Tax Law Changes on the Horizon for Exemption Applications

June 3, 2014

A significant change is pending regarding the Internal Revenue Service’s Application for Recognition of Exempt Status (IRS Form 1023). If approved by the Treasury’s Office of Management and Budget (OMB), the change will enable prospective charities to apply for exemption in an expedited manner that will take less time, require less information and have a lesser user fee. The anticipated process has been compared to a highway express lane.

While this change is attractive to organizations that have been caught up in the IRS backlog, it is not yet a “done deal.” Treasury submitted the new form to OMB for approval and circulated a draft with instructions on April 23. The comment period ended April 30, although comments will be welcome at any time. The form, if approved, will not be released until mid-late summer.

Key Considerations to Keep in Mind

  • What will be different? The 1023 EZ will be three pages long instead of 12 primary pages and 36 pages of instructions. It will not require applicants to provide narrative descriptions, governing documents, financials or other original documents.
  • Who will be able to file the EZ? Small organizations with actual or anticipated revenues of no more than $200,000 and assets of no more than $500,000 will be eligible so long as they are not disqualified by their planned activities. An LLC, church, school, hospital, foreign organization or supporting organization will not be eligible for the abbreviated filing. Social entrepreneurs may find this form incompatible with their planned activities and projected revenues.
  • Why is a change necessary? In the last few years, the determination process has ground to a halt, stranding lots of new organizations in a limbo between exempt and non-exempt status. Even though the IRS released an interactive electronic form, that form was essentially the same as the original paper version and failed to achieve greater efficiency. It is currently taking months to receive a favorable determination from the Exempt Organization Division. This is preventing the fledgling organizations from growing.
  • How is the Form 1023 EZ being received? Despite its simplification, the EZ is not being uniformly greeted with enthusiasm within the professional community. In extensive comments, the National Council of Nonprofits expressed concern that the new form will decrease the quality of information the IRS needs to make informed decisions, reduce public trust and inappropriately shift the IRS obligations onto others, i.e. the public, existing nonprofits, the funding community and state charity regulators.
  • What should new organizations do? If an organization has already submitted its Form 1023 and is patiently waiting for a determination, it should stay the course and wait this out. If an organization has not yet filed its Form 1023, it can do so now using the existing Form 1023 application and submitting to the current process. If, however, an organization prefers to wait until mid-late summer, it can do so with the understanding that the new form will be different than the present and its handling may be different as well. There is no guarantee as to timing, fee or results.

If you wish additional information or would like to discuss the proposed change in greater detail, please feel free to contact me at [email protected]