Form 1023-EZ Process Allows Unqualified Entities to Obtain Tax-Exempt Status

The IRS Form 1023-EZ based streamlined process for seeking 501(c)(3) status is designed exclusively for certain, small nonprofit organizations.Form 1023-EZ is the streamlined version of Form 1023, Application for Recognition of Exemption Under Section 501(c) (3) of the Internal Revenue Code. Any organization may file Form 1023 to apply for recognition of exemption from federal income tax under section 501(c)(3). Only certain organizations are eligible to file Form 1023-EZ

 

Form 1023-EZ IRS Backlog

Since July 2014, the IRS has addressed backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3).  Form 1023-EZ adopts a “checkbox approach” that requires applicants merely to attest, rather than demonstrate, that they qualify for exempt status.

Filing Form 1023-EZ

In particular, Form 1023-EZ does not solicit any narrative regarding an organization’s planned activities, any organizing documents (such as articles of incorporation or bylaws), any financial data, or any explanatory material.  The IRS approves about 95 percent of applications submitted on Form 1023-EZ.  However, the IRS’s own data show it approves only about 77 percent of applications when it requests documentation.

 

What is Form 1023?

The 1023-EZ was designed to assist the IRS and charities in clearing up a backlog of applications for tax exemption that, by 2013, had reached 66,000. Charities were waiting months or years for determinations from the IRS, with “applications requiring review” taking 18 months or more to be assigned to a reviewer. (It’s noteworthy that an applicant for tax-exemption as a charity has the right to sue the IRS if their application hasn’t been acted on within 270 days.)

 

Who Files Form 1023-EZ?

Specifically, applicant organizations must satisfy the IRS definition of small.  That means they must:

  • Anticipate less than $50,000 in annual gross receipts each year for the first 3 years, and
  • Have already had less than $50,000 in annual gross receipts for all 3 prior years (if applicable), and
  • Have total assets valued at under $250,000

 

EZ eligibility is dependent upon purpose

Form 1023-EZ eligibility is dependent upon purpose.  The organizational types below are usually required to supply the IRS with more information regarding their activity than is required by the streamlined process.

These purpose exclusions include:

  • Organizations investing more than 5% of assets in non-publicly traded securities
  • Nonprofits exclusively purposed to test consumer products for public safety
  • Accountable Care Organizations
  • Health Maintenance Organizations
  • Credit counseling purposes (including budgeting, personal finance, financial literacy, mortgage foreclosure assistance, etc.)
  • Supporting organizations under section 509(a)(3) (formed to support another specific 501(c)(3))
  • Charitable risk pools
  • Cooperative service organizations
  • Cooperative hospital service organizations
  • Hospitals and medical research organizations
  • Schools, colleges, and universities
  • Churches and church associations
  • Organizations maintaining one or more donor advised funds

 

What is the organizational test for qualification as a Section 501(c)(3) organization?

Similarly, TAS conducted a research study, published in Volume 2 of the report, that examined a representative sample of organizations in 20 states that make articles of incorporation viewable online and whose Form 1023-EZ application had been approved by the IRS.  It found, among other things, that 37 percent do not meet the organizational test for qualification as a Section 501(c)(3) organization.  In other words, these organizations received favorable determination letters from the IRS even though they are not eligible for exempt status under the law.  The report recommends that the IRS revise Form 1023-EZ to require applicants to submit their organizing documents, a description of actual or planned activities, and past or projected financial information, and that the IRS review this information before deciding whether to approve exemption applications

 

Who cannot use Form 1023-EZ?

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.”

 

501c3 and Form 1023-EZ

Most organizations seeking exemption from federal income tax under section 501(c)(3) are required to complete and submit an application. However, the following types of organizations may be considered tax exempt under section 501(c)(3) even if they do not file Form 1023 or Form 1023-EZ.