10 years ago, the IRS released the Form 1023-EZ, a streamlined application for recognition of tax exemption. Similar to the Form 1023, the 1023-EZ allows organizations to apply for tax-exempt status under Internal Revenue Code § 501(c)(3). Unlike the 1023, the 1023-EZ does not require detailed information about the organization’s framework, activities, and finances. Instead, the 1023-EZ relies heavily on checkboxes whereby the applicant organization attests that it meets the requirements for exemption.
Due to its simplicity and lower filing fee compared to the 1023, the 1023-EZ has become the most filed application for recognition of tax exemption. Indeed, of the approximately 130,000 determination requests received by the IRS in fiscal year 2023, nearly 90,000 were 1023-EZ applications and nearly 30,000 were 1023 applications.
Only certain organizations are eligible to apply for recognition of 501(c)(3) status using the 1023-EZ. Prior to applying, the applicant organization must complete a 1023-EZ Eligibility Worksheet. The worksheet can be found as part of the instructions to Form 1023-EZ published by the IRS. The worksheet contains 30 “yes or no” questions about the applicant organization. If the applicant answers “yes” to any of the questions, it is not eligible to file the 1023-EZ. Generally, organizations expecting to have gross annual income of less than $50,000 for three years and having total assets worth less than $250,000 are eligible to file the 1023-EZ.
The 1023-EZ was created to streamline the application and approval process for smaller and less complex organizations. To this end, the 1023-EZ is three pages in its entirety, whereas the 1023 is 18 pages (excluding any schedules that need to be included by certain organizations). Where the 1023 asks for detailed information, the 1023-EZ asks for attestations and brief explanations. Even attachments are disposed of. The 1023 requires applicant organizations to attach their organizing document (such as Articles of Incorporation) and Bylaws (if applicable) to the 1023 while the 1023-EZ does not.
While preserving the main elements of the 1023, the 1023-EZ presents as easier to digest for new nonprofit founders. In our experience, however, the 1023-EZ has led to many mistakes and misrepresentations by individuals new to the nonprofit sector. Despite its own pitfalls, the 1023 effectively forces applicants to articulate their plans in a manner that mimics creating a business plan and, at the same time, provides some education on the rules governing 501(c)(3) organizations. By attempting to make the application process more efficient, the 1023-EZ fails to reproduce these crucial aspects of the 1023.
For example, any nonprofit wishing to be recognized as a 501(c)(3) organization must include in its organizing document a statement that it shall be organized and operated exclusively for one or more § 501(c)(3) purposes. Further, organizations must include a dissolution clause in their organizing document stating that the organization’s assets will be distributed to another 501(c)(3) organization or government entity upon the organization’s dissolution. The 1023 requires applicant organizations to attach a copy of their organizing document so the IRS can verify the applicant’s compliance with these rules. Contrarily, the 1023-EZ simply asks the applicant organization to check a box attesting that the required provisions are contained in the organization’s organizing document. Time and time again we have seen new founders attest that their organization is setup properly without that actually being the case.
It is easy to make mistakes on the 1023-EZ and it is often costly to fix those mistakes. It takes a lot of time, money, and effort to properly form and start a 501(c)(3) organization. Going back to correct mistakes or restructure parts of the organization to comply with the law requires additional time, money, and effort which would be better spent on the organization’s charitable endeavors. It matters to get it right the first time.
The 1023-EZ is a good faith effort by the IRS to make the 501(c)(3) application process more efficient and accessible. But it is important to acknowledge that it has drawbacks. The 1023-EZ makes it easier for illegitimate 501(c)(3)s to be officially recognized by IRS. Nevertheless, in many cases the 1023-EZ is the ideal option for those organizations eligible to file. It is less intimidating and cheaper than the 1023, and allows the IRS to process applications more quickly and efficiently. Nothing is perfect, but the 1023-EZ fills a necessary and important role for smaller and less sophisticated organizations seeking to do good for the community.
Kyler Mejia is an attorney (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.