Streamlined 1023-EZ Process – Is It Really That Easy?
With a backlog of nearly 60,000 tax-exempt applications, reduced staff, budget restraints and public pressure, the IRS has been thinking strategically about how to move Form 1023 applications through the determination process quicker and more efficiently. The result was the creation of the new online 1023-EZ, which the IRS made available to the public July 1, 2014.
Prior to the creation of the 1023-EZ application, organizations that submitted a full 1023 application waited as long as 17 months to receive their determination letter from the IRS stating they were officially tax-exempt under Internal Revenue Code (IRC) Section 501(c)(3). Now, many similar organizations that qualify for the 1023-EZ streamlined application could receive their determination letter in approximately 14 business days. Prior to the creation of the 1023-EZ application, all organizations had to file the same 26-page Form 1023 application, regardless of their size and mission—a process that often takes weeks to prepare—and submit a complete and accurate application. The new 1023-EZ process eases the filing burden on small organizations by allowing them to do the following:
- Submit an online three-page application through the federal website
- Check the box stating an organization officer:
- Accurately completed (under penalties of perjury) the Form 1023-EZ Eligibility Worksheet
- Is eligible to apply for exemption using the Form 1023-EZ
- Understands the requirements to be exempt under IRC 501(c)(3)
- Pay a $400 application fee
The new streamlined 1023-EZ application not only reduces the filing burden on smaller organizations, it simplifies the process and drastically reduces the historically lengthy timeline to receive a response from the IRS. According to 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.”
Which groups qualify to use the 1023-EZ application, and how does it work? According to the IRS, “as many as 70 percent of all applicants qualify to use the new streamlined form.” However, determining which organizations qualify to use the streamlined form isn’t as straightforward as one would think. To qualify, an organization must fall under the IRS definition of a “small organization”—an organization that didn’t have gross receipts of more than $50,000 in any of the previous three years of activity and projects to have less than $50,000 in the current year of activity as well as the following two years of activity. The organization also must have less than $250,000 in assets during these periods.
In addition to the filing thresholds listed above, several groups of organizations are not eligible to use this new streamlined application, regardless of their income and asset levels. These include churches, colleges and universities, hospitals and some medical research institutions, supporting organizations and private operating foundations, among others. The 1023-EZ has an eligibility worksheet in its instructions that consists of 26 questions; an organization answering “yes” to any of the 26 questions is disqualified and must use the full 1023 application.
This new streamlined application creates a strategic planning opportunity for many organizations. However, there is no such thing as a free lunch. There are initial concerns about how easy it is for a person to apply and qualify for tax-exempt status. Some have expressed concern about those “bad eggs” that can fill out a form, check a few boxes, pay a $400 fee and begin collecting donations and grants from the public for a fraudulent yet valid tax-exempt organization. The 1023-EZ process eliminates the IRS review of important documents, e.g., organizational bylaws and articles of incorporation, which are required to be filed with the full 1023 process. IRS Commissioner John Koskinen doesn’t think this will be a large problem.
“We believe that many small organizations will be able to complete this form without creating major compliance risks,” Koskinen said in an IRS news release. “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.”
As you can see, the new EZ form doesn’t always translate to easy. If you have questions about this new form or related issues, contact your BKD advisor.