Form 1023-EZ Under Scrutiny

In July 2014, the IRS (Service) approved the three-page Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (Code), for applicants of tax-exempt status that expect to have annual gross receipts of $50,000 or less in their current tax year and subsequent two years.

In addition, the applicant organization could not have had more than $50,000 in annual gross receipts in any of the three preceding years or had more than $250,000 in assets. 

The Service permits only certain organizations to use Form 1023-EZ. For instance, supporting organizations, private operating foundations, schools and hospitals cannot use the form to seek exempt status.

Form 1023-EZ was the Service’s solution to its problem of backlogged Forms 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, in the system. The new form has dramatically cut turnaround time for review and approval of applicants, but since the streamlined application was introduced it’s been strongly scrutinized.

Prior to July 2014, all organizations seeking tax-exempt status under 501(c)(3) were required to file the 26-page Form 1023. Upon submission, organizations would need to provide evidence supporting how they meet organizational and operational tests under the Code. Now, when submitting the shorter Form 1023-EZ, an organization is only required to attest to meeting the two required tests.

That’s where the scrutiny comes in. A recent report in The New York Times alleged that an individual successfully established more than 50 fake charities by filing Form 1023-EZ when seeking tax-exempt status. Based on the report, U.S. Representative Bill Pascrell, a New Jersey Democrat who chairs the House Ways and Means oversight committee, requested an audit to be completed by the Treasury Inspector General Tax Administration (Inspector General).

According to the Inspector General’s report released October 3, for the period 2018-2021, approximately 249,000 Forms 1023-EZ were approved by the Service, with less than 1% of applicants denied. The report also states that in fiscal year 2021, 75% of the 90,000 applications were filed using Form 1023-EZ. The Inspector General concluded that Form 1023-EZ is “insufficient to make an informed determination about tax-exempt status and does not educate applications about eligibility,” and recommended the Service provide clear guidance on what constitutes exempt activities on the Form 990-EZ.

In response, the Service disagreed with the Inspector General’s recommendation and stated that providing eligibility information on Form 1023-EZ would only increase paperwork and would not promote compliance. The Service agreed to look into potentially requiring more attachments be included when filing Form 1023-EZ and to correct inaccurate guidance on its webpage for charities and nonprofits. 

Compounding matters these days is the issue that the Tax Exempt & Government Entities division of the Service has been experiencing a significant amount of turnover within their commissioner ranks. Edward Killen is the current deputy commissioner of the Tax Exempt & Government Entities business operating division tasked with alleviating the issues for which the Form 1023-EZ is being scrutinized. Stay tuned.

About Schneider Downs Not-for-Profit Services 

Our Not-for-Profit industry group is committed to providing exceptional service and expertise to a community of clients who serve our regions tirelessly each day. We provide valuable insight to not-for-profit organizations of all sizes and their boards through our assurance, tax, advisory and technology consulting services and not-for-profit fund accounting software.  

To learn more, visit our Not-for-Profit Industry Group page.  

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