If your friend filed the simple Form 1023-EZ to obtain his recognition of charitable tax exemption, he certified to the IRS that he would be a public charity under one of the standard public support calculations.  If he filed the full Form 1023, he also had to provide a budget that would allow the IRS to reach the same conclusion. Those classifications are good for the first five years of operation and wouldn’t be overturned at least until after a full five years have been completed.

As long as he continues to file the 990-N annual return, the IRS will have no numbers on which to make a calculation and will undoubtedly accept the conclusion that he has maintained public support.  The only exception might be in the highly unlikely situation in which he is one of the very few 1023-EZ applicants selected for random reviews each year.

The issue will arise, however, if he graduates to filing a Form 990-EZ or full Form 990 as his annual report if his normal gross receipts exceed $50,000 a year.  In that case, he would no longer be eligible to file the 990-N.  Those forms both require a completed Schedule A, which sets out the sources of income for the five-year period ending with the year of the filing.  Schedule A requires a determination of the percentage of public support on the basis of that five-year record.  Even if he gives more than two-thirds of the revenue over the period and fails to meet the basic one-third public support test, he may still be able to qualify under the 10% “facts and circumstances” test.  (See Ready Reference Page: “Calculating Public Support”).  But he ought to keep the tests in mind when deciding how much of his own money to put into the operation.  It is always better to meet the one-third test and not have to ask for the IRS to exercise its discretion in your favor.  They are not always cooperative.