Is the 1023-EZ a Step Backward for Regulators and Nonprofits?

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June 2, 2014; The Hill

Applications for tax exemption have received a lot of press attention over the past year, as they are at the center of the IRS scandal. There is a significant backlog of applications awaiting processing by the IRS. Last summer, the reported backlog was just more than 65,000 applications, primarily for charities. Applicants have complained that the 22-page Form 1023 is cumbersome to fill out and typically requires an expert such as a CPA or attorney to complete properly. The application process is especially burdensome for the majority of charities that apply because they are small organizations that have no plans to become large.

The IRS announced the design of a Form 1023-EZ, meant to reduce drastically the complexity of the application for tax exemption by charities. The three-page form, currently in draft, mostly asks applicants for contact information, intended charitable activities, and a list of their board members. One key difference with the 1023-EZ is that it asks applicants to verify that they have forms and policies in place, but does not require applicants to provide copies of the forms and policies. The streamlined form will not only be far easier to fill out, it should be far simpler (and faster) for the IRS to process. The new form and instructions are anticipated to be in use in the next three months (Summer 2014).

Tim Delaney, President and CEO of the National Council of Nonprofits, objects to the Form 1023-EZ in its present form. There are concerns that the streamlined form omits most of the exhibits that the IRS uses to perform its due diligence to confirm that an applicant organization truly qualifies for tax exemption. Some see this abbreviated form as an invitation to abuse of charitable status, with the IRS lacking the documentation to evaluate the facts. Delaney also notes concern from states: “The National Association of State Charity Officials [NASCO] has sternly warned the IRS that ‘the Form 1023-EZ will increase opportunity for fraud and heighten the burden on state regulators.’”

Ellis Carter, an attorney specializing in nonprofit law, noted that the Form 1023-EZ is likely designed for small nonprofits of specific types. The 34-page draft instructions for the three-page form include an “eligibility checklist” for using the form. Generally speaking, applicants with revenue under $200,000 and assets under $500,000 could use the form, unless their activities (e.g., foreign activities, hospital, church, supporting organization for another charity, etc.) dictate using the Form 1023.

Carter’s analysis isn’t too different from Delaney’s and NASCO’s: Something needs to be done, but the IRS’s proposed Form 1023-EZ approach is too broad to accommodate ease of applying and processing applications while also protecting taxpayers from unscrupulous and ill-prepared applicants for tax-exemption.—Michael Wyland

  • David Lowden

    I agree that the current Form 1023 is too intimidating for smaller nonprofits. But the questions the current form asks are helpful to inform new nonprofits of the various issues that they will need to face to maintain tax exempt status. I therefore question the appropriateness of the 1023-EZ in its proposed form and with its proposed criteria for use. I also find it frustrating that the Service did not allow more time for public comment (it allowed about a week).

    The financial thresholds for the new form are akin to the thresholds for the Form 990-EZ (gross receipts of less than $200,000 and assets of less than $500,000). The new form might be more appropriate for nonprofits that are eligible to use the Form 990-N (i.e., those with gross receipts normally below $50,000 per year).

    There also should be a follow-up procedure, akin to that which was used when the Service issued advance rulings as to public charity status, where the nonprofit has to provide more detailed information after a period of operations (e.g., three or five years) and would need to provide more information if the entity “graduates” to having income and assets that would trigger the need to file the next higher-up Form 990.