“Easier than Getting a Library Card?” Critical Considerations on Using the IRS Form 1023-EZ

August 5, 2014

With the release of Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, applying for tax-exempt status has never been faster or easier. As Tim Delaney, president and CEO of the Council of Nonprofits, put it, “It’s easier to get tax-exempt status under 1023-EZ than it is to get a library card.”[1] While this new form offers a number of benefits in terms of simplicity and speed, it also comes with some serious potential drawbacks. This post offers some critical considerations you might take into account in deciding whether your organization can and should utilize the new form.

Attesting to a Legal Conclusion under Penalties of Perjury

Form 1023-EZ requires the filer to attest to numerous legal conclusions about the organization under penalties of perjury. If there is any question about the organization’s qualification for tax-exempt status, filing a traditional Form 1023 may actually be the preferred route, as it allows the organization to “test” its detailed qualifications with the IRS and make any adjustments required in the course of its review.

Of note, the Form 1023-EZ filer is required to attest that the organization:

is organized and operated exclusively to further one or more exempt purposes;
does not further nonexempt purposes (such as purposes that benefit private interests) more than insubstantially; and
is not organized or operated for the primary purpose of conducting a trade or business that is not related to its exempt purpose.

Form 1023, on the other hand, allows an organization to present a full description of its operations, leaving it to the IRS to determine whether it qualifies for tax-exemption. For example, a Form 1023 can describe a financial relationship between the organization and a related person, in the hopes that the IRS will issue a determination letter effectively verifying that the arrangement does not further that person’s private interests more than insubstantially.

Should Private Foundations Respect an “EZ” for Expenditure Responsibility Purposes?

Probably not. Revenue Procedure 2014-40 states that a determination letter issued to an organization that submitted a Form 1023-EZ may not be relied upon if it was based on any inaccurate material information submitted by the organization, such as incorrect information regarding the organization’s organizational documents, exempt purposes, conduct of prohibited and restricted activities or its eligibility to file Form 1023-EZ.

Private foundations often don’t need to exercise expenditure responsibility when making grants to many types of organizations. They may, however, find it difficult to rely on a determination letter issued pursuant to a Form 1023-EZ, since they may not be able to determine whether the organization made an “incorrect attestation” without undertaking the type of in-depth review that once would have been done by the IRS.

Can a Donor Rely on an “EZ” For Deductibility Purposes?

Yes. The instructions to Form 1023-EZ state that donors may rely on a favorable determination letter under section 501(c)(3) until the IRS publishes notice of a change in status.

Will Guidestar and the IRS Business Master File Indicate Whether an Organization Filed a Form 1023-EZ?

We assume that either or both Guidestar.org and the IRS Business Master File eventually will somehow indicate whether an organization received its tax-exempt status using a Form 1023-EZ.

Will Attorneys General Take a Closer Look at “EZ” Filers?

It appears that use of Form 1023-EZ may be viewed as a red flag by state regulators. The National Association of State Charity Officials submitted comments to the Department of Treasury recommending against the Form 1023-EZ when it was proposed, stating, “We believe that the Form 1023-EZ will increase opportunity for fraud and heighten the burden on state regulators to compensate for the reduced standards that will be required of the organization to meet federal tax exemption requirements.”[2]

No Expedite Request? No Need

While an expedite request cannot be filed in connection with a Form 1023-EZ, it appears that there is no need. The early returns indicate that determination letters are being issued to Form 1023-EZ filers in two or three weeks’ time.

Can My Organization Replace a Long-Delayed 1023 with an “EZ”?

As long as a filed Form 1023 has not yet been assigned for review, which can take over a year, the IRS will accept a Form 1023-EZ as a replacement. However, the initial filing fee from the Form 1023’s submission will not be refunded, and the submission date of the 1023-EZ will replace the Form 1023’s filing date for purposes of the 27-month general limit on retroactivity, though it does permit the filer to petition the IRS for an earlier effective date.

The Home Address of Every Director and Officer?

When it comes to information regarding officers, directors and trustees, the Form 1023-EZ may actually require more information. While the instructions to Form 1023-EZ require the filer to “Enter the full names, titles, and personal mailing addresses of your officers, directors, and/or trustees,” the instructions to the traditional Form 1023 specifically provide that “Officers, directors and trustees may use the organization’s address for mailing.” It remains unclear whether the IRS will accept the organization’s address for the officers, directors and trustees of Form 1023-EZ filers.

Can a Form 1023-EZ be Filed to Reinstate an Automatically Revoked Organization?

Yes, but not for retroactive reinstatement. If the organization wishes to apply for retroactive reinstatement, it will need to file the traditional Form 1023, along with an appropriate reasonable cause statement and a confirmation that the required returns have been filed.

Conclusion

While the Form 1023-EZ may look like a panacea to any organization qualified to use it, its use can come with serious disadvantages. While it may be easier than ever to get tax exempt status, your organization should consider these issues before making a decision on whether to file a Form 1023 or a Form 1023-EZ.

[1] Massimo Calabresi, “IRS to Rubber Stamp Tax-Exempt Status for Most Charities After Scandal,” TIME, 07/13/2014, available at http://time.com/#2979612/irs-scandal-tax-exempt-tea-party-political-groups-john-koskinen/.

[2] National Association of State Charity Officials’ comment letter is available at: http://www.nasconet.org/wp-content/uploads/2014/05/FINAL-NASCO-comments-re-Form-1023-EZ1.pdf.

OFER LION is counsel in the Los Angeles office of Hunton & Williams LLP. He has served as an adjunct professor at the UCLA School of Law, teaching a course in tax-exempt organizations. He can be reached at olion@hunton.com.

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