EZ Does It, or Not: The New Form 1023-EZ for Nonprofits

Achieving tax-exempt status as a 501(c)(3) nonprofit organization has always been an arduous process, with numerous checks and double-checks built in by the Internal Revenue Service to prevent the fraud that the nonprofit sector seems to attract. Now the IRS has taken a major step to streamline the process, but not everyone is thrilled with the change.

On July 1, 2014, the IRS introduced Form 1023-EZ. As with personal forms carrying the “EZ” designation, the 1023-EZ is a simpler version of its predecessor, 3 pages long versus the 26 pages of the standard Form 1023. “This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,” said IRS Commissioner John Koskinen, noting that under the previous process small, community-based organizations were subject to the same rigors as much larger company.

In the view of much of the established nonprofit community, however, the simpler process sets the bar too low for achieving 501(c)(3) status. Tim Delaney, president and CEO of the Council of Nonprofits, says, “‘It’s easier to get tax-exempt status under 1023-EZ than it is to get a library card.”

While the IRS maintains that simplifying the application process levels the playing field for smaller organizations, the nonprofit community fears the new form amounts to little more than a rubber stamp, inviting fraud. Others voiced concern that more of the enforcement responsibilities will be shifted to the state level, where resources are already strained.

Not every organization will qualify to use the 1023-EZ. Larger companies (with revenues of more than $50,000 annually or assets exceeding $250,000) do not qualify, and there is a lengthy list of restrictions based on the nonprofit’s activity type.This may have implications, as well, for non-profits who anticipate breaking the 50,000/annual income barrier as they grow. Talk to legal counsel about whether or not the 1023-EZ is a wise choice for your non-profit.

Form 1023-EZ may only be submitted online, and only after the completion of an eligibility checklist. It’s worth noting that while the form itself is only 3 pages long, the instructions and checklist run to 20 pages.

Our verdict: While the new 1023-EZ will level the playing field and make tax exempt status possible for more organizations, but small nonprofits should be aware of the 50,000 cap that may affect their planned growth. Concerns of potential misuse, however, are legitimate, and the 1023-EZ could have implications for non-profits that are unforeseen and unintended.

For more information on Form 1023-EZ and whether it may be workable for your organization, as well other matters relating to nonprofits, contact Simms Showers through their website at http://www.simmsshowers.com/.

Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Robert Showers, Daniel Hebda at djh@simmsshowerslaw.com or Justin Coleman at jrc@simmsshowerslaw.com for specific legal advice on this issue for your needs.