The Internal Revenue Service has introduced a new 1023-EZ form that shortens the application that charities need to submit if they want to be granted tax-exempt status under Section 501(c)3 of the Tax Code.
The new Form 1023-EZ, which was posted Tuesday on IRS.gov, is three pages long, compared with the earlier 26-page Form 1023. The IRS said that most small organizations, including as many as 70 percent of all applicants, already qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are also eligible.
“This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,” said IRS Commissioner John Koskinen in a statement. “The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work. Previously, all of these groups went through the same lengthy application process—regardless of size. It didn't matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.”
The IRS said the change would allow it to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. There are more than a million 501(c)(3) organizations recognized by the IRS.
The IRS has faced increasing criticism in the past year over its process for screening applications for another type of tax-exempt status, under Section 501(c)4 of the Tax Code, which applies to social welfare organizations but has also been used by many political groups that want to avoid disclosing the names of their donors. A report last year from the Treasury Inspector General for Tax Administration found that the IRS was using terms such as “Tea Party” and “Patriot” to screen applications from conservative groups. Documents from the IRS later revealed that some liberal groups had also received extra scrutiny if they had terms such as “Progressive” and “Occupy” in their names. During a contentious series of hearings, IRS officials were grilled about the use of so-called “BOLO lists,” short for Be on the Lookout. A number of top officials were ousted from the agency, including the former director of the IRS’s Exempt Organizations unit, Lois Lerner, who asserted her Fifth Amendment rights and declined to answer questions from Congress.
In response to requests from emails from Lerner and others involved in the scandal the IRS recently admitted that it was unable to find over two years’ worth of emails exchanged between Lerner and people outside the agency due to a computer crash in 2011, provoking fresh outrage at the agency.
The IRS was also recently forced to withdraw proposed regulations governing how it would assess the political involvement of groups applying for 501(c)4 status after it received an unprecedented number of comments reacting negatively to the proposed rules.
The IRS also has heard considerable feedback about the tax-exempt application process for 501(c)3 charities. Following feedback this spring from the tax community and those working with charitable groups, the IRS refined the 1023-EZ proposal for today's announcement, including revising the $50,000 gross receipts threshold down from an earlier figure of $200,000.
"We believe that many small organizations will be able to complete this form without creating major compliance risks," Koskinen said. "Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, 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."
The new 1023-EZ form must be filed online. The instructions include an interactive 26-question eligibility worksheet that organizations must complete before filing the form. If they answer yes to any of the questions, they ae not eligible to apply with the Forem 1023-EZ but can still apply for tax-exempt status using the older Form 1023.
The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, which was posted Tuesday on IRS.gov.
Revenue Procedure 2014-40 sets forth procedures for applying for and for issuing determination letters on the exempt status under Section 501(c)(3) of the Internal Revenue Code using Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. This revenue procedure is generally available for certain U.S. organizations with assets of $250,000 or less and annual gross receipts of $50,000 or less. Revenue Procedure 2014-40 will be published in Internal Revenue Bulletin 2014-30 on July 21, 2014.
The IRS also posted further information on Form 1023-EZ here.