A new IRS form that is only three pages long will make filing for tax-exempt status much easier. Form 1023-EZ, the Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, is intended to reduce long processing delays at the IRS and cut the paperwork required for small charitable organizations applying for tax-exempt status. Nearly 70 percent of organizations applying for tax-exempt status are expected to qualify for the new shorter form. The IRS hopes that by allowing small charities to use the streamlined form it can focus its resources on reviewing the applications of larger, more complex organizations. The intent is to reduce the current nine-month backlog of 60,000 applications.
Organizations eligible to file Form 1023-EZ
Organizations with total assets of $250,000 or less are eligible to file Form 1023-EZ. In addition, an organization’s annual gross receipts for the past three years and the projected annual gross receipts for the next three years must be $50,000 or less.
The IRS has identified several categories of organizations that are not eligible to use Form 1023-EZ. The following is a partial list of organizations that are not allowed to use the streamlined application:
- Schools (primary, secondary, preparatory, colleges, and universities)
- Hospitals, cooperative hospital service organizations, health maintenance organizations (HMOs) and Accountable Care Organizations (ACOs)
- Supporting organizations
- Credit counseling services
- Organizations maintaining one or more donor advised funds
- Private operating foundations
There are some organizations that may be considered tax-exempt under Section 501(c)(3), even if they don’t file Form 1023 or Form 1023-EZ. These include:
- Churches (including synagogues, temples, and mosques)
- Integrated auxiliaries of churches and conventions or associations of churches
- Organizations with annual gross receipts of $5,000 or less
Choosing which form to file: Form 1023-EZ or Form 1023
Eligible organizations are not required to complete this new shorter form. They may elect to file the longer, 26-page Form 1023 instead. In addition, if a small organization has already applied using the longer Form 1023, and the application has not been assigned to an IRS agent, the organization is allowed to file Form 1023-EZ. The new Form 1023-EZ will automatically withdraw the pending Form 1023. However, the user fee for the withdrawn Form 1023 generally will not be refunded.
Application process using Form 1023-EZ
If the organization qualifies to file the Form 1023-EZ (there is an eligibility worksheet in the instructions), it will need to register for an account at Pay.gov. The Form 1023-EZ is completed online and must be filed electronically using the Pay.gov website. The $400 user fee is due at the time the application is submitted, also using Pay.gov.
While the process for applying for tax-exempt status may be significantly shorter with the streamlined form, the other compliance rules are the same for all applicants whether using Form 1023-EZ or Form 1023. For example:
- The application must be filed within 27 months from the date the organization was legally formed.
- Form 990 is required to be filed while Form 1023-EZ approval is pending.
- The Form 1023-EZ and all related documents must be made available for public inspection if tax-exempt status is granted.
The instructions remind organizations that the submission of Form 1023-EZ doesn’t guarantee approval of tax-exempt status. If the IRS finds an organization’s activities are consistent with the requirements for tax-exempt status, a favorable determination letter will be issued, classifying the organization as either a “public charity” or a “private foundation.”
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.