The organization was incorporated in MA in 2012 as a nonprofit corporation, and applied for an FEIN at the same time, indicating it was a non-profit.

However, it never filed Form 1023 to become tax-exempt, and has never filed income tax returns either. Now the organization wants to become a 501(c)(3) and be a tax-exempt org. For the 2012-13 year, donations received was around $23,000 and for 2013-14, $53,000. All were cash donations.

Not sure what kind of tax issues will be facing when finally submit f1023 for review. Please help!

First I am going to intentionally ignore the State issue regarding the failure to file, and be recognized, as a NPO (Non Profit Organization).

Instead I am going to focus directly on IRS Publication 557.

An organization may file an application, Form 1023, after the 27-month deadline may be recognized as NPO. One may also request the NPO start effectively back to when one intended it to start by completing Schedule E, Form 1023, and checking the Yes box in Question 5 of that schedule.

This is important; one should prepare a good narrative, along with any documental reason(s) for not filing Form 1023 until now. The IRS may approve the request if the NPO had a valid reason, and operated in "good faith." I would also recommend a section where one could show that the US Government would not be adversely affected by the IRS granting such a request.

In my opinion you would be best to file Form 1023 and your documented reasons before the IRS finds out. By way of example, only as a hypothetical; if the IRS were to audit one of the people who donated to your firm. A quick check would reveal that you were not registered nor approved as a NPO.

Obviously there is more work that needs to be done and my advice to you is to get this going AS SOON AS POSSIBLE. I would also recommend that you reference IRS Publication 557.

Good luck and best regards,

Ron Fenney
Tax Accountant
Huntington Beach, CA