For nonprofits looking to establish 501(c)(3) exempt status with the IRS, the Form 1023 can be a formidable step. The form requests a lot of information about activities; management and leadership; financials; compensation; fundraising and more. The form itself is 29 pages, including all exhibits (which an organization may or may not have to fill out, depending on their type and activities); the instructions are 38 pages long.
And once a nonprofit has completed and submitted the form, it can be in for a long wait. We’ve blogged about delays at the IRS before, and while things appear to be slowly improving, many nonprofits should be prepared to wait a year or longer to get their determination letter.
The IRS has been working to resolve the backlog, and one new proposal involves a short-form application to establish 501(c)(3) status—the Form 1023-EZ. And at just two pages, it is indeed short-form. It does not require a narrative description of activities or financial/budget information, and instead requires applicants to attest that they will not conduct any of the following listed prohibited activities :
- Supporting political candidates
- Participating in private inurement
- Furthering non-exempt purposes more than insubstantially
- Operating a trade or business unrelated to exempt purposes as a primary activity
- Devoting more than an insubstantial amount of activities to lobbying
- Engaging in activities that are illegal or violate public policy
- Providing commercial insurance as a substantial part of activities
It also asks some questions that could garner more IRS follow up or examination, such as whether the organization will operate internationally, provide disaster relief, or donate funds to individuals.
It is important to note that the types of organizations eligible to file this form are fairly limited. For example, an organization cannot use the form if any of the following apply:
- Gross receipts expected to exceed $200,000 annually
- Total assets in excess of $500,000
- It is structured as a limited liability company
- It is a successor to a for-profit
- It is a church, school or hospital
- It is a supporting organization
- It will sponsor donor-advised funds
- It will participate in joint ventures.
This is not an exhaustive list; check out the draft instructions for more organizations that will be excluded.
Reaction to Draft Form
The draft form has already generated a fair amount of buzz—positive and negative–among practitioners. Some see the form as long overdue for providing smaller, less complex organizations with a quicker avenue to exempt status. There is a corollary form, the 990-EZ, in the information filing area, and it can make sense to allow for similar treatment at the front end.
However, others express concern that the form will open the door to abuse and non-compliance with the law, intentional or not. It is worth noting that exempt organizations are highly regulated, and many who are starting a nonprofit have no idea about the scope of that law and all that they are required (and prohibited) from doing. Completing a full Form 1023, even without the assistance of an attorney or another professional, can be an important learning opportunity, and this may be foreclosed by a truncated process.
Others have raised constitutional concerns about the exclusion of churches from using the form. While churches actually do not have to file a Form 1023 to establish 501(c)(3) status, many opt to do so because it makes it easier for their donors to establish that their donations are deductible (because the church will get a determination letter and be on file with the IRS as a 501(c(3). Requiring smaller churches to fill out the full Form 1023 while other organizations can use the simpler Form 1023-EZ may not be appropriate.
Comments on the draft form can be submitted to:
Treasury PRA Clearance Officer
1750 Pennsylvania Ave. NW., Suite 8140, Washington, DC 20220 or email at PRA@treasury.gov
Office of Information and Regulatory Affairs Office of Management and Budget
Attention: Desk Officer for Treasury,
New Executive Office Building, Room 10235, Washington, DC 20503 or email at OIRA_Submission@OMB.EOP.gov