In July 2014, the IRS adopted Form 1023-EZ, a simplified application process for nonprofit organizations that wish to obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code.
Your organization is not eligible to use Form 1023-EZ if:
—It has more than $250,000 in total assets.
—It has gross receipts of more than $50,000 a year or anticipates that it will.
—It exceeds $50,000 in gross receipts in either of the next two years.
—It is organized as a limited liability company (LLC).
—It is based overseas.
—It has another application for 501(c)(3) status pending with the IRS.
—It is a church, university, hospital or one of several other specific types of nonprofit.
Form 1023-EZ is essentially a checklist — you answer a number of questions, and if you answer them correctly, your organization is granted 501(c)(3) status. Before registering, you sign up for an account at www.pay.gov (type "Form 1023-EZ" in the search box) and pay the $275 filing fee by credit card or PayPal. There is no lengthy IRS review, no laundry list of follow-up questions from IRS agents you have to respond to, no bureaucratic red tape. What's not to like?
Well, actually, quite a bit. Before you consider going online today and registering your little nonprofit club that meets three times a year in your house over wine and cheese, consider the following.
Form 1023-EZ assumes that you are familiar with the many, many restrictions that apply to 501(c)(3) organizations. By saying you are eligible to use Form 1023-EZ, you are swearing under oath to the federal government that you understand these restrictions and are willing to comply with them. For example, most 501(c)(3) organizations:
—Must file an annual report to the IRS (for some small nonprofits, this will be the postcard filing on Form 990-N).
—Cannot engage in political activity of any kind unless they register as a qualified political organization (aka lobbying group).
—Must adopt conflict of interest and compensation policies for their executive directors and other key employees.
—Are subject to numerous federal and state rules and regulations restricting their fundraising activities, their dealings with donors and so forth.
If you register your nonprofit using Form 1023-EZ and then violate any of these rules (even innocently) — well, let's just say I wouldn't want to be in your shoes if the IRS finds out about it.
What about that "$50,000 a year in gross receipts" limit on the use of Form 1023-EZ? What if, as a startup organization, you have absolutely no idea what your gross receipts will be in the next two years? What if you register under Form 1023-EZ, apply successfully for a bunch of federal and state government grants, and end up with more than $50,000 a year in 2020 or 2021?
The instructions for Form 1023-EZ don't say. IRS Revenue Procedure 2014-40, which authorized Form 1023-EZ (the text of which can be downloaded in PDF form at www.irs.gov/pub/irs-drop/rp-14-40.pdf), contains merely a cryptic statement that says, "a determination letter recognizing exemption may not be relied upon if there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization, or a change in the applicable law." Translation: If the IRS finds out you've goofed, it may revoke or modify your 501(c)(3) exemption, even retroactively.
The IRS recently started looking closely at Form 1023-EZ filings in the belief that the form may be making it too easy for unqualified nonprofits to obtain tax-exempt status. According to research on Form 1023-EZ filers performed last year by the IRS Office of the Taxpayer Advocate (see https://taxpayeradvocate.irs.gov/news/nta-blog-form-1023-ez-now-elicits-additional-information-but-it-s-not-clear-that-irs-reviewers-are-considering-it), 26 to 42% of the time, the requirements for Section 501(c)(3) tax-exempt status were not met, and the IRS approval was erroneous. An equally large number failed to properly incorporate their nonprofits before filing Form 1023-EZ by omitting certain language in their certificates of incorporation required by Section 501(c)(3).
The bottom line: If you are planning to use Form 1023-EZ to register your nonprofit, be sure to meet with a lawyer first, and have him or her review your organization's incorporation documents, purpose, goals and management structure to be 100% sure you meet the Form 1023-EZ eligibility requirements and will continue to meet them in the future. You may also want to complete Form 1023-EZ electronically in the attorney's office, with him or her looking over your shoulder, to be 100% sure you don't make any mistakes.
Many charity-minded attorneys will waive their hourly charges and quote you a flat fee for these services if you ask them nicely (for comparison's sake, I currently offer such a service to my nonprofit clients for a one-time $2,000 flat fee that includes the $275 IRS filing fee and the state incorporation fees).
If you are at all unsure about your organization's eligibility for Form 1023-EZ, do not file it . To be sure, filing the regular IRS Form 1023 is a major pain in the you-know-what. You have to pull together lots of information about your organization, prepare financial projections, provide biographies of your executive director and key employees, and make sure your organizational documents are 100% letter-perfect. You then have to wait nine to 12 months to have your application approved.
By going through this detailed application process, however, you can be sure the IRS is looking at your organization very closely to be 100% sure it complies with all of the 501(c)(3) rules and restrictions, making it less likely the IRS will revoke it later on without a really good reason.
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.
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