What Is IRS Form 557 and Who Should File It?
Clarify the role of Form 557 in the 501(c)(3) application process. This guide explains its specific function for organizations operating under a group exemption.
Organizations seeking to operate as tax-exempt entities must apply to the Internal Revenue Service (IRS) for official recognition. This process requires demonstrating that the organization’s purpose and activities align with the Internal Revenue Code. For most charitable, religious, or educational missions, this falls under Section 501(c)(3).
Obtaining tax-exempt status from the IRS confirms that the organization is exempt from federal income tax on its earnings related to its exempt purpose. For many organizations, it also provides a benefit in fundraising, as contributions may be tax-deductible for donors. The IRS provides guidance, such as Publication 557, to help organizations understand the rules for applying for and maintaining tax-exempt status.
Determining Eligibility for Filing
The standard application for most organizations seeking tax-exempt status under section 501(c)(3) is Form 1023 or its streamlined version, Form 1023-EZ. These forms require detailed information about an organization’s purpose, activities, and financial data. A different application, Form 1024, is used by organizations seeking a determination for a qualified group legal services plan under Section 120. This section of the tax code allows employees to receive prepaid personal legal services as a tax-free benefit from their employer.
An employer or the administrator of an employer-adopted plan files Form 1024 with its Schedule L to have the plan recognized by the IRS as a qualified plan. This determination allows employer contributions to the plan to be excluded from the employees’ gross income. The plan must be a separate, written plan for the exclusive benefit of employees, their spouses, and their dependents. The application must be filed to ensure the plan is considered qualified from the beginning of its first plan year.
Required Information and Documentation
Before completing Form 1024 and Schedule L, the applicant must gather key information and documents. The most current Form 1024 and its instructions should be obtained from the IRS website. A fundamental requirement is the plan’s or organization’s Employer Identification Number (EIN). The applicant must also have the formal written plan document and any related trust agreements.
The applicant will need to provide details about the employer and the class of employees eligible to participate. A copy of the collective bargaining agreement, if any, under which the plan was established should also be included. For a group legal services plan, the applicant must complete and attach Schedule L. This schedule requires specific details about the plan’s provisions, eligibility rules, and benefits to demonstrate that it meets non-discrimination requirements.
The Submission Process
A user fee is required to file Form 1024, and the current amount can be found on the IRS website. The completed application package must be assembled in the order outlined in the form’s instructions, with the signed Form 1024 on top. The entire package should be mailed to the specific IRS address designated for exempt organization applications. This address can be found in the instructions for Form 1024 and is subject to change, so it is important to verify the correct address before mailing. Sending the application package using a service like U.S. Postal Service Certified Mail is recommended for proof of delivery.
After the Application is Submitted
After the application package is mailed, the IRS review process begins. The timeline can vary depending on the volume of applications and the complexity of the case, and it is not uncommon for the review to take several months. An IRS agent may be assigned to the case and could reach out with questions or a request for additional information. Promptly responding to any such requests keeps the application process moving forward.
The outcome of the review is the issuance of a determination letter from the IRS, which states the decision regarding the plan’s qualified status. A favorable determination letter confirms that the plan is recognized as a qualified group legal services plan under Section 120. This letter is a permanent record and should be kept with the plan’s official documents.
In the event of an adverse determination, the letter will explain the reasons for the denial. Once qualified status is granted, the plan has ongoing responsibilities, including annual information filing requirements, such as filing Form 5500.