IRS FORM 1023-EZ: STREAMLINED APPLICATION FOR EXEMPTION UNDER IRC SECTION 501(C)(3)
By: Rudman Winchell Attorney Jonathan Bench
Recently the IRS introduced Form 1023-EZ as a streamlined alternative to the existing Form 1023, the application form required to apply for “exempt” tax status with the IRS under Internal Revenue Code (“Code”) Section 501(c)(3). An organization granted exempt status by the IRS is exempt from paying some or all federal income tax on income the organization receives that is related to its exempt purposes (not unrelated business income). A variety of other organizations may also be granted exempt status under other sections of the Code, such as those under 501(c)(4) (civic leagues and certain social welfare organizations), 501(c)(7) (social clubs) and 501(c)(8) and (c)(10) (fraternal societies), among others. However, additional tax benefits are available to donors who contribute to organizations granted exempt status under 501(c)(3), which is why so many organizations seek exemption under 501(c)(3). Donors contributing to 501(c)(3) exempt organizations may make tax-deductible contributions, but contributions to other exempt organizations are not tax-deductible.
Form 1023-EZ was designed to streamline the existing Form 1023 for small organizations seeking exempt status. Form 1023-EZ is submitted online rather than through the mail. The form is only three pages long, rather 12 pages for Form 1023 (not including any applicable exhibits). The instructions to Form 1023-EZ, a crucial starting point for any IRS application, are 10 pages long, but the instructions are 26 pages shorter than the instructions to Form 1023. The instructions to Form 1023-EZ also include an eligibility worksheet to quickly determine whether the organization may file Form 1023-EZ. In order to file Form 1023-EZ, the organization may not:
- Have annual gross receipts in excess of $50,000;
- Have total assets of more than $250,000;
- Have been formed under foreign law;
- Be a limited liability company (LLC);
- Be a successor to a for-profit organization;
- Have had exempt status previously revoked;
- Be a church or a convention or association of churches;
- Be a school, college or university;
- Be a hospital, hospital organization, cooperative hospital service organization or medical research organization;
- Be a cooperative service organization of operating educational organizations if organized and operated solely to provide investment services to its members;
- Be applying for exemption as a qualified charitable risk pool;
- Request classification as a supporting organization;
- Invest 5% or more of its total assets in securities or funds that are not publicly traded;
- Participate in partnerships in which profits and losses are shared with partners other than other 501(c)(3) exempt organizations; or
- Maintain or intend to maintain one or more donor advised funds.
The above does not contain all of the restrictions relating to organizations seeking to file Form 1023-EZ. The organization seeking exemption should carefully review all of the criteria regarding an organization’s ability to file Form 1023-EZ.
Certain organizations, such as those with gross receipts in each taxable year of normally not more than $5,000 may be considered tax exempt under 501(c)(3) even without filing Form 1023 or 1023-EZ. Generally, for organizations that file Form 1023-EZ or Form 1023 within 27 months after the organization’s formation, the exempt status will apply retroactively to the organization’s formation date. For organizations filing 27 months after formation, the effective date of exempt status will be the date the form is submitted to the IRS. Organizations that file after the 27-month deadline may, after receiving their Determination Letter, write a letter requesting that the exemption be applied earlier than granted in the Determination Letter.
Organizations desiring to obtain exempt status utilizing Form 1023-EZ should consult with their legal and accounting professionals to conduct a thorough review of the organization’s legal documents and financial records to ensure they historically, currently and in the future will adhere to the stringent requirements of an organization exempt under 501(c)(3).