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Applying for Tax Exemption Just Got “EZ”er

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Last summer I wrote a blog entitled “IRS Determination – Why the Wait” that described the IRS’s process for evaluating application forms of organizations applying for tax exempt status under Section 501 (c)(3). This process often took months and in some cases over a year. Well, good news has arrived this summer as the IRS just recently released a draft of Form 1023-EZ. A copy of the draft can be found here. The goal of the new form is to simplify the application and approval process and allow smaller organizations to gain exemption more easily.

Form 1023-EZ

According to the draft instructions, only certain organizations will be eligible to use the EZ form when it becomes final. Some of the organizations that will not be able to file the EZ form include churches, schools, hospitals, foreign organizations, limited liability companies, and supporting organizations. In addition, organizations that meet the following criteria cannot apply for tax exempt status using this form.

  • Have projected annual gross receipts expected to exceed $200,000 in any of the next 3 years.
  • Have annual gross receipts that exceeded $200,000 in any of the past two years.
  • Have total assets in excess of $500,000.

The Form 1023-EZ is extremely less complex than Form 1023. Form 1023 is a 26-page application while the draft EZ form consists of only 3 pages.  One of the biggest changes is that an applying organization will no longer have to submit lengthy explanations about whether they compensate officers and directors, engage in grant making, or participate in financial transactions with interested persons. The EZ form requires only a series of simple yes or no answers to these questions.  In addition, an organization will now attest that it will adhere to the following by simply checking a single box.

  • Refrain from supporting or opposing candidates in political campaigns in any way.
  • Ensure that net earnings do not inure in whole or in part to the benefit of private shareholders or individuals (that is, board members, officers, key management employees, or other insiders).
  • Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially.
  • Not be organized or operated for the primary purpose of conducting a trade or business that is not related to your exempt purpose(s).
  • Not devote more than an insubstantial part of activities attempting to influence legislation or, if a section 501(h) election was not made, not normally make expenditures in excess of expenditure limitations outlined in section 501(h).
  • Not provide commercial-type insurance as a substantial part of activities

Further, unlike Form 1023, Form 1023-EZ does not require the applicant to include multiple years of actual and/or projected financials, thus significantly reducing the preparation time of the application.

The form also encompasses a short section for those organizations that are seeking reinstatement following automatic revocation.

While the Form 1023-EZ is a huge step in improving the efficiency of the application process, organizations should carefully read the instructions when finalized by the IRS. Currently, the IRS expects to have the Form 1023-EZ and its instructions finalized by mid to late summer.

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