The New Form 1023-EZ

The New Form 1023-EZ

On July 1, 2014, the IRS released the new Form 1023-EZ, the streamlined application for recognition of exemption under Internal Revenue Code Section 501(c)(3). At only 3 pages long, it is a much shorter application than the Form 1023, which is twenty six pages long. The Form 1023-EZ allows smaller organizations seeking Section 501(c)(3) exemption an easier expedited process for obtaining exemption.
The IRS expects that this expedited process for smaller organizations will result in a faster exemption process for these organizations. Removing these smaller organizations from the traditional Form 1023 approval process will reduce the time it takes for larger, more complex organizations to move through this process.

In order for smaller organizations to determine if they are eligible to file the Form 1023-EZ, they must complete an eligibility checklist, which is found in the Form 1023-EZ instructions. In general, the eligibility checklist outlines certain requirements and exclusions. The organization must be a domestic charitable organization with annual gross receipts having been or expected to be $50,000 or less and total assets of $250,000 or less. The organization may not be:

• LLC
• Private Operating Foundation
• College/University
• Hospital Organization
• Medical Research Organization
• Credit Counseling Activities
• Investors of 5% of More of Total Assets in Investments (Not Publicly Traded)

• Successor to a For-Profit Entity
• Cooperative Service Organization of Operating Educational Organization
• Health Maintenance Organization
• Cooperative Hospital Service Organization
• Organizations that Participate in Partnerships
• Church

• Maintainers of Donor Advised Funds
• School
• Supporting Organization
• Hospital
• Accountable Care Organization
• Charitable Risk Pools
• Sellers of Carbon Credit or Carbon Offsets
• Public Safety Testing Foundations

There are also exclusions for some organizations that have had their exemption revoked.

Organizations are cautioned that this process raises concern for fraud and abuse due to the applying organization being permitted to essentially declare their exemption using a short process of answering, “Yes” or “No,” to a series of questions. There is no documentation required. Critics note that the Form 1023-EZ does not serve the educational role for new organizations that the traditional Form 1023 served. It is feared that some organizations will commence operations without a thorough understanding of some of the complex rules surrounding their exemption. The IRS has responded to this criticism by promising that they will provide oversight on the ‘back end’ of this process by increasing the number of organizations that are audited. Due to the shift in this process, organizations are advised to exercise due care and to seek competent professional advice in order to avoid organizational or operational errors that may not be discovered in the short term.

Despite the criticism, small organizations are expected to welcome the streamlined, expedited process, while larger, more complex organizations are expected to experience an improved exemption process as a result of the removal of approximately 70% of the applications for exemption using the Form 1023.

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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.

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