1023EZ – Application for Tax Exemption

1023 EZ Application for Tax Exemption - Emerging Problems

The IRS rolled out the 1023-EZ application form in 2014. It is a simplified application for tax exemption that can be filed online. While it seemed to be good news for small organizations - saving them time and money – after five years we are starting to see some serious problems.

The biggest concern is that the process is so simple that many organizations are receiving tax exemption when they are not eligible – creating major headaches for the organization down the road. The IRS has conducted a number of sample surveys and found that many organizations that received tax exemption by way of 1023 EZ application, were in fact not eligible at the time. In fact, a 2017 survey showed that 51% of applicants were not properly compliant and had to take steps like amending their articles of incorporation – and a few even had their tax exemption revoked. The report can be read here: https://www.irs.gov/pub/irs-tege/tege_fy2017_accomplishments.pdf

Unfortunately, organizations may not realize they have a problem because unlike the full 1023 form, the 1023 EZ does not walk the applicant through the requirements for tax exemption. Completing the full 1023 form will usually reveal issues such as:

  • not having the required provisions in the organizing documents (articles of incorporation or bylaws);
  • having some purposes that are appropriate for a charity – and some that are not
  • not meeting the public support test
  • inappropriate financial benefits to board members

So, what are best practices? Before filing a 1023EZ, we recommend that you seek advice of an attorney who is experienced with nonprofit law. Have the attorney look over your organizing documents and discuss your charitable purposes with you.

If you received tax exemption using the 1023EZ, consider getting an attorney to do a review of your documents and operations.

The 1023 EZ may still be a good choice for many small organizations: with good legal advice, you can save time and money in your application for tax exemption.

Practice Area(s): Non Profit and Tax Exempt

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