It's unfortunate when the limiting factor in a criminal defense is lack of funds. People like to believe that justice will prevail, but the fact is that sometimes significant resources are needed to see justice through. In some cases, legal defense funds can help shoulder the burden. A legal defense fund is a nonprofit organization that provides legal service to the needy or initiates its own cases in the public interest. It also meets the IRS criteria for tax exemptions.
Choose a strategy. The IRS only allows four kinds of litigating tax exempt organizations. They are (1) legal aid organizations, (2) human and civil rights defense organizations, (3) public interest law firms and (4) groups that initiate legal actions as plaintiffs. A group in this last category must also show that its goals are public rather than private in nature. Although it is possible to dabble across these divisions, for official purposes it is better to choose one approach to meeting your goals. Having a clear strategy will simplify your operations as well.
Form a charitable trust. Most legal defense funds are organized as an irrevocable charitable trust. The trust document empowers a board of trustees to manage the trust funds according to the terms of an operating plan, included with the trust formation document and outlining its objective.
Apply for an employer identification number (EIN). As an irrevocable trust, the defense fund is a separate tax entity and will need to apply for a federal EIN from the IRS. The process can be completed with a single form or even online (see Resources). Some states also require registration for tax and exemption purposes.
Open a bank account. Using the EIN, open a bank account in the name of the charitable trust. The original donors can then pool their funds in the account. Only trustees or those they grant power of attorney to access the account should be able to do so.
Build a donor base. The IRS treats tax exempt organizations differently depending on whether the source of its funds are a small group of individuals or the public at large. A small donor base is treated as a foundation, which will not be advantageous if your organization is not particularly wealthy. Although your initial based might be small, taking in public donations will allow the most favorable tax treatment from early on.
Apply for tax exempt status. If the defense fund serves a public, rather than private interest, it can apply for tax exempt status (IRS Form 1023). If it does so within 27 months from its organization, the trust can be retroactively recognized as tax exempt from its inception. Not only does tax exempt status prevent the funds raised by your group from being taxed, it provides a tax deduction for your donors.
- If your gross income for the year is less than $5,000 you're not required to file Form 1023 to be recognized as a tax exempt organization.
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