The IRS has released a new Form 1023-EZ to provide a much simpler way for small charities to get tax exempt status at the federal level.
The new form is 3 pages long instead of 26 pages in the full 1023. This application is allowed for organizations who expect revenue to be $50,000 or less for each of the next three years.
If the applicant is already in operation, the income in each of the past years cannot be over $50,000.
There are a few other conditions for using the 1023-EZ, but I think that charities that plan to be under $50K for three more years won’t have much problem meeting those requirements. One condition to keep an eye on is that the applicant cannot have over $250,000 in assets.
An eligibility worksheet needs to be prepared, but not submitted, before filing the 1023-EZ.
The form must be filed on-line. There is a $400 user fee. Both the application and fee can be taken care of at www.pay.gov.
This will be a much simpler, easier, and quicker way for very small organizations to get their federal determination.
The whole process still takes all the other work of getting to the exempt stage. The charity needs to be incorporated, obtain exemption under state law, and comply with all federal and state filing requirements. The only thing different is the ease of getting a federal exemption.
Critique of the new form
There are critics of the new form. The main concern seems to be the reduction in provided information will make it easier for scammers and fraudsters to get exemption. That’s not a concern for me.
If certain parties wants to scam donors, they won’t be deterred by completing another 23 pages of an application and providing a multiyear financial forecast and copies of the articles, bylaws, and other policies. Preparing those documents is a low hurdle for a scammer.
Find the new forms
The sample form can be found at the IRS website here.
The application is completed at www.pay.gov. Choose the agency list and select IRS. Select the Streamlined Application for Recognition of Exemption Under Section 501(c)(3). That is the last item on the second page of the list when I looked. You will find a fillable form that looks like the sample.
IRS press release
The IRS issued the following press release, which I quote in full. It provides good background on the form and this new, streamlined approach.
IR-2014-77, July 1, 2014
WASHINGTON — The Internal Revenue Service today introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.
“This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,” said IRS Commissioner John Koskinen. “The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”
The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.
“Previously, all of these groups went through the same lengthy application process — regardless of size,” Koskinen said. “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.”
The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months.
Following feedback this spring from the tax community and those working with charitable groups, the IRS refined the 1023-EZ proposal for today’s announcement, including revising the $50,000 gross receipts threshold down from an earlier figure of $200,000.
“We believe that many small organizations will be able to complete this form without creating major compliance risks,” Koskinen said. “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.”
The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted today on IRS.gov.
There are more than a million 501(c)(3) organizations recognized by the IRS.