by Richard Keyt and former CPA Richard C. Keyt, Arizona nonprofit corporation & charitable organization attorneys
On July 1, 2014, the IRS simplified its Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code by creating a short online version of the application form called the IRS Form 1023-EZ. The new three page IRS Form 1023 EZ can be used by eligible organizations in lieu of the longer more complex 26 page IRS Form 1023. This article discusses the pros and cons of using the Form 1023 EZ and who can use the new form.
Form 1023-EZ, Streamlined Application for Recognition of Exemption under
Section 501(c)(3) of the Internal Revenue Code
In a July 1, 2014, press release IRS Commissioner John Koskinen said the following about the new Form 1023-EZ:
“This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well. The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work Previously, all of these groups went through the same lengthy application process — regardless of size. It didn’t matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS. We believe that many small organizations will be able to complete this form without creating major compliance risks, Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do.”
Facts about Form 1023-EZ
- The IRS estimates that about 70% of new would-be 501(c)(3) charities will be able to use the new form.
- The applicant cannot use the Form 1023EZ if any of the following applies: (1) it received more than $50,000 in any of the prior three years, (2) it will receive more than $50,000 in any of its next three years, (3) it has more than $250,000 in assets, (4) it was formed outside the U.S., (5) it has a mailing address outside the U.S., (6) it is a limited liability company, (7) it is a successor to a for profit entity, (8) it is a church, (9) it is a school, college or university, (9) it is a hospital, or (10) it is a private operating foundation. For the complete list of disqualifications read the “IRS Form 1023-EZ Eligibility Test.”
- The names and “mailing address” of all directors, officers and trustees must be listed in the form. The address can be the address of the nonprofit corporation.
- An officer, director, or trustee who is authorized to sign for the organization must sign the Form 1023-EZ.
- The signer declares to the IRS that he or she “completed the Form 1023-EZ Eligibility Worksheet in the current instructions, is eligible to apply for exemption using Form 1023-EZ, and has read and understands the requirements to be exempt under section 501(c)(3).”
- The instructions for the Form 1023-EZ states that the estimated average time to complete the form is 10 hours for recordkeeping + 2.5 hours to learn about the law and the form + 5.5 hours to prepare the form and 1 hour to copy, assemble and send the form to the IRS. The grand total is 19 hours!!! The IRS may have overestimated the total time to complete and send a 2.5 page form on the internet.
- The filing fee is $275.
- For help with the form or questions about the form call the IRS’ Exempt Organization Customer Account Services toll free at 1-877-829-5500.Applications can be approved in 2 – 4 weeks.
- If approved the information in the 1023-EZ and related document can be inspected by the public and the charity must make the 1023-EZ and related documents available to the public.
What We Like about IRS Form 1023-EZ
- It’s 2 pages versus 40 pages.
- Much easier to complete than IRS Form 1023.
- Much less time needed to complete the application.
- It’s submitted online.
- Easy to get an IRS approval letter as a tax-exempt charitable organization within 2 – 4 weeks of submitting the form online.
- Our fee to prepare the Form 1023-EZ is $450 vs the $3,500 we charge to prepare IRS Form 1023.
What We Don’t Like about the IRS Form 1023-EZ
- #1 Reason Not to Use IRS Form 1023-EZ: Some donors may decline to make donations to organizations that obtained their IRS tax exemption by filing IRS Form 1023-EZ instead of IRS Form 1023. IRS Revenue Procedure 2014-40 states that “a determination letter issued to an organization that submitted a Form 1023-EZ . . . may not be relied upon if it was based on any inaccurate material information submitted by the organization. Inaccurate material information includes an incorrect attestation as to the organization’s organizational documents, the organization’s exempt purposes, the organization’s conduct of prohibited and restricted activities, or the organization’s eligibility to file Form 1023-EZ.” Few donors will have the information needed to make a determination that the attestations of the signer made in a Form 1023-EZ are correct.
- The signer of the Form 1023-EZ assumes a lot of liability because of statements and representations in the Form 1023-EZ the signer must make under penalties of perjury that the information in the Form is true and correct.
- The signer of the Form 1023-EZ must attest under penalty of perjury as to the legal conclusion that the applicant qualifies to be a tax-exempt organization under Internal Revenue Code Section 501(c)(3). Most people who sign the form will not have the legal knowledge needed to reach that conclusion. A big advantage to filing IRS Form 1023 instead of Form 1023-EZ is that ultimately the IRS will make the determination after its review that the organization qualifies as a tax-exempt organization under Internal Revenue Code Section 501(c)(3).
- The signer of the Form 1023-EZ must attest that the applicant is organized and operated exclusively to further charitable, scientific, religious, literary, educational purposes and/or the purposes of testing for public safety, fostering national or international amateur sports competition or the prevention of cruelty to children or animals.
- The signer of the Form 1023-EZ must attest that the applicant WILL NOT engage in any of the following activities during its entire life: (1) support or oppose candidates in political campaigns, (2) use money or property to benefit any board members, officers, key management employees, or other insiders, (3) further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially, (4) operate with the primary purpose of conducting a trade or business that is not related to the applicant’s exempt purpose(s), (5) attempt to influence legislation, or (6) provide commercial-type insurance.
- The signer the Form 1023-EZ attests under penalties of perjury that: (1) the applicant has the organizing document necessary for the organizational structure of the applicant, (2) the organizing document limits the applicant’s purposes to one or more exempt purposes within Section 501(c)(3), (3) the organizing document does not expressly empower the applicant to engage, otherwise than as an insubstantial part of its activities, in activities that in themselves are not in furtherance of one or more exempt purposes, and (4) the organizing document contains the dissolution provision required under Section 501(c)(3) or that the applicant does not need an express dissolution provision in its organizing document because it relies on the operation of the state law of the state in which the applicant was formed for its dissolution provision.
Note: Contrast the attestations under penalty of perjury made by the signer of the Form 1023EZ with those made by the signer of a Form 1023. An organization can file a Form 1023 and describe its actual or planned charitable activities and let the IRS determine if the organization qualifies for tax-exempt status. For example, the applicant can explain a financial relationship between the organization and a related person and if the IRS issues a determination letter it will have concluded that the relationship does not further the related person’s private interest more than insubstantially.
Bottom Line: If your organization is eligible to apply for a tax-exemption as a charitable organization by using IRS Form 1023-EZ, proceed with caution. The new Form 1023-EZ does simplify and shorten getting a letter from the IRS that an organization is tax exempt, but do not use the new form unless your organization is willing to accept the consequences listed above and the signer of the form is willing to make all the required attestations under penalty of perjury.
Warning: The decision as to who will sign the IRS Form 1023-EZ is very important. The signer must understand the contents, meaning and legal significance of the attestations the signer must make under penalty of perjury. The signer must be the primary person who prepares and signs the Form 1023-EZ. If a person compiles the information necessary to complete the form and at the last minute causes a different person who is ignorant about the Form 1023-EZ and its attestation clauses to sign the form, the person who induces the signer to sign could have liability to the signer.