If you are organizing a brand new nonprofit and want to receive tax-exempt status with the IRS, you may be wondering why there are two different forms and what the big difference is. Both forms are applications for 501(c)3 status with the IRS. Keep reading to learn more about what form is best for your organization.
The OG Form 1023
The original form 1023 is often referred to as the long form 1023. This is the original application that was meant for nonprofits to complete in order to receive tax-exempt status. This form is extensive- about 20 pages that includes questions about program narratives, budgets, supporting documentation and more. It can take anywhere from 2-12 months for the application to be processed and the cost to file the form 1023 is $650 plus consulting fees that average around $1000.
While many new nonprofits were turning to fiscal sponsorships (partnering with more experienced nonprofits) while saving up for their own tax-exempt application, 1023-EZ form introduced in 2014 changed the game as a less time consuming, affordable alternative. The new form 1023-EZ is a shortened version of the long form 1023 that is about 3 pages. The end results are the same- by filing this application nonprofits are applying for and receiving tax-exempt status with the IRS. The 1023-EZ form questions resemble the long form 1023 form in many ways, but it doesn't require a list of activities and doesn't ask for supporting documentation for the information provided. This form has a much quicker processing time, with most applications being approved within 30 days. The cost to file is $275 plus consulting fees that average around $200.
True or False?
"There are certain nonprofits that don't qualify for form 1023-EZ"
THIS IS TRUE!
The IRS has a few contingencies when it comes to those who are eligible to file form 1023-EZ. For simplicity, there are a few that most new, United States based nonprofits will need to consider.
1. If you are a church, hospital, school, or you offer financial literacy you do not qualify to apply with form 1023-EZ
2. Your organization must currently have total assets less than $250,000
3. Your organization's gross receipts in the past 3 years are below $50,000 and there is no guarantee of receiving more than $50,000 per year in the next 3 years
"If we file the 1023EZ and then receive more than $50,000 in the next 3 years I will be in trouble with the IRS"
THIS IS FALSE!
As a newly established nonprofit, the first 3 years are your startup phase years and there is a lot that must be done in order to get your programs up and running. It is unlikely that most nonprofits will receive more than $50,000 in the first few years. In fact, unless you have a written or verbal agreement between your organization and a donor, in most cases it is not reasonable to assume you will receive this amount of funding in your first 3 years. If your organization files the 1023-EZ form and does receive more than $50,000 there is no reason to be worried. You would contact an accountant or CPA who is familiar with nonprofit work and they will list the money you received on your 990 (the yearly "non taxed" tax return for nonprofits). The worst that can happen is the IRS asks your organization to file the long form 1023 and pay the $650 filing fee.
"I heard people are getting audited after filing 1023EZ"
THIS IS TRUE!
There are policies put in place by the IRS that allow them to make sure that organizations who don't qualify to be tax-exempt nonprofits (for profit companies) aren't finding sneaky ways to avoid paying taxes or receive other benefits they don't qualify for. One of the ways the IRS does this is random auditing. The 1023EZ does not require supporting documentation for the answers that are submitted on the form, however it may be requested before approval during an audit. This could include asking for program narratives, budgets, and more. There is no additional fee for the audit, but it does ask some of the questions that are on the long form 1023.
"I read somewhere that you may not qualify for certain grants if you apply with the 1023EZ"
THIS IS FALSE!
There is no discrimination from funders- tax exempt status is tax exempt status. Your certificate will not state whether you used the1023 or 1023EZ application to apply.
"If I offer financial literacy I do not qualify for 1023EZ"
THIS IS TRUE- AND FALSE!
The guidelines about financial literacy are unclear. According to the IRS website, if a substantial amount of your activities includes financial literacy, financial consulting, or anything similar you must file the long form 1023. However, in the case of an audit our experience has been that any mention of financial literacy will result in a denial. If your organization will and must provide financial literacy, it is best to file the long form 1023 to avoid wasted time and resources.
With that being said, there is no time better than now to get your 1023EZ application underway. If you are interested in filing for your 501(c)3 1023EZ application contact us and we will file this application for you.
This article is just for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.