Earlier this year, the IRS quietly rolled out a revised Form 1023 and 1023-EZ, and corresponding electronic application. These forms are used by charities and foundations to apply to the IRS for recognition as a tax-exempt organization. While the new forms are substantially the same as the prior version, there are some subtle yet important distinctions to note, and all organizations considering application should be sure to use the appropriate form.
As an initial matter, the most substantial change is that all applications must be completed and submitted online through Pay.gov, and paper applications will no longer be accepted.
Form 1023-EZ is much shorter and easier to complete, but is reserved for smaller organizations. One of the most common disqualifying factors for use of Form 1023-EZ is that the annual gross receipts of the applicant organization must not exceed $50,000 in any of the last 3 or next 3 years (according to projections). This and other prerequisites to eligibility for filing Form 1023-EZ are listed on the eligibility worksheet found on page 13 of the Instructions for Form 1023-EZ.
The revised Form 1023-EZ includes directly on the application some of the eligibility requirements that were previously set forth only in the eligibility worksheet. So, for example, questions about annual gross receipts, total assets and public charity classification were added directly to the Form 1023-EZ from the eligibility worksheet. A new text box was also added to the Form for applicants to provide a brief description of their mission or most significant activities.
The longer Form 1023 is reserved for applicants who are ineligible to file Form 1023-EZ. While some changes to Form 1023 simply rearrange questions to optimize its format for electronic filing, key changes include a question of the applicant’s NTEE Code, and several new representations regarding the applicant’s OFAC compliance. One question, in particular, asks the applicant to describe the practice they will utilize to ensure that foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities. The applicant organization should not only carefully consider their response to this question, but also consider corresponding changes to its Bylaws or other written operating manual to ensure that the compliance procedures represented to the IRS are memorialized in the organization’s records.
The other key difference is that certain responses to Form 1023 trigger automatic follow-up questions. For example, if the applicant reports a response to a question regarding the applicant’s financials that would require an itemized explanation, a follow-up question is automatically generated to require a response from the applicant before the applicant can continue to the next question. This makes it nearly impossible for an applicant to overlook the need to itemize where required.
The electronic Form 1023 also prevents an applicant from skipping a page until all responses on that page are completed. In order to help ensure that all responses are appropriately completed, it is recommended that a sample application is completed first.
With these changes, it has become more important than ever for an applicant-organization to seek support from counsel with experience in the new Form in order to minimize errors, which will therefore minimize the IRS processing time.
For questions on forming a non-profit, or applications for tax-exempt determination, including both Form 1023-EZ and Form 1023, please contact Jordan Savitz at email@example.com.
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As a member of Offit Kurman’s Business Law and Transactions practice group, Jordan Savitz advises clients in all stages of the business life cycle. He assists clients with matters including, but not limited to, choice of entity, complex operating and stockholder agreements, compliance with Rule 506 of Regulation D, real estate leasing, employment agreements, website terms and conditions, trademark filings, complex contract drafting and negotiation, succession planning, as well as stock and asset purchase agreements.
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