The IRS recently finalized the new Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code”, and also issued revised instructions, a new Revenue Procedure (Rev. Proc. 2014-40) and temporary regulations that amend existing regulations to permit the use of the new Form 1023-EZ. The final version of the Form 1023-EZ contains some changes to the draft that was released earlier this past spring. The new Form 1023-EZ needs to be filed online and requires a $400 user fee.
Use of the short form is limited to small organizations with actual and projected annual gross receipts of $50,000 or less and total assets of $250,000 or less. These amounts were reduced from the original draft’s thresholds of $200,000 and $500,000, respectively, as a result of feedback the IRS received when the draft form was released this past spring. Certain organizations are prohibited from using the shortened form—see the checklist that accompanies the instructions to the shortened form for a detailed listing of these organizations.
IRS Form 1023-EZ
The shortened Form 1023-EZ was designed to help reduce the burden of small organizations trying to obtain tax exempt status; however, the IRS also believes it will help to uncover illegitimate charities. The IRS has indicated that as many as 70% of all applicants will be able to use the shortened form, and, as a result, the IRS will be able to speed up the process for smaller organizations and free up resources that can now be used to focus on the larger, more complex applicants.
IRS commissioner John Koskinen recently explained that because the new Form 1023-EZ will be digital and online, the IRS can (for the first time) screen the applications and look for inconsistent and questionable responses in an effort to determine which applications they want to review further before approving tax-exempt status. In addition, Koskinen indicated that the IRS will be able to focus more of its efforts on the compliance side to make sure that charities are actually doing the work they were granted exempt status to perform.
The final version of the Form 1023-EZ is still receiving criticism from many tax practitioners. Some feel that it will provide fraudsters with an easier chance to set up fraudulent-exempt organizations. Some wonder how the IRS will hold organizations that file for exempt status under the shortened form accountable for inaccurate financial projections that make them eligible to use the shortened form, when in reality, their actual results will exceed the maximum receipts and/or total assets thresholds. Finally, some feel that organizations filing the shortened form will face increased scrutiny from state regulators because certain information that is on the original Form 1023 does not appear on the shortened version.
Please find additional information, the form and its instructions here >>
Kevin Fontana is a manager in our tax department, Kevin has over ten years of accounting experience and oversees and coordinates tax compliance services for many of the firm’s corporate, partnership and individual clients. His privately owned clients span industries such as multi-location retail, distribution, manufacturing and real estate. In addition, Kevin oversees the tax compliance services for several non-profit clients, including independent schools, social clubs, historical societies and private foundations.