Proposed Form 1023-EZ

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The IRS recently proposed Form 1023-EZ, a simplified version of Form 1023 for recognition of federal exemption under 501(c)(3) of the Internal Revenue Code. The new form converts Form 1023’s 25-pages into merely 3, creating a less burdensome exemption process for certain qualifying organizations. The goal of the streamlined application is to help small charities gain exemption more easily, and free up some IRS resources to spend more time monitoring already exempt organizations, rather than reviewing new ones.  The IRS estimates that the 1023-EZ will take founders approximately 14 hours to complete, as opposed to the estimated 101 hours for the full Form 1023.

According to the draft instructions, those organizations eligible to use the 1023-EZ are small nonprofits with either actual or projected annual revenues of $200,000 or less and total assets of $500,000 or less, which are not eliminated by the list of non-qualifying criteria (See page 4 of the draft instructions). Some of the organizations not able to file the short form include churches, schools, hospitals, foreign organizations, limited liability companies, and supporting organizations.

Additionally, instead of submitting lengthy explanations about whether an organization compensates officers and directors, engages in grantmaking, or participates in financial transactions with interested persons, the form requires a series of simple yes or no answers.  Founders must attest, by checking a box, that the organization has not and will not engage in political activity, inure to the benefit of private individuals, be organized and operated primarily for purposes other than the exempt purpose(s), engage in illegal activities, and devote more than a insubstantial amount of time to influencing legislation. Further, unlike Form 1023, Form 1023-EZ does not require the applicant to include multiple years of actual and/or projected financials. The form also encompasses a short section for those organizations that are seeking reinstatement following automatic revocation.

While the proposed form may alleviate one of the many challenges facing founders of nonprofit organizations and lessen the burden on the IRS for review, some argue that the Form 1023-EZ oversimplifies the charitable exemption process. Critics worry that this may open the floodgates for organizations which have not been adequately vetted or researched, either by their own leaders or the IRS, and would not pass muster under the current process. As a result, noncompliance with applicable tax laws is likely to become more commonplace, which may further erode public confidence in the nonprofit sector.

The Treasury Department has issued a comment request, seeking thoughts on burden estimates, or any other aspect of the proposed form, on or before April 30, 2014.  These comments may be sent to the following addresses, even after the deadline:

Office of Information and Regulatory Affairs , Office of Management and Budget
Attention: Desk Officer for Treasury
New Executive Office Building, Room 10235,
Washington, DC 20503
OR email at OIRA_Submission@OMB.EOP.gov

Treasury PRA Clearance Officer
1750 Pennsylvania Ave. NW., Suite 8140
Washington, DC 20220,
OR email at PRA@treasury.gov

You can also submit your comments to the IRS online here.

 

For additional information:

The Federal Register Notice https://www.federalregister.gov/articles/2014/03/31/2014-07066/submission-for-omb-review-comment-request

 

[Ed. Here are my comments submitted today: The result of adopting the proposed Form 1023-EZ will be more nonprofits created by leaders not possessing an adequate understanding of the requirements under 501(c)(3). The long Form 1023 forces founders to consider the requirements more carefully and allows the IRS to provide immediate feedback. Many professionals who focus on the [exempt organizations] area believe the current application process makes it much too easy to get 501(c)(3) status. See Anything Goes: Approval of Nonprofit Status by the IRS published by Stanford University Center on Philanthropy & Civil Society. Form 1023-EZ will practically eliminate an already low bar for getting 501(c)(3) status and create a greater need for the IRS to enforce penalties and revocations. Adoption of the Form will therefore cost more in the long run because of the greater need for resources to be allocated to enforcement and the misuse of tax-exempt funds for which donors received charitable deductions.]

 

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