IRS Simplifies Application Process For Small And Mid-Size 501(c)(3) Organizations
A new package of guidance has been released to simplify the tax-exempt application process for small and mid-size organizations seeking Code Sec. 501(c)(3) status. The package follows-up on earlier promises by the IRS to streamline the application process for small and mid-size charitable organizations. ( For more details about Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, see the article in this week’s newsletter).
CCH Take Away. "I was quite happy to see that the IRS did lower the filing thresholds for the 1023-EZ," Brian Yacker, JD, CPA, Partner, YH Advisors, told CCH. "I think it will create a little more of a barrier to entry for ‘would-be’ applicants."
Code Secs. 508 and 501 require, with limited exceptions, that organizations must apply for Code Sec. 501(c)(3) tax-exempt status. In the past, organizations applied using the 26-page Form 1023. In an attempt to address the growing backlog of tax-exempt applications, the IRS released a draft version of a simplified Form 1023-EZ in April 2014.
Now, U.S. organizations with both assets valued at $250,000 or less and annual gross receipts of $50,000 or less may submit Form 1023-EZ unless the organization is designated as ineligible to use Form 1023-EZ, the IRS explained. In Rev. Proc. 2014-40, the IRS identified 22 categories of organizations that are not eligible to use streamlined Form 1023-EZ to apply for Code Sec. 501(c)(3) exempt status. These include (but are not limited to):
Organizations whose tax-exempt status was suspended (for a reason other than failure to file a Form 990 series return or notice for three consecutive years);
Successors to for-profit entities;
Limited liability companies;
Churches or associations of churches;
Schools, colleges or universities described under Code Sec. 170;
Supporting organizations under Code Sec. 509;
Private operating foundations; and
Health maintenance organizations.
The IRS has stated that it plans to look at the annual tax filings for many of the organizations using the Form 1023-EZ, to make sure they are compliant in all respects, Yacker told CCH. "The 990-N threshold will still remain at $50,000, but I have recently attended public presentations where IRS officials from the Tax Exempt and Government Entities division stated that they plan to increase their oversight of 990s and 990-EZs [annual report of tax-exempt organizations]. Additionally, for the 990-N filers, the IRS has indicated that they are planning to look at more of those entities to ensure compliance."
The IRS explained in Rev. Proc. 2014-40 that an organization’s submission of Form 1023-EZ is considered complete if it: (1) Includes accurate responses for each required line item of the form, including the date of organization and attestation that the organization is eligible to use Form 1023-EZ; (2) Includes the organization’s correct Employer Identification Number (EIN); (3) Is electronically signed by an individual authorized to sign for the organization; and (4) Is accompanied by the $400 user fee.
Rev. Proc. 2014-40 is effective July 1, 2014.
Pending Forms 1023. The IRS will accept a Form 1023-EZ for processing from an organization that has a pending Form 1023, if the pending Form 1023 has not yet been assigned for review. Conversely, the agency will not accept a Form 1023-EZ for processing if a pending Form 1023 has been assigned for review.
Additional information. The IRS may request additional information from organizations submitting Form 1023-EZ.