Private Foundations & the 1023-EZ – Should You Be Concerned?
On July 1, 2014, the IRS released the new Form 1023-EZ, Streamlined Application for Recognition of Exemption Under 501(c)(3) of the Internal Revenue Code. This new application allows smaller charities to apply for and receive tax-exempt status much easier than in the past by completing the following tasks:
- Submitting an online three-page application
- Checking the box that an organization officer:
- Has accurately completed (under penalties and 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 501(c)(3)
- Paying a $400 application fee
An organization meeting these requirements can receive its determination letter from the IRS stating it’s a tax-exempt organization in as few as 14 business days.
How are private foundations affected by this new streamlined process, and what concerns do they have?
First, the IRS is somewhat vague if contributions to these “streamlined (c)(3) organizations” will qualify for a private foundation’s annual expenditure requirement. IRS Revenue Procedure 2015-5 states:
… a determination letter issued to an organization that submitted a Form 1023-EZ in accordance with this revenue procedure may not be relied upon by the organization submitting the application if it was based on inaccurate material information submitted by the organization. Inaccurate material information includes an incorrect attestation as to the organization’s organizational documents, the organization’s exempt purposes, the organization’s conduct of prohibited and restricted activities, or the organization’s eligibility to file the Form 1023-EZ.
Private foundations that distribute grants to meet their annual expenditure requirements to a 1023-EZ recipient may want to consider additional due diligence and research to determine if the grantee is a valid tax-exempt organization. This can be accomplished by validating the grantee is listed on Publication 78 or the Business Master File (BMF) on the IRS website to ensure the grantee is in compliance with the IRS Revenue Procedure 2015-5 requirements.
Private foundations can consider an additional due diligence procedure in their grant-making process before distributing funds to these streamlined 1023-EZ recipients: requesting the determination letter from the 501(c)(3) organization to which they are making the grant. Organizations that have applied for and received exempt status by using the 1023-EZ streamlined application process receive determination letter 5436, which opens with the following: “We’re pleased to tell you we determined you’re exempt from federal income tax under Internal Revenue Code (IRC) Section 501(c)(3).” Conversely, organizations that submitted the full Form 1023 application are issued determination letter 947, which opens with the following: “We are pleased to inform you that upon review of your application for tax-exempt status, we have determined that you are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code.”
This simple request can help initiate conversations between the private foundation and public charity, alleviating fears the foundation might have when distributing its funds to meet its annual expenditure requirement.
Similar to the full 1023 application, organizations that file the streamlined 1023-EZ application and receive exempt status must make the application and related documents available to the public on request.
For more information, contact your BKD advisor.