How to Change From 501(c)(4) to 501(c)(3)

For IRS purposes, non-profit organizations fall into two broad categories, known as 501(c)(4) and 501(c)(3) after the relevant sections of the IRS Code. While a 501(c)(4) is subject to taxes on its income, it can follow a broader agenda, including direct participation in political campaigns. A 501(c)(3) is tax-exempt, but must meet strict limits on its activities and must strictly limit any political campaigning. The IRS permits a change in status if a group follows these rules, properly registers itself with the authorities, and completes an IRS application.

The first step in this process is to draw up or revise the articles of organization that lay out the intent and purpose of the group. A 501(c)(3) must be operated for exempt purposes. It can be a religious, educational, athletic or educational group. The IRS allows certain specific functions, such as relief of the poor or raising public monuments, but prohibits a 501(c)(3) from using its earnings and donations for the benefit of any single individual, or from lobbying or political activities. A tax-exempt charitable group can pursue certain civic activities linked to political campaigns, such as voter registration drives, but must maintain neutrality between competing candidates. The founding document must be filed with the proper state agency, such as a Division of Corporations or an agency handling non-profit registrations.

The IRS rules don't provide for a simple re-designation of existing 501(c)(4) groups. Instead, a non-profit seeking a change to 501(c)(3) status must start at the beginning and complete Form 1023, Application for Registration of Exemption. This 26-page form goes into detail on the group's activities, leadership, compensation and finances. Applicants must also submit a statement of purpose and founding articles according to the group's status as a corporation, limited liability company, trust or unincorporated association. The review process can be lengthy. It is possible to request expedited processing, but the group must show a compelling reason in writing.

The review process concludes with the issuance of a determination letter by the EO Determinations Office. If the IRS approves the 1023, the exemption generally is valid dating from the date the group was founded. The agency will refund any taxes already paid when the group enjoyed that retroactive legal status. If the decision goes against the group, it has 30 days to appeal by filing a written statement with the IRS Appeals Office. If all administrative remedies have failed to win the exemption, the group has the option to file an appeal in federal court.