Should Your Charity Submit IRS Form 1023-EZ?
Most nonprofit charities seeking the benefits of 501(c)(3) federal tax-exempt status must apply directly to the IRS. Traditionally, this means submitting the lengthy Application for Recognition of Exemption (IRS Form 1023), paying a hefty $600 application fee, and waiting around three to six months or longer while the IRS examines your charity’s application, formation documents, organizational structure, history, and finances.
However, since 2014 some charitable organizations have had the option to submit the simplified IRS Form 1023-EZ instead. Form 1023-EZ is a short version of Form 1023 designed for smaller nonprofits, and it can only be filed online at Pay.gov. It consists of six simple sections (versus the eleven complex sections in Form 1023), consists mainly of checklists asking for general information, doesn’t require attachments or copies of organizational documents, and comes with a $275 application fee.
Below you’ll find information about who qualifies to submit Form 1023-EZ, an overview of the form’s requirements, and a brief discussion of the pros and cons of choosing Form 1023-EZ over the traditional Form 1023.
Who Qualifies To Submit IRS Form 1023-EZ?
In general, every organization seeking 501(c)(3) tax-exempt status can submit the traditional IRS Form 1023, but only certain organizations can submit Form 1023-EZ.
The most general qualifications for submitting Form 1023-EZ are financial. If your nonprofit earned gross receipts of more than $50,000 in any of the past three years or expects to earn more than $50,000 in the next three years, it won’t qualify. Likewise, you can’t submit Form 1023-EZ if your nonprofit’s total assets exceed $250,000.
There are, of course, other qualifying (or disqualifying) factors. LLCs, churches, schools, and hospitals can’t submit Form 1023-EZ under any circumstances, and the same thing applies to charities that maintain donor-advised funds, some private foundations, and all foreign organizations.
As part of its instructions for Form 1023-EZ, the IRS provides an eligibility worksheet to help applicants determine if their nonprofit qualifies to file Form 1023-EZ. The worksheet consists of 30 “yes” or “no” questions. If you answer “yes” to even one of these 30 questions, your nonprofit doesn’t qualify to submit Form 1023-EZ. You can view the full list of 30 questions at the end of the IRS’s instructions for Form 1023-EZ.
Completing IRS Form 1023-EZ
If you want to compare the individual sections of Form 1023-EZ with the traditional Form 1023, you’ll find Form 1023’s requirements discussed in detail at Northwest’s Guide 501(c)(3) Tax-Exempt Status. What follows is an overview of the basic requirements for each section of the simpler Form 1023-EZ.
Form 1023-EZ Contains The Following 6 Sections:
Part One: Identification of Applicant
First, you’ll provide basic contact information, such as your nonprofit’s name, address, employer identification number (EIN), tax year, and contact information. You’ll also need to include the names, addresses, and titles of your nonprofit’s officers, directors, and/or trustees.
Part Two: Organizational Structure
Next, you’ll provide basic information about your nonprofit’s organizational structure, including your organization’s type (corporation, unincorporated association, or trust), when your organization formed or incorporated, and the name of its charter state. This section also requires you to attest (but not prove) that your nonprofit’s formation document includes the tax-exempt language and provisions required by the IRS, including an appropriate statement of purpose, a prohibition against operating for the sake of private gain, and a dissolution of assets provision. Unlike the lengthier Form 1023, IRS Form 1023-EZ doesn’t require attachments of any kind, so the IRS is basically taking you at your word.
Part Three: Your Specific Activities
This section requires that you select a 3-character code that describes your nonprofit from the National Taxonomy of Exempt Entities (NTEE) Code, which you can find at the end of the IRS’s instructions for Form 1023-EZ. After that, you’ll complete a checklist ensuring that your nonprofit’s activities fit generally with the IRS’s expectations for 501(c)(3) tax-exempt charities, including abiding by prohibitions against attempting to influence legislation and enriching your nonprofit’s management and members beyond paying them reasonable compensation for services rendered.
Part Four: Foundation Classification
The questions in this section serve to classify your nonprofit as a public charity or private foundation qualified to submit Form 1023-EZ. For a public charity to qualify, it must typically get at least one-third of its financial support from public sources (though there are some exceptions). Private foundations can submit Form 1023-EZ only if they aren’t private operating foundations.
Part Five: Reinstatement After Automatic Revocation
This section is exclusively for existing 501(c)(3) charities applying to get their exempt status reinstated after it got revoked by the IRS. If you’re starting a new nonprofit, of course, as you likely are if you’re reading this blog, you can skip this section.
Part Six: Signature
Form 1023-EZ’s final section requires the electronic signature of an ized officer, director, or trustee listed in the first section (“Identification of Applicant”) discussed above, as well as checking a “penalties of perjury” box attesting to the signer’s ization to sign and submit the form.
Should You Submit Form 1023-EZ?
How do you know if IRS Form 1023-EZ is right for your nonprofit? The short answer, as with most things IRS-related, is “it depends.” On the one hand, Form 1023-EZ is cheaper, faster, and simpler than Form 1023, and most smaller domestic nonprofits qualify to submit the form. Form 1023-EZ costs a mere $275 (compared to $600 for Form 1023), and you can expect the IRS to process your documents in half the time. For many young and underfunded nonprofits, that’s probably already enough to seal the deal.
On the other hand, “cheaper, faster, and simpler” means that the IRS doesn’t closely vet tax-exempt organizations that submit Form 1023-EZ, which could cause problems for your organization down the road. Form 1023-EZ consists of a bunch of questions, after all, in which you attest to your organization’s adherence to Section 501(c)(3) of the Internal Revenue Code (and hence your organization’s right to claim federal tax-exempt status). But the IRS doesn’t require any real proof of the answers you give. This differs sharply from the requirements for Form 1023, which involve backing up every claim with attachments, organizational documents, information about your nonprofit’s financial history, and so on.
Why the lack of oversight? The answer is that IRS Form 1023-EZ was introduced as a solution to an administrative backlog. The vetting process for the traditional Form 1023 application is so strenuous that over time the IRS generated a huge pile of unapproved applications. Form 1023-EZ helps prevent an increase to this backlog by allowing lower-risk organizations (domestic charities that don’t generate much revenue anyway) to essentially certify themselves as 501(c)(3) tax-exempt organizations.
Basically, if your nonprofit presents a risk, the IRS wants to examine your documents closely. If it doesn’t present an obvious risk, the IRS is okay with rubber stamping your application and simply checking for compliance down the road through random audits. That’s probably good for the IRS, but it may not be a good thing for your organization or your donors. Imagine starting a nonprofit in good faith, believing that you’ve done everything necessary to comply with federal regulations, and finding out ten years from now that some aspect of your nonprofit’s structure or activities disqualify its original claim to federal tax-exempt status.
So if you’re new to the nonprofit sector, don’t choose lightly between submitting Form 1023 or Form 1023-EZ, and don’t base your decision solely on what looks “easiest” on the surface. Compare the short term benefits of submitting Form 1023-EZ with the potential long-term benefits of starting your nonprofit’s life on a more solid footing with the IRS. In many cases it might be best to submit the lengthier, costlier Form 1023 and simply wait the half year or so necessary for the IRS to properly vet your charitable organization.