501(c)(3) Application process has been simplified for certain entities.


Update:
The early returns are in, and the Form 1023-EZ appears to be significantly speeding up the approval process for tax-exempt status. The average age of pending applications has decreased to approximately two months (at the time of the initial post, it was approximately nine months). Indeed, we have seen an organization receive approval of its tax-exempt status in as few as nine days.


New Form 1023-EZ
On July 1, 2014, the Internal Revenue Service (IRS) announced that certain charities may apply for their Section 501(c)(3) tax-exempt status by using a less burdensome form.  Previously, entities applying for such status were required to complete the twenty-six page Form 1023. While the new Form 1023-EZ is merely three pages long, potentially reducing the resources an entity expends in the application process, any entity wishing to apply using the new form will first need to complete a seven page worksheet contained within the instructions to confirm eligibility. The IRS Commissioner believes that the new form will improve the speed with which the IRS responds to applications (as of July 3, 2014, the average age of pending applications was October 2013). Entities not eligible to use the Form 1023-EZ but still seeking to apply for tax-exempt status pursuant to Section 501(c)(3) will need to continue using Form 1023 for their applications.

Reasons for Disqualification
An entity must be able to answer in the negative each of the twenty-six questions contained in the eligibility worksheet in order to use the Form 1023-EZ. While the IRS does not require the worksheet itself to be submitted, the Form 1023-EZ requires users to attest that they have completed the worksheet and are eligible to apply using the new form. Some of the disqualifying reasons include:

  • The gross receipts of the entity have exceeded $50,000 in any of the prior three years, or will exceed $50,000 in any of the next three years;
  • The entity’s total assets are in excess of $250,000;
  • The entity was formed under the laws of a foreign country;
  • The entity is a church, school, or hospital.

The above list is not exhaustive, and applying entities should carefully complete the worksheet in its entirety before attempting to complete the Form 1023-EZ.

Maintaining Your Exempt Status
As always, it is critical that once an entity is granted its 501(c)(3) status, it continue to comply with the requirements for staying exempt. If the Form 1023-EZ lives up to its expectations, the IRS will have more resources to expend in other areas. Indeed, the IRS Commissioner has stated, “we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do.”

Whether you are seeking to apply for Section 501(c)(3) tax-exempt status for your entity using the new form or the old one, or you simply need advice on how best to ensure your entity’s continued compliance with IRS requirements for maintaining your exempt status, Immix can assist you.

Patrick De KlotzAbout the Author: Patrick De Klotz
Email: patrick.deklotz@immixlaw.com | Direct: (503) 802-5535

As a business attorney in Portland, Patrick assists clients by advising them on regulatory compliance, FOIA issues, intellectual property issues, and other general business needs.

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