IRS Form 1023-EZ attempts to make filing for 501(c)(3) exemption easier for certain types of charities. The form isn’t applicable to every type of charity: churches, schools, and any organization with over $250,000 in assets or over $50,000 in annual revenue are not allowed to use the 1023-EZ (to see if you qualify for the 1023-EZ, complete the IRS checklist found here). However, if your organization isn’t disqualified from using the form, is it a good idea to use it?
As its name implies, the form is, in fact, easy to use. A traditional 1023 form is 40 pages including various schedules, and contains highly complex and technical questions that requires at least some understanding of tax compliance issues. Additionally, applicants must include a 3-year budget, a written narrative describing proposed programs, copies of their articles of incorporation, and bylaws. On the other hand, the 1023-EZ form is a 3-page form containing mostly yes or no questions, and there is no narrative or attachment requirement.
Another benefit of the EZ form is the cost; it is only a $275 fee compared to $600 for the full form. The 1023-EZ can be most helpful to true micro-charities, or charities that are simple in nature. If the organization intends to stay small and local while never seeking large amounts of grant money or corporate donations, a 1023-EZ is a much simpler and cost-effective form compared to a traditional 1023.
Despite the draw to an easier and more cost-effective form, the 1023-EZ has significant drawbacks. Most state’s Attorney General’s offices have spoken out against the form since its inception due to the high level of fraud associated with it. Many organizations over the course of the 1023-EZ’s lifetime have set up sham charities that, while not legally qualifying for exemption, have been approved for 501(c)(3) exemption because they used the EZ form. This ends up passing along the cost of compliance to states, as they have aggressively ramped up examinations and audits of small nonprofits.
The 1023-EZ form can also be deceptively easy for non-profits that are just starting out. While there are no attachments to send with the form, you are still required to have a good business plan and be in compliance with federal and state law. The EZ form may make it seem like starting a non-profit is as simple as checking the boxes on the EZ form, but the reality is that there are lots of steps to ensure your organization is properly registered and in compliance with the law. When filing a 1023-EZ it is possible to make a mistake that could lead to serious tax or legal ramifications.
The best thing to do, no matter which form you decide to use, is to ask for professional help to ensure compliance. There are certain organizations that can utilize a 1023-EZ effectively, and others that should use the traditional form. CNLC can help you pick which form is best for your organization, and help you through the process of applying for 501(c)(3) exemption.
By Justin Vanderveer