How to Apply for Tax-Exempt Status: Form 1023-EZ - What is it, and can you use it?
In 2014, due to pressure from Congress and the private sector over exceedingly long approval delays for 501c3 applications using the traditional “long form” 1023 Application for Tax Exempt Status (averaging 18 months or more) the IRS introduced the greatly simplified “Form 1023-EZ”.
This new, streamlined process for obtaining 501(c)3 tax-exempt status was created for the most common types of moderate-budget nonprofit organizations.
In fact, about 85% of our clients choose the 1023 EZ due to lower cost, less complexity, and quicker approval times.
If you are trying to figure out how to start a tax-exempt nonprofit with a straightforward charitable purpose - one that doesn’t appear on the list of prohibited types and derives most of its revenues from donations and program-related activities, the 1023 EZ might be for you.
But maybe not.
Is the 1023-EZ the best way to go for my 501(c)3 Application?
Some organizations that fit into the streamlined process may want to consider filing the more standard long-form IRS 1023 application as a wise alternative.
Nonprofits started by those with a bigger vision, who expect to bring in significant funding, or whom expect corporate donations as a significant part of their income stream, may find that some donors consider the EZ a short-cut for founders who don’t take their organization seriously.
Established donors generally have a serious vetting process for considering providing big grants and gifts, often examining the original IRS 1023 filing, as part of its public record.
The Form 1023 EZ provides little information for grantmakers to rely upon to assess the present and future capacities of the organization, while the long form 1023 goes into great detail.
However, if startup costs and approval delays figure strongly in your decision, and your nonprofit doesn’t plan to rely on large gifts and grants, the 1023 EZ may be the way to go.
Are you Eligible to Submit the 1023-EZ?
Many nonprofits qualify to use Form 1023-EZ, but the IRS defines a number of prohibitions as to the projected budget and mission & purpose of those seeking to travel this path.
You may be asking “What if I file the 1023 EZ with revenue expectations below $50K, and then the Bill and Melinda Gates Foundation writes me a $1 Million Dollar check?”
First off, I certainly hope that happens for you!
In the event that it does, it’s important to mention that there’s no penalty or problem if you estimate lower and then exceed your expectations.
For example, if you estimate a low budget and you end up raising more than $50,000, the IRS doesn’t come back and penalize you - or even assess the extra $325 in IRS Filing Fees after the fact.
They just accept your best guess on a sort of “Scout’s Honor”.
Surprisingly, you'll simply file your annual 990 tax return by May 15 of the following year, and report how much funding you brought in.
This may be the most surprising fact about the IRS filing process...because the IRS is well-known for collecting money - mostly from people who make a “mistake” on their tax return, but in this situation, that is not the case.
Documents Required to be in Place to Apply for 501(c)3
You must represent to the IRS that you have properly filed the following documents….and they will check.
1. Addendum to Articles of Incorporation – Statement of Exempt Purpose
This statement must be included in your Articles, and a copy of your Articles must accompany your application:
The Statement of Exempt Purpose tells the IRS that the organization exists to serve a truly charitable purpose.
2. As Addendum to Articles: Dissolution Clause
An organization’s “dissolution clause” is put in place to assure the IRS (and anyone else who asks) that the public interest will be served should the organization shut its doors.
IRS rules ONLY allow assets to be turned over to another 501(c)3 or to the government - not to a private individual or company, unless the nonprofit is receiving proper compensation as an exchange.
3. Bylaws, including Procedure for Selecting Directors/Trustees:
The IRS requires an affirmation that your nonprofit has adopted bylaws, which need to include the process your organization will use to select officers, directors, and/or trustees who have governing power over the organization.
As we mentioned in our article about your nonprofit’s Founding Board, the organization’s bylaws must include clear, solid procedures for selection of directors - and other provisions designed to allow a smooth transition of decision-making power in the event of a crisis.
4. Conflict of Interest Policy
A “Conflict of Interest Policy” is a document which describes an organization’s protocol for situations where, if misconstrued or abused, “insiders” could be accused of using the organization for personal benefit.
Your “Conflict of Interest Policy” is the policy in place to prevent wrongdoing—or even the appearance of it—in your nonprofit organization.
For example, when a board member or officer has a personal or financial interest in anything being considered by the board of directors, that person must disclose the interest and refrain from the discussion and vote.
In addition, your meeting minutes must document the disclosure as well as the vote and reasoning for approval.
Having a good “Conflict of Interest Policy” is required for your nonprofit application to be approved.
When helping our clients, we provide a trove of all required documents - and a number which are not to help your organization run smoothly.
FORM 1023-EZ - CONCLUSION
While this may seem like a significant list of prohibitions and conditions, a large percentage of 501(c)3 eligible organizations meet the criteria to use the Form 1023-EZ.
Still confused about which path to take?
Find out if your organization qualifies for the the 1023 EZ by downloading the eligibility quiz here.
Also, if you're ready to start your nonprofit and you'd like everything done for you so you don't have to worry about any paperwork and details, then check out our done-for-you 501(c)3 nonprofit service.
Or, if you you're ready to get started, but you have a few questions, the please book a free strategy session here.
-Christian LeFer, Nonprofit1023 EZ Eligibility, InstantNonprofit