Many tax practitioners have client organizations wishing to apply for exempt status under one of the many legal categories. Organizations such as hospitals, youth groups, and associations dedicated exclusively to charitable, educational, or scientific endeavors are special. In order to receive donations that qualify as a charitable contribution deduction by donors, this kind of entity must apply for exempt status as a "501(c)(3) organization." In addition to filing the IRS application, the entity typically must also file a similar application with the state where it is located.

Entities that fail to apply for exempt status can get into trouble. If the application is not filed within 15 months from the date of organization, the date on which exempt status begins may not be retroactive. If this happens, the entity is considered taxable for the period it was not recognized as exempt, and must file tax returns. Organizations that don't apply run the further risk of breaking local laws governing solicitations of donations from the public; this can mean citations, fines and penalties. Some of the fines can be assessed against board members personally.

Entities that are not considered "501(c)(3) organizations" (labor unions, social clubs and professional business groups, for example) must file a different type of application. These organizations receive income through membership dues and assessments. Not all income received by these entities is tax exempt: income from unrelated business activities, such as advertising income and investment income, is considered "Unrelated Business Income" ("UBI") and is taxable. The organization with UBI must file two returns - one showing the exempt income and activities, and another reporting UBI and paying the resulting tax. An organization with substantial UBI can risk losing its exempt status.

Client organizations face complex issues that the practitioner must recognize and address, such as:

• The determination of the proper classification of status under IRC Section 501
• The correct language required in the organization's articles of incorporation or association and bylaws
• The proper completion of the required state and federal applications for exempt status
• Issues affecting the organization's ability to raise funds from the public
• Permissible activities of the non-profit organization
• Support organization issues
• Private foundation status
• Political action committee issues
• Filing requirements of the non-profit organization and failure to file penalties
• Unrelated business income and its impact on the organizations' potential tax liability and exempt status
• Accountability issues
• Issues specific to labor unions and professional business organizations