On July 1, 2014, the Internal Revenue Service (IRS) radically changed the way nonprofits apply for exempt status by introducing the 1023-EZ form, an alternative process for applying for §501 (c) (3) tax- exempt status. As we first told you in June, the new form has been compared to a highway express lane that will streamline a stalled out process.
Here’s what you need to know about the 1023-EZ:
- Who can file the 1023-EZ? The new application form is available for eligible charities with assets of $250,000 or less and gross receipts of $50,000 or less. An LLC, church, school, hospital, foreign organization or supporting organization will not be eligible for the abbreviated filing. Social entrepreneurs may find this form incompatible with their planned activities and projected revenues. Each applicant must consult the NTEE Code attached to the Eligibility Worksheet to confirm eligibility. Not all organizations are eligible to use this new form.
- What has changed? The 1023-EZ simplifies and shortens the application to three pages (with 20 pages of instructions) and charges a $400 User Fee. It does not require attachments, exhibits or pro forma budgets. The 1023-EZ must be filed on-line at www.Pay.gov. Paper submissions will not be accepted.
- What should organizations do? If an organization has already submitted its Form 1023, it may stay the course and wait for a determination. If it has been filed but not yet assigned to a reviewer, the organizations may decide to file the new 1023-EZ form and pay the reduced user fee. Unfortunately, the original User Fee is generally not refunded.
- How it helps: Today, there is a huge backlog of more than 60,000 unreviewed cases and a timeframe of over nine months for a final determination. The 1023-EZ will relieve the IRS from having to screen approximately 80% of the organizations seeking tax-exempt charitable status each year. In 2012, the IRS considered using an abbreviated application. At that time, the idea was rejected. In the wake of the §501 (c)(4) scandal under Lois Lerner’s watch, shortcuts were identified that the IRS used to review right-wing groups under 501 (c)(4), resulting in budget cuts and reduced staffing.
Because the questions on the new form are extremely general and do not require confirmation, some critics worry about an increased opportunity for fraud. Others are concerned that legitimate charitable nonprofits will be adversely affected by this press to achieve efficiencies and reduced costs. Defenders of the IRS action observe that the IRS budget cutbacks and shrunken resources have made it necessary to reduce the burden on both the taxpayer and the regulator. Revenue Procedure 2014-40 describes the applicable procedures.