IRS Simplifies Tax-Exempt Applications for Small Nonprofits

May 5th 2014
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As investigations continue into the "Tea Party scandal" involving applications for tax-exempt status by conservative groups, the IRS is making it easier—and faster—for small nonprofits to apply for a tax exemption. It has created new Form 1023-EZ, a streamlined version of the regular Form 1023 used to apply for tax-exempt status under Section 501(c)(3) of the tax code.

A draft of new form 1023-EZ, as well as its accompanying instructions, was released on April 23. It is just two pages long as compared with the 26 pages in length for regular Form 1023. As of early May, it is not yet final, but the IRS expects that the shorter, simplified form will become available later this summer. The plans for the announced form were described in the March 31 Federal Register. (Note that the form and instructions may change before final release.)

Who Can Use the New Form?
Most tax-exempt charities operate under the auspices of Section 501(c)(3). This covers public charities and private foundations "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." To qualify for the 501(c)(3) exemption, the organization normally is required to complete and file Form 1023 and attach the appropriate fee.

But gathering all the necessary information and filing out the paperwork can be an arduous task. Alternatively, a nonprofit will probably be able to file Form 1023-EZ if it meets the following conditions:

  • No more than $200,000 of projected annual gross receipts in any of the next three years.
  • Annual gross receipts of no more than $200,000 in any of the past two years.
  • Total assets of the organization of no more than $500,000.

Although the IRS anticipates that many smaller nonprofits will be able to take advantage of the streamlined firm, a recent article by Thomson Reuters indicates that certain organizations are specifically prohibited from using it, including churches or conventions or associations of churches; schools, colleges or universities; cooperative hospital service organizations or cooperative service organizations of operating educational organizations; and various other types of entities.

The newly-released 1023-EZ instructions also remind taxpayers about several important conditions for attaining tax-exempt status under Code Sec. 501(c)(3). First and foremost, the organization must be organized and operated exclusively for one or more tax-exempt purposes. In addition, an organization generally won't qualify for 501(c)(3) status if a "substantial part" of its activities is attempting to influence legislation or it directly or indirectly participates in or intervenes in in any political campaign on behalf of, or in opposition to, any candidate for elective public office.

Thomson Reuters also says that some detractors have complained that the new streamlined form will allow nonprofits to skip some of the rigorous steps needed to comply with the rules such as providing vital details about the organization's financial affairs and operational procedures. However, it appears that the IRS is determined to move forward with this project, perhaps attempting to curry more favor in the nonprofit sector.

Related articles:

Filing Deadline Extended to March 30 for Some Tax-Exempt Organizations
Small nonprofits that lost exempt status may be eligible for reinstatement

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