On July 1, 2014, the IRS released the new Form 1023-EZ Streamlined Application for Recognition of Exemption Under 501(c)(3) of the Internal Revenue Code. This new and easy “check-the-boxes” application allows the smallest charities to apply for and receive tax-exempt status under 501(c)(3) in as few as 14 days. The three-page application includes a user fee of $400 (lower than the $850 generally required when filing the long Form 1023). The new form is only available online.
Why Was Form 1023-EZ Created?
Form 1023-EZ is intended to decrease the burden on smaller public charities who may not have the ability to hire a CPA or tax attorney to complete the longer Form 1023. While the new form is a mere three pages long (actually more like two-and-a-half) with no attachments required, the long Form 1023 is a robust 26 pages - before the attachments, which can number up to 100 pages. While nonprofit organizations that fall under Code Sections 501(c)(4), 501(c)(5), and 501(c)(6) have been able to essentially self-declare their tax-exempt status without a formal application (Form 1024 is still available to those types of organizations who choose to file a formal application), 501(c)(3) public charities must file an application. However, up until now, small public charities desiring status under 501(c)(3) have had no choice but to submit the very lengthy, time-consuming, and costly Form 1023 application in order to obtain this coveted tax-status.
While this intention is noble, the real reason Form 1023-EZ was created was to reduce the IRS’ burden in processing these applications. The IRS has long been criticized for the time it takes to approve applications, which has been averaging nine months (we know of some organizations who have been waiting for over a year). Currently, there are approximately 60,000 Form 1023 applications waiting to be approved. According to the IRS, roughly 70% of applicants qualify to use the shorter Form 1023-EZ. Moving this 70% to the fast-track approval process will help IRS staff focus on those public charities who have a more complicated application.
Form 1023-EZ Eligibility
Form 1023-EZ is ideal for those charities that are either very small or will take a few years before significant growth occurs. Here is a short list of some of the key eligibility requirements for filing Form 1023-EZ:
$50,000 or less in current year gross receipts or projected gross receipts during the next two years
$50,000 or less in gross receipts during any of the past three years
$250,000 or less in total fair market value of assets
Organizations formed under the laws of a state or territory within the United States
Organizations with a mailing address in the United States
Organizations that are not churches, schools, colleges, universities, hospitals, or medical research organizations
Organizations whose public charity status was not previously revoked and are not successors to such an organization
Not considered a supporting organization under 509(a)(3) (those organizations that exist only to support other nonprofit organizations or governmental units)
Private foundations
Potential Dangers in Using Form 1023-EZ
Fraud
It has been argued that Form 1023-EZ will lead to an increase in charity fraud and abuse since the application is seen as a rubber stamp to obtain public charity status with the IRS (although the IRS has alluded that there will be more after-the-fact audits). After a few years, a fraudulent organization could ramp up activities to a level well beyond the $50,000 gross receipts limit that is in place during the first three years. The thought here is that legitimate organizations could be pooled in this higher audit risk group simply because they filed Form 1023-EZ.
Less attractive to grantors and other funders?
It’s tough to say if this potential danger is real or not. Quite often, a grantor organization will request a copy of the completed Form 1023 as part of a grant application. The theory behind this danger is that if an applying organization submits their three-page Form 1023-EZ with their grant request, the “wimpy” 1023-EZ will be seen as reflective of a poorly-conceived or ill-prepared organization that does not measure up to other nonprofit organizations that have taken the time to complete the longer application. In the very competitive world of grant funding, this could be an easy way for grant committees to filter out the applicants.