Selected Changes to Tax-Exempt Applications Coming in Early 2018

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In recent communications, the IRS has shared changes coming to the tax-exempt application and annual reporting processes, starting in early 2018. These changes include Form 1023, Form 1023-EZ, Form 1024 and the new Form 1024-A. The IRS also will implement rejection procedures for incomplete applications for exemption and Form 990 series returns.

Changes to Form 1023-EZ are in line with those shared in September 2017, when the IRS released its Tax Exempt and Government Entities FY 2018 Work Plan. The changes shared at that time included:

  • Only organizations applying for exemption under Internal Revenue Code (IRC) Section 501(c)(3) may use Form 1023-EZ going forward. Form 1023-EZ is now referred to as the Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.
  • If an organization’s Form 1023 approval is still pending, it’s no longer eligible to submit the Form 1023-EZ streamlined application instead.

According to the IRS, the changes to Form 1023-EZ are based on reviews of approximately 3 percent of filed Form 1023-EZs, and some changes to the form include:

  • An applicant must now complete a box on the form by specifically describing its tax-exempt purpose. This is in line with IRS proposed changes outlined in the June 2017 release of Treasury Decision 9819.
  • Applications also will now be explicitly asked to indicate whether they’re seeking recognition of tax-exempt status as a church, hospital or school. Note, this doesn’t change that some organizations seeking that recognition are required to complete the full Form 1023 instead of the streamlined Form 1023-EZ.
  • To enhance clarity, the Form 1023-EZ also will now separate the question regarding an applicant’s gross receipts and assets into two separate questions.

In the IRS Fiscal Year (FY) 2018 work plan, the IRS Tax Exempt & Government Entities division anticipated changes to the exemption applications process will increase the average processing time.

Changes to Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and Form 1024, Application for Recognition of Exemption Under 501(a), are coming in early 2018. Form 1023 will be modified to include the exemption as an agricultural research organization and Form 1024 will be modified for changes related to 501(c)(4) organizations, which will now file Form 1024-A. The IRS anticipates these changes will streamline the forms.

Changes also are coming to applications for recognition of tax-exempt status under IRC §501(c)(4) as a result of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). Although organizations seeking 501(c)(4) status are still allowed to self-declare tax-exempt status without filing for exemption, the new Form 1024-A can be used by those organizations that desire an official determination of their exempt status by the IRS. The official Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code, will be released in early 2018.

Form 1024-A was authorized by the PATH Act and an original draft of the form was released in September 2017, subject to a comment period. However, it’s not clear at this time whether any changes will be made to the official form based on feedback received during this comment period.

In addition to the revised application forms, the IRS is enhancing the process to reject incomplete or inaccurate applications and annual reporting, including Forms 990 and 990-PF. A form will be rejected if the organization uses one incorrectly—Form 990 versus Form 990-PF—or if required attachments are missing. The rejection also will apply to incomplete paper-filed Form 990s. Internal Revenue Manual 3.11.12 lists the criteria the IRS uses for return submission and analysis.

Smaller organizations seeking tax-exempt status under IRC §501(c)(3) should plan accordingly for the increased disclosures required as part of the Form 1023-EZ filing process. Organizations seeking tax-exempt status under IRC §501(c)(4) also should stay tuned to IRS updates and consider waiting until the final Form 1024-A is released before submitting an application for IRS recognition. All organizations should take care to file a correct and complete Form 990 with the IRS using the required attachments.

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