When an organization wishes to become a tax-exempt organization eligible to accept tax deductible contributions from donors it is not sufficient that it be a non-profit organization. That, however, is the first step. Before the organization can be recognized by the IRS as a tax-exempt organization, it must file organization papers with the state as a non-profit corporation.
The process of becoming recognized by the IRS as a 501(c)(3) tax-exempt organization requires the filing of Form 1023 or 1023-EZ and the paying of a fee. Form 1023 is the long form and has been around for years. The 1023 is 29 pages long, but can expand to 100 pages with attachments. It frequently takes in excess of 100 hours to complete the form. In addition, the IRS normally takes 3-6 months to process the 1023, but it can take up to a year. The filing fee is $850.
Obviously, there is a great deal of frustration on the part of the IRS and applicants in dealing with Form 1023 due to the time to prepare and to process. Consequently, in September of 2013, the IRS introduced a streamlined application Form 1023-EZ. It is three pages long, can normally be completed in well under 10 hours, is submitted online, and the filing fee is only $275 (reduced in 2016 from $400). Acceptance times for a properly submitted Form 1023-EZ run two to four weeks.
In order to qualify to submit the short form, the organization must have or anticipate having less than $50,000 in revenues during each of the first three years of operations. In addition, it cannot have more than $250,000 in assets. The organization must be a corporation. The instructions to Form 1023-EZ include an eligibility checklist to determine if the organization qualifies to file the simplified form.
Unfortunately, it seems that the 1023-EZ may be too simple. A 2015 study by the Office of Taxpayer Advocate showed that 37 percent of applicants don’t meet the organizational test which must include organizational purpose and dissolution clauses. In 2016, a similar study found that 26 percent of approved organizations failed this test. A number of LLC’s, churches, schools, colleges, and private operating foundations were given 501(c)(3) approval despite their ineligibility to file Form 1023-EZ.
Apparently, submission of Form 1023-EZ results in almost automatic approval of the application. The Office of Taxpayer Advocate has recommended that organizations be required to submit organization documents and summary financial information along with the application. Very few advocate doing away with Form 1023-EZ. It is easier on the taxpayer to prepare and submit an application. It has also made significant reductions in the workload of the IRS.
What is the answer? It seems that the IRS must strike a balance in keeping Form 1023-EZ as it was designed, a fairly simple “do-it-yourself” application for tax-exempt status. Many of these organizations are not well-funded and cannot afford thousands of dollars to prepare Form 1023. We don’t want to lose this. On the other hand, The IRS has a responsibility of approving “valid” tax-exempt organizations. It would seem that it is not too burdensome for the IRS to verify that the organization is a non-profit corporation and has the requisite organization documents.
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
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