In July of 2014, the Internal Revenue Service (IRS) introduced a shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily. At that time, the Form 1023-EZ required a $400 user fee to be submitted with the application.
Effective July 1, 2016, the cost will drop to $275 for Form 1023-EZ filers, pursuant to recently issued Revenue Procedure 2016-32.
Unlike the Form’s full counterpart that is a detailed 26-pages long and is accompanied by an $850 user fee, the Form 1023-EZ is only 3 pages long. Critics have posited that the new form oversimplifies the charitable exemption process and leads not only to an increase in charity fraud and abuse, but also reduces the level of necessary education that founders of public charities need, and would have gleaned during the process of completing the longer Form 1023. See, for example, I.R.S. Shortcut to Tax-Exempt Status is Under Fire, an article in The New York Times last April discussing how both the National Council of Nonprofits and the National Association of State Charity Officials took a stand against the EZ route.
In January of this year, the Taxpayer Advocate Service issued its annual report which pointed to the Form 1023-EZ as one of the IRS’s most serious problems. In particular, it stated that the IRS approves 95% of Form 1023-EZ applications, but once it reviewed documents or basic information from a sample of the applicants, it only approved 77% and 20% did not qualify for exempt status as a matter of law, whereas TAS’s analysis concluded that 37% did not meet the legal requirements for exempt status.
Will this relatively small savings produce a positive impact for public charities that file Form 1023-EZ, or will it result in an increase of the same harms discussed by all of its critics?