As anticipated, the Internal Revenue Service announced a streamlined, much simpler and shorter version of Form 1023, the Application for Recognition of Tax Exempt Status.
Standard Form 1023
The standard Form 1023 is 26 pages long, not counting a 38-page instruction booklet, 3 additional pages of instructions the IRS has added to the front of the form making changes to the form and the instructions, and a 2-page checklist to make sure the entire submission package is complete and compiled in the correct order. But that’s not all — one of the most important sections of the form, Part IV, is only about a quarter-page long but it calls for the applicant to attach a detailed narrative description of the organization’s activities explaining how each of them supports the organization’s charitable purpose, and several other sections leave so little room to include all the necessary information that most applicants find it necessary to attach addtional pages. With all that, and with the other information that must be submitted, such as articles of incorporation and bylaws, Form 1023 submission packages can easily reach 50, 60, or 70 pages.
The IRS says that they currently have a nine-month backlog of Form 1023 applications, and it is possible that number is actually an understatement. Once received by the IRS, Form 1023 applications go through a sort of triage process. Applications that are complete and do not appear to pose significant obstacles to approval are directed into a queue to be processed more quickly than applications that will require the IRS to request significantly more information. Just this week our office received a determination letter for a Form 1023 that had been pending for more than seven months, and that application was, presumably, directed through the quicker process.
In contrast, Form 1023-EZ is less than three pages long, although that is a little misleading because it still requires an instruction booklet with 10 pages of instructions to explain how to complete the form, a 7-page worksheet that must be completed in order to determine if the organization is eligible to use the streamlined form, and a 3-page list of National Taxonomy of Exempt Entities (NTEE) Codes from which the applicant must select the code that best fits the organization. Nonetheless, Form 1023-EZ should be considerably less burdensome than the standard form.
After completing the worksheet, the applicant must file the form online at www.pay.gov, which requires a username and password obtained through free registration. Any applications submitted on paper are automatically deemed incomplete.
Most organizations with annual revenues less than $50,000 for the current year, each of the previous three years, and the next two projected years are eligible to submit Form 1023-EZ. However, some types of organizations must submit the standard Form 1023 regardless of revenues. Here is a partial list of organizations that are ineligible for Form 1023-EZ:
- Those organized as limited liability companies.
- Churches and associations or conventions of churches. (Note: Churches are not required to submit an application for recognition of tax exempt status, but if they do not, they will not have a determination letter from the IRS, which can be useful for various reasons. Those that wish to receive a determination letter will continue to submit Form 1023 rather than 1023-EZ.)Schools, colleges, and universities.
- Hospitals, medical research organizations, and hospital organizations.
- Health maintenance organizations (HMOs).
- Accountable care organizations (ACOs).
- Supporting organizations (i.e., charitable organizations that are derive their status as public charities from their supporting relationship to another charitable organization that is a public charity).
- Credit counseling organizations.
- Organizations that have previously had their tax exempt status revoked except organizations that have had their tax exempt status revoked for failing to file Form 990 (or 990-EZ or 990-N) for three consecutive years.
That last part is significant because many smaller organizations have lost their tax exempt status for failure to file Form 990, and Form 1023-EZ will be available to those wishing to have their tax exempt status reinstated.
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