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Filing for 501c (3) Tax Exempt Status: Easing the Burden on Smaller Nonprofit Organizations

Dec 5, 2019 | Non-Profit, Tax

Most organizations seeking 501c (3) tax exempt status must file an application with the IRS. Until 2014, the only means available to organizations was filing Form 1023: Application for Recognition of Exemption Under Section 501c (3) of the Internal Revenue Code. Preparing this 26 page application is a cumbersome and time consuming process as organizations are required to disclose information in regards to organizational structure, governance, charitable purpose and related activities, sources of funding, and current and prior financial statement data. In addition, organizations are also required to submit their articles of organization and bylaws with the application. The overall process of preparing the application as well as the related recordkeeping can take over 100 hours to complete, followed by an IRS approval process that can take over a year.

In 2014, the IRS significantly reduced the burden on smaller organizations as well as expedited the approval process by introducing Form 1023-EZ: Streamlined Application for Recognition of Exemption Under Section 501c (3) of the Internal Revenue Code. Eligible organizations seeking 501c (3) tax exempt status are permitted to file this 3 page application in lieu of filing Form 1023. As previously mentioned, Form 1023 preparation and the related recordkeeping can take over 100 hours to complete and the approval process can take over a year. In contrast, Form 1023-EZ preparation and related recordkeeping can take only 16 hours to complete while the turnaround time for IRS approval can take only 1-2 months.

Form 1023-EZ contains some of the same required information and attachments as Form 1023, but on a much more scaled down level. To be eligible to file Form 1023-EZ, an Organization must complete an eligibility worksheet. If any of the questions is answered as “yes,” then the organization is not eligible to file Form 1023-EZ. Some of the more pertinent questions are related to an Organization’s annual revenues and assets. Organizations cannot file Form 1023-EZ if annual revenues exceed or are expected to exceed $50,000 per year or if total assets have a fair market value that exceeds or is expected to exceed $250,000.

For individuals and organizations who have shied away from forming nonprofits in the past because of the time, effort, and cost needed to do so, Form 1023-EZ may be a viable option. However, even though the IRS has “simplified” the application process, a CPA should be utilized or consulted. Preparing a complete and accurate application as well as the required formation documents will give your nonprofit the best chance for approval.

By Jeffrey A. Wilson, CPA

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