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IRS releases draft of streamlined application for tax-exempt status

April 23, 2014

IRS has released Draft Form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code) and its draft instructions. The 2-page Form 1023-EZ is a shorter, less burdensome version of the regular Form 1023; it may be used if an organization meets specific criteria.

Tax-exempt organizations. An organization is a tax-exempt organization under Code Sec. 501(c)(3) if it is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. With limited exceptions, an organization must notify IRS that it’s applying for Code Sec. 501(c)(3) status. (Code Sec. 508(a), Reg. § 1.508-1(a)) To obtain recognition of exemption from federal income tax under Code Sec. 501(c)(3), an organization must generally file the 26-page Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code). (Instructions for Form 1023, Rev. June 2006)

Draft form. The new Form 1023-EZ has been created as a method for smaller organizations to apply for exemption under Code Sec. 501(c)(3) in a streamlined two-page form if the organization meets specific requirements (determined by completing the Form 1023-EZ Eligibility Worksheet). Form 1023-EZ (like Form 1023) provides IRS with information to determine the applicant’s exempt status and private foundation status. Upon acceptance of the form, IRS will issue a letter that provides written assurance about the organization’s tax-exempt status and its qualification to receive tax-deductible charitable contributions.

Organizations that would normally file Form 1023 will be able to file Form 1023-EZ if they meet the following requirements: no more than $200,000 of projected annual gross receipts in any of the next three years; annual gross receipts of not more than $200,000 in any of the past two years; total assets not in excess of $500,000.

In addition, the following can’t file a Form 1023-EZ:


…a church or a convention or association of churches; a school, college, or university;
…a cooperative hospital service organization or a cooperative service organization of operating educational organizations; a charitable risk pool; or a Code Sec. 509(a)(3) supporting organization;
…an organization with a substantial purpose of its 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;
…an organization investing or that plans to invest more than 5% of its assets in hedge funds, or that participates in joint ventures, including partnerships or limited liability companies treated as partnerships, in which it shares profits and losses with partners other than Code Sec. 501(c)(3) organizations;
…an organization that sells or intends to sell carbon credits or carbon offsets; a health maintenance organization (HMO); an accountable care organization (ACO); or an organization with activities that include ACO activities; a Code Sec. 4966(d)(1) sponsoring organization that maintains or intends to maintain one or more Donor Advised Funds; an organization organized and operated exclusively for testing for public safety and requesting a foundation classification;
…a foreign organization; a limited liability company (LLC); a successor to a for-profit entity;
…an organization that is a successor to, or controlled by, an entity suspended under Code Sec. 501(p) as a terrorist organization; or
…a previously revoked organization or a successor to a previously revoked organization (other than automatic revocation for failure to file Form 990).


RIA observation: Some practitioners have expressed concern that, in offering the abbreviated form (which doesn’t request details on an entity’s organization, operation, and financing), IRS has erred too much on the side of simplicity and organizations that don’t actually qualify as tax-exempt will apply for and be granted such status.
Observation: IRS notes that some organizations may be considered tax-exempt under Code Sec. 501(c)(3) even if they do not file Forms 1023 or 1023-EZ. These include churches, including synagogues, temples, and mosques, integrated auxiliaries of churches and conventions or associations of churches, and any organization that has gross receipts in each tax year of normally not more than $5,000. However, IRS cautions that even though these organizations aren’t required to file Forms 1023 or 1023-EZ to be tax exempt, they may be liable for annual filing requirements (see Pub. 557).

The Instructions state that if an organization files Form 1023-EZ within 27 months after the end of the month in which it was legally formed, and IRS approves the application, the legal date of formation will be the effective date of its exempt status. If it did not file Form 1023-EZ within 27 months of formation, the effective date of its exempt status will be the date it filed Form 1023-EZ (postmark date). If it did not file Form 1023-EZ within 27 months of formation, and it believes it qualifies for an earlier effective date than the postmark date, it must file Form 8940 after it receives exemption, in order to request the earlier date. Alternatively, it could complete Form 1023 in its entirety instead of completing Form 1023-EZ.

Qualification of Code Sec. 501(c)(3) organizations. The Form 1023-EZ Instructions remind taxpayers about key requirements for an organization to be exempt from federal income tax under Code Sec. 501(c)(3). It must be organized and operated exclusively for one or more exempt purposes. Further, an organization doesn’t qualify for Code Sec. 501(c)(3) status if a substantial part of its activities is attempting to influence legislation. In addition, all Code Sec. 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating or intervening in any political campaign on behalf of (or in opposition to) any candidate for elective public office; although non-partisan voter education activities (including public forums and voter education guides) are allowed.

Observation: IRS notes that most public charities are eligible to elect to make expenditures to influence legislation by filing Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation. More specifically, by filing Form 5768, an eligible organization’s legislative activities will be measured solely by an expenditure limit rather than by the above “no substantial part” rule.
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