Streamlined? Easy? Rarely are these two words used to describe activities by the Internal Revenue Service. However, the regulatory landscape for small nonprofits seeking exempt status is changing, and on July 1, 2014, the IRS unveiled its friendlier and leaner Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. Form 1023-EZ, in lieu of the standard Form 1023, promises to be a less burdensome application process for small charitable organizations that are seeking exempt status. The IRS contemporaneously issued Form 1023-EZ instructions and Revenue Procedure 2014-40 which provides further guidance on the use of the new Form.
Organizations that are eligible to use Form 1023-EZ must have projected annual gross receipts of $50,000 or less during certain periods of time, and assets of $250,000 or less. The filing fee associated with Form 1023-EZ is $400, about half the cost of filing the standard Form 1023. Form 1023-EZ is expected to prove less burdensome for the IRS given that the agency already has a backlog of over 60,000 standard exemption applications to review and act upon.
The new Form 1023-EZ is short – less than three pages long – as compared to the standard Form 1023 that consumes over 26 pages. The IRS anticipates that about 70 percent of all new applicants will be eligible to use 1023-EZ form.
Applicants must first qualify for this exempt process by completing IRS’ Form 1023-EZ Eligibility Worksheet. This Worksheet poses 26 questions about the organization’s exempt purposes, gross receipts, total assets, corporate structure, type of 501(c)(3) entity and its activities, ownership of donor advised funds, and other information about the status and activities of the organization. Any “Yes” answers to the questions on the Worksheet will disqualify the organization from using Form 1023-EZ. If a prospective charity can answer “No” to all the questions on the Worksheet, then it can use Form 1023-EZ. Applicants should be aware that the IRS may request additional information before accepting the filed Form 1023-EZ for processing or making a determination on exempt status.
Filing Form 1023-EZ is straightforward; applicants must first register electronically using pay.gov, and complete the form on-line. The IRS will not accept paper applications using Form 1023-EZ.
Small organizations that currently have a Form 1023 application pending with the IRS may also benefit from this new process. The IRS will allow such organizations to also submit Form 1023-EZ with some conditions. If the Form 1023 application has not yet been assigned to an IRS agent, the IRS will treat the originally-submitted Form 1023 as withdrawn, and will instead process the organization’s Form 1023-EZ. However, if the IRS has already assigned the standard Form 1023 application for review to one of its agents, then unfortunately the Agency will not accept the Form 1023-EZ application.
The IRS’s efforts to simplify and streamline the exemption application process are laudable, but are not without its critics. Some argue that such a truncated application process simply amounts to a “registration” for exemption rather than a robust description and disclosure of the organization’s activities, governance, and finances. Others believe that the lack of transparency into an organization’s activities will create opportunities for fraud and abuse by bad actors.
Notwithstanding the incentives to use Form 1023-EZ, there may be reasons that a small organization chooses to use the standard Form 1023. For example, as noted above, the new form does not provide an organization with opportunities to explain or elaborate on the specific activities of the organization. Potential funders may be leery of funding an organization based on the 1023-EZ form alone due to the dearth of information. Furthermore, some fear that the lack of transparency about the organization will create the opportunity for misuse of its charitable funds. The IRS recognizes these concerns, and anticipates implementing an auditing program to examine charitable organization’s activities once the charity is up and running.
With the advent of Form 1023-EZ, the IRS is moving away from the one size fits all approach, and allowing the agency to better allocate scarce resources to address the crush of backlogged Form 1023 applications. Form 1023-EZ will allow would-be charitable organizations to get a jump on doing their good work, rather than being mired in paperwork and waiting months and sometimes years for the IRS’ review and approval of its application for tax-exempt status.