In February the IRS released a draft of Form 1023-EZ (which was further updated in May), a simplified application for tax-exempt status that may be used by smaller organizations. The simplified form drastically reduces the burden on smaller charities by permitting them to attest that they meet the organizational and operational tests for tax-exempt status.

Prior to this, an organization that wished to be recognized by the IRS as tax-exempt under Section 501(c)(3) of the Internal Revenue Code would need to complete the 25-page Form 1023, which, in the IRS's estimation, requires 101 hours to complete. Currently, the proposed Form 1023-EZ is only three pages long, and the IRS estimates it can be completed in 14 hours. Unlike Form 1023, Form 1023-EZ does not require a narrative description of an organization's activities, nor does it require budgetary information.

In order to use Form 1023-EZ, an organization must attest that it has completed an eligibility worksheet with 22 questions. If your organization answers "yes" to any of the following questions, then it is not eligible to use Form 1023-EZ:

  1. Are your projected annual gross receipts expected to exceed $200,000 in any of the next three years or have your annual gross receipts exceeded $200,000 in any of the past two years?
  2. Do you have total assets in excess of $500,000?
  3. Were you formed under the laws of a foreign country?
  4. Are you a successor to, or controlled by, an entity suspended under 501(p)?
  5. Are you a limited liability company?
  6. Are you a successor to a for-profit entity?
  7. Were you previously revoked or are you a successor to a previously revoked organization (other than automatic revocation for failure to file Form 990)?
  8. Are you a church or a convention or association of churches described under IRC 509(a)(1) and 170(b)(1)(A)(i)?
  9. Are you requesting classification as a school, college or university under IRC 509(a)(1) and 170(b)(1)(A)(ii)?
  10. Are you requesting foundation classification under IRC 509(a)(1) and 170(b)(1)(A)(iii) as a hospital or medical research organization?
  11. Are you applying for exemption as a cooperative hospital service organization under section 501(e)?
  12. Are you applying for exemption as a cooperative service organization of operating educational organizations under section 501(f)?
  13. Are you applying for exemption as a charitable risk pool under section 501(n)?
  14. Are you requesting classification as a supporting organization under IRC section 509(a)(3)?
  15. Is a substantial purpose of your activities to provide assistance to individuals with credit counseling activities such as budgeting, personal finance, financial literacy, mortgage foreclosure assistance or other consumer credit areas?
  16. Are you investing or do you plan to invest 5% or more of your total assets in securities or funds that are not publicly traded?
  17. Do you or will you participate in joint ventures, including partnerships or limited liability companies treated as partnerships, in which you share profits and losses with partners other than section 501(c)(3) organizations?
  18. Do or will your activities include selling carbon credits or carbon offsets?
  19. Are you an HMO?
  20. Are you an ACO, or do or will your activities include ACO activities?
  21. Are you a sponsoring organization as defined in section 4966(d)(1) that maintains or intends to maintain one or more Donor Advised Funds?
  22. Are you organized and operated exclusively for testing for public safety and requesting a foundation classification under IRC 509(a)(4)?

The draft instructions do not indicate the user fee for filing Form 1023-EZ, but it is expected the user fee will be reduced.

Although on its face a simplified exemption application might appear to be beneficial, the limited nature of Form 1023-EZ could cause compliance issues, specifically because the IRS may not receive enough information to ensure that an applicant qualifies for tax-exempt status. For example, it appears as if an applicant may not need to provide the IRS with its governing documents, which is important because an applicant may not be equipped to evaluate whether its documents meet the basic requirements for tax exemption.

As the comment period is still open, the final draft of Form 1023-EZ is not yet released.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.