Describe the process for becoming a tax-exempt organization. Why do you believe it is important for an accountant to understand this process?

Question

What will be an ideal response?

Answer 1

A group of people with similar interests form a not-for-profit corporation (or charitable trust) with a state to establish a legal identity separate from the incorporators. An application for exemption from federal income tax is then made to the Internal Revenue Service under one of the tax-exempt code sections, e.g., IRC Sec. 501(c)(3). The appropriate code section will depend on the mission of the organization and whether the public at large is served or the mutual benefits of the organization's members. An accountant working with a tax-exempt organization (or its auditor) must understand to whom the entity is accountable and comply with all laws and regulations relating to the organization and its operations. The accountant can also be helpful in filing proper reports with the appropriate agencies. Very often accountants are asked to serve as treasurers of the board, and, in this position, bear the responsibility for financial accountability as defined in the by-laws of the not-for-profit corporation.