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FASTLANE TO TAX EXEMPT STATUS? The IRS 1023-EZ Application

FASTLANE TO TAX EXEMPT STATUS? The IRS 1023-EZ Application

By Timothy E. Harden, Esq.

Are you looking for an easier and quicker way to obtain tax exempt status for your charity? If so, read on to see if filing IRS Form 1023-EZ is right for you.

A Streamlined Application Process

Similar in some respects to filing an Form 1040-EZ tax return, the IRS Form 1023-EZ is designed to make it easier for some nonprofit entities, usually smaller ones, to obtain tax exempt status. First, it is three pages long compared to thirty-one for the alternative, IRS Form 1023. Second, the processing time is dramatically shorter. For 2014, it was 13 days for the Form 1023-EZ versus 191 for the Form-1023. Not surprisingly, taxpayer satisfaction ratings were higher for the Form 1023-EZ.

Requirements

At a basic level, the applicant using a Form 1023-EZ has to satisfy the same general requirements for organizational form and charitable purpose as are required on the longer form. Beyond that, the entity has to be “small.” For this purpose, it means that it has to have less than $50,000 in annual gross receipts for the prior three years it existed, if applicable, as well as to anticipate that continuing for the next three years. In addition, it must have total assets under $250,000. Further, the entity cannot be an LLC. Finally, the applicant cannot be a church, hospital, or a qualified charitable risk pool. Finally, there are a few other conditions that must be satisfied that are not as broadly applicable. There is an eligibility checklist at the end of the instructions.

Why Not Use the Form?
Given the above, it would seem logical that the Form 1023-EZ would be preferred if the applicant is eligible. That is generally true, but there are some considerations to the contrary. One reason not to use it is if the entity plans on applying for grant or corporate funding, because the types of donors in this arena scrutinize public filings as part of their due diligence process. Both the Forms 1023 become part of the public domain, but because the Form 1023-EZ has less detail, the prospective donors will have less information upon which to base their decision. This may make it more difficult to get this type of funding.

Further, according to the relevant IRS Revenue Procedure, you cannot rely on the determination letter received as the result of applying with a Form 1023-EZ if it was based on “any inaccurate material information submitted by the organization.” That increases the risk to potential donors. This is not so when it comes to determination letters obtained through Form 1023. In that case, donors can make contributions to the organizations in good faith until the IRS says otherwise. That creates some uncertainty when it comes to Form 1023-EZ.

Conclusion
The IRS Form 1023-EZ is a potentially valuable tool for smaller charitable organizations, but anyone considering using it should consult with an attorney about whether it makes sense to use it in their particular situation.

For more information regarding our tax services, please contact Tim Harden at (248) 645-2511 or via email at tharden@berrymoorman.com.