE Fines!

The penalty for failing to file Form 8938 is an astonishing $10,000!  And it doesn’t stop there.  You can be assessed that fine even if you do file 8938 but file it incomplete or incorrect.  No ‘A’ for Effort here!  If you don’t file, then the IRS send you a letter telling you to file, and you still don’t file…another $10,000every 30 days!  Let me say that again…

$10,000 a month for failing to file IRS Form 8938

Need I say more about the importance of telling the IRS about your foreign financial accounts?  Here’s a quick link to the IRS website where you can get a PDF copy of this all-important form for rich people who own stuff in foreign countries.  If your accountant didn’t tell you about this then fire him or her immediately.




How to Easily Pay Off Your Tax Debt

You may have at one time thought very little of running up a tab with the IRS.  Perhaps you were very young and considered yourself under the radar, and you didn’t worry about the IRS.  But now you’re older and you want to move forward with your life.  Perhaps you want to get a credit card or buy a home.  Owing back taxes to the IRS makes this sort of thing very difficult.  Here’s what can happen if you don’t pay your tax bill with the IRS.

If You Don’t Pay Your Back Taxes, You Could End Up With a Tax Lien

Unpaid back taxes will not just go away.   Sometimes you can file for bankruptcy and eliminate some of your tax debt, but only if the taxes you owe are income taxes, you weren’t committing fraud when you failed to pay them, and the tax debt is at least three years old.  You also have to have filed a tax return in order to declare bankruptcy and remove your tax debt.  On top of that, it’s case by case so you’re never sure whether you can remove your tax debt with bankruptcy.

Taxes that go unpaid will cause the IRS to send you letters about your bill.  They letters get more and more insistent that you pay, and if you ignore the letters you’ll eventually have a tax lien.  This is a very nasty situation because the IRS is freezing your life…they pretty much own your house, your car, and your assets until you pay up.  Once you get a tax lien from the IRS, you can’t remove it with bankruptcy.

Avoid a Tax Lien and Set Up an Installment Agreement With the IRS

Work something out with the IRS and don’t get into a tax lien situation where you can’t even sell your home or get a credit card.  The IRS has several options for paying back taxes and they want to resolve it in a practical way.  Why else would they have come up with IRS Form 9465… Installment Agreement Request?  This is a form for setting up a payment plan with them so you can pay your tax bill even if you don’t have the cash on hand at the moment.  Form 9465 is short and easy to fill out, and it saves you from the tax lien that can wreck your life for a while.

You simply enter how much you owe, and how much you can pay each month.  Send it to the IRS completely filled out and you’re on your way to solving your tax debt.



us tax form

5 Things You Must Know About Tax-Favored Accounts

Tax-favored accounts make sense because they offer a way to save for the future and save on taxes at the same time.  Put your money in a savings account and that’s a step up from doing nothing.  Put your money into a tax-favored account and that’s a step higher.  Why?  Because the money you put into a tax-favored account (called your contributions) is money you won’t have to pay taxes on, at least not just yet.

Here’s an example: you put money into an IRA …if it’s a Roth IRA, you won’t pay income tax on the money you take out after the age of 59 1/2.  It’s a way of helping yourself out in retirement…pay the taxes now so you won’t have to later.  You’ve already paid the taxes now because the money came from your current income, which is taxed.

1.  There are Rules About Using Money in a Tax-Favored Account

But if you withdraw that IRA money before you hit age 59 1/2, you pay a penalty.  You’ll have to pay an additional 10% tax on the distribution.  It’s called an early distribution when you withdraw money from a tax-favored account that’s supposed to remain intact until its designated purpose.

2.  If You Break Those Rules, You Have to Tell the IRS About It

Tax-favored accounts come in all sorts of shapes and sizes.  Some are for retirement, some are for medical expenses, and others are for education.  The general idea is, you are encouraged to save money for these important life events that require large amounts of cash.  The encouragement comes in the shape of a tax break…hence the label tax-favored account.  If you use the money for something other than the designated purpose, you are taking an early distribution.  You will have to fill out and submit IRS Form 5329 and ‘fess up to the IRA about breaking the rules of the tax-favored account you had.

3.  Not Only Do You Have to Tell the IRS You Broke the Rules, You’ll Also Have to Pay a Fine or a Tax

Also, you’ll be paying some sort of penalty or tax, as well.  There’s an Additional Tax on early withdrawals from your IRA, for example.  It’s 10%.

4.  Tax-Favored Accounts Can Actually be Worse Than Doing Nothing At All

If you break the rules, that is.  That’s because of above-mentioned additional taxes and penalties.  So think carefully if you are considering a tax-favored account.  If you can think of any reason at all where you’d be likely to need that money for something else, you’d be better off doing nothing at all with your cash than just leaving it in a savings account.

5.  It’s Possible to Break the Rules in Many Different Ways

You can even break the rules by contributing too much to your tax-favored account.  There are contribution limits to IRAs and such.  If you put in too much, again you’ll have to file IRS Form 5329 and pay an additional tax.

Here’s a link to IRS Form 5329 and the instructions that go with it.  Make sure you know the conditions of a tax-favored account before setting one up so you don’t have to pay additional tax or other penalties.



How to Get Ready for the Financial Apocalypse

The future is uncertain… but one thing we all seem to agree on is that our Social Security system is getting weaker and weaker, while health care costs get worse and worse.  People retiring twenty years from now face laughable Social Security checks, unheard of medical costs, and probably financial doom…in other words a Financial Apocalypse.

Yup, you can start an IRA now.  You can try and pay off your debts.  You can live frugally, keep a budget and live wisely and exercise all you want but if you don’t start thinking outside the box you’ll never be ready for any type of secure financial future.  Save all you can for the future and hope Social Security somehow comes through for you by the time your retire.  But on the medical cost angle…here’s what else you can do.  Prepare yourself, because it’s radical…

Stop going to the doctor’s so much.

Americans run to the doctor for every little sniffle, every little ache, and consequently run up medical costs like no other country in the world.  Guess what, it doesn’t make us any healthier, either.  It just makes us poorer.  If you can cut your doctor’s office visits, take better care of yourself, eat right and exercise, you can probably change the type of health insurance plan you have.  And that’s what this post is all about: the Health Savings Account.

HSA’s and IRS Form 8889

If you get a high-deductible health insurance plan, you are eligible to open a Health Savings Account (HSA).  That means huge tax savings when it comes to filing your federal income tax return with the IRS.  IRS Form 8889 is used to report to the IRS the contributions you make to an HSA.  Your contributions are tax free!  They reduce your taxable income, thereby reducing your tax bill.  Plus, you are saving for future medical expenses so no medical emergency will wipe you out, causing a Financial Apocalypse.