By Ruth Masterson, Exponent Philanthropy 

The IRS is looking to speed its response time to applications for 501(c)(3) status. With a backlog of 60,000 applications and an average wait time of 9 months for applicants at the beginning of last summer, it’s no wonder.

The IRS now accepts a streamlined application for 501(c)(3) status, called Form 1023-EZ, which is intended to decrease both time to complete the application and time to review it.

What is Form 1023-EZ? Form 1023 is the full version of the application for 501(c)(3) status; the new, shorter version is cleverly named Form 1023-EZ. The new form is only 2 pages (versus 12 pages plus 8 supplemental sections of the full form). It can only be filed electronically and must be accompanied by a $400 filing fee, compared to $850 for most organizations using the full form.

But only organizations that meet a long list of criteria are permitted to use the shorter form. Primarily, EZ filers must be quite small, with annual income (gross receipts) not expected to exceed $50,000/year for 3 years and with less than $250,000 in total assets. In addition, filers may not be a foreign-based organization, an LLC or successor to a for-profit, a church, a hospital, a school, or other specified organization types. The IRS provides a worksheet at the end of the Form 1023-EZ instructions to help filers know if they are eligible to use the new form. Further, the IRS plans to require additional documentation from a randomly selected sample of EZ filers, so EZ filers may need to supply additional information. 

What does the new form mean for funders? 

• If any of your grantees lost their tax-exempt status because they did not submit a Form 990 for 3 consecutive years, this is a great opportunity to get tax-exempt status back at lower cost and with greater ease. 
• The ease of using this shorter application affects the calculus for small start-up grantees who may be deciding when and whether to use a fiscal sponsor. 
• Funders may also use the new form to create new giving structures. In particular, those considering a donor advised fund might find it easier to create a private foundation instead; giving circles that desire independence from fiscal sponsors might take advantage of this opportunity; and individual donors may find it easier than ever to fund new charitable projects of their own creation. This is also an opportunity for stand-by foundations, which are created in advance of ramping up assets. 
• One criticism of the new form is that it does not provide the structure and education of the full form; some questions that direct applicants to comply with certain requirements are simply not there. Established funders will want to be aware of the risk of small grantees not having this education and also might view it as opportunity to convene and/or educate grantees. Contemporary technology might help as well. The IRS could require viewing of a series of short educational videos prior to (or as part of) the form’s electronic submission (platforms such as Coursera use this strategy regularly), or ask applicants to certify (using the honor system) that they have watched the series prior to submitting the form.

Will the new form solve the IRS backlog? It’s not clear how many of the backlog of 60,000 applications fall within the eligibility requirements of the Form 1023-EZ (and we won’t know until they have been processed). The new form might help to address the backlog—or it might not, either because the simpler form inspires even more nonprofits to apply for tax-exempt status or because the subset eligible for EZ filing is too small to significantly impact the backlog.

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Senior Program Director Ruth Masterson works closely with members to create written materials and training curricula, and answers member questions on foundation administration, governance, boards, and tax and legal topics. She is also is the project manager for Exponent Philanthropy’s Practical Board Self-Assessment. Prior to joining Exponent Philanthropy, Ruth served nonprofits in her work at Adler & Colvin, the Council on Foundations, and the International Center for Not-for-Profit Law.