Should You Use the 1023-EZ to Get Your 501(c)(3)?

          Back in July of 2014, the Internal Revenue Service saw a need to address a growing backlog of applications for tax exempt status. Their solution was to introduce a new, shorter application (the 1023-EZ) aimed at small-revenue charity applicants. Although the 1023-EZ sounds like an organization’s dream, there are some drawbacks when compared with the original long form. Let’s take a look at some pros and cons, and determine if you may be eligible for this EZ form. 

Eligibility to Complete Form 1023-EZ

  • You are not eligible to use the 1023-EZ form if your organization:
    • has received more than $50,000 in its previous three year existence.
    • is projected to receive more than $50,000 in the next three years,
    • has accumulated more than $25,000 in assets.
    • was formed, or has a mailing address, outside of the United States.
    • is a limited liability company (LLC).
    • is a church, school, college, or university.
    • has replaced a for-profit organization.
    • is a private operating foundation.
  • A complete eligibility worksheet can be found at the end of the Form 1023-EZ instructions at this link.

Rationale for Using Form 1023-EZ:  Pros

  • Shorter and easier to complete

Instead of filling out the 26-page application, the new EZ application is only 3 pages.Planning a nonprofit The IRS estimates that it takes 19 hours to complete this form. However, this is mainly due to preparation hours, which they consider will take up to 10 hours. If you’re prepared it should only take you 4-5 hours to complete. In contrast, the estimated completion time for the long Form 1023 is 105 hours.

  • More rapid determination and notification of status

Normally the determination process can take anywhere from 6 months to a year and a half. With the 1023-EZ, the IRS gives you an approval or denial letter within 2-4 weeks of completing the application. We have even heard of organizations receiving notification within 3 days.

  • Less costly

Because the new application is fairly easy and self-explanatory, you will not have to hire legal counsel to assist with the form.

The filing fee for the 1023-EZ has been reduced to $275 as of July 1, 2016, whereas the filing fee for IRS Form 1023 is either $400 of $850, based on your organization’s projected income.  

Basis Against Using Form 1023-EZ:  Cons

  • Lack of IRS backing for donors

 From the perspective of donors, the Form 1023-EZ process transfers the responsibility for attestation of appropriate organizational materials from the IRS to the signer of the Form 1023-EZ. IRS Revenue Procedure 2014-40  clearly states,

“a determination letter issued to an organization that submitted a Form 1023-EZ…may not be relied upon, if it was based on any inaccurate material information submitted by the organization.”

Inaccurate material is rather subjective in this instance, as this could pertain to your organization’s projections, exemption purpose, conduct of prohibited and restricted activities, or even organizational documents. Form 1023-EZ, does not provide the IRS with as much information as the original application does, so there is less verified information to make a determination on the attestations the signer made.

  • Signer Liability

There are numerous liabilities the signer of the 1023-EZ Form takes on because the statements and representations penalty-of-perjurymade in the application fall under penalties of perjury should the statements be shown false.

For instance, the signer is accountable for any false information on the application. The signer also must attest to conditions he or she may not be qualified to fully understand. Some of these, but not all, include the verification of the organization’s charitable purpose, the existence of the proper founding documents, and that the founding documents contain the appropriate wording to ensure that the organization will be obeying laws regarding political activity, inurement of funds, and dissolution to name a few.

The form’s instructions do not mention any of these liabilities, only that the signer must check the box “penalty of perjury.”

  • Research Findings

The Taxpayer Advocate Service, (TAS) in its 2015 Report to Congress, stated,

“analysis of a representative sample of Form 1023-EZ applicants that obtained exempt status: 37% of the organizations in the sample did not satisfy the legal requirements for exempt status.”

In that same report, the TAS provides the following graphic showing that normally 95% of 1023-EZ applications are approved for exemption, however when the documentation is requested from a representative sample, only 77% of organizations are approved.

Should we be concerned that those running fully one-third of the 1023-EZ organizations are not aware of the requirements on 501(c)(3) organizations?

Read the full report here

Boiling it Down

     Generally speaking, the 1023-EZ application seems to best-fit smaller nonprofits looking to quickly get on the grid and not spend a huge sum of money. However, if you’re an organization who decides to go down this avenue, proceed with caution. This is a fairly new process, with some contradictions and confusing consequences. Perjury is as serious as it sounds. You will want to consult a knowledgeable source before proceeding.

Andrew MengelContributed by Andrew Mengel

HSI Intern, Summer ’16


Considerations When Starting a Nonprofit

There are many benefits to starting a nonprofit organization: the chance to start a cause that you’re passionate about, becoming your own boss, perks that come with professional independence and more! Although the impact of a nonprofit is more societal and less monetary than a for-profit business, it is still a business that functions much like any other. You’ll still have to set up financial systems, create a payroll and open a bank account; hire staff and prepare a personnel manual; buy the right kinds of insurance, and so on. The systematic functions of a nonprofit also mirror a for-profit business, as it will still need organizational structure, mission statements, long-range planning, evaluation, etc.

Preparation

Though this process may seem daunting, the end benefits could be incredibly intrinsically rewarding. Most think that startingPlanning a nonprofit the paperwork for becoming tax exempt or partnering with a financial partner is the first step. However, your organization needs a purpose, vision or direction before you can even think about the means.

Your first task should be to create a mission statement that encapsulates the work your organization will do, who you will do it for and why this work is important. From here, you can create a vision and short-term and long-term goals to keep you focused and on track towards successful impact.

Another task that’s vital to the preparation process is creating a Board of Directors. This team will serve as your organization’s backbone. All members of the board should be eager and ready to support the organization with the individual talents and skills they bring to the table. This will give your nonprofit a solid foundation and a platform to launch. Check out HSI’s Board of Directors and mission statement for a concise and effective example of each. 

Incorporation

Once you’re well prepared you must establish your organization within the laws of the state. Each state’s regulations vary so you’ll have to do your research on your specific state. Not only do state regulations fluctuate, but so do the benefits that  states offer to nonprofit organizations. For example, states differ on when exemptions or provisions must be applied for, when fees must be paid, etc. Make sure you do your homework on all aspects of this process. You cannot function on a corporate level until you’ve been recognized by a state.

However, if you check out The National Association of State Charity Officials website, they have updates in a state by state list on the differing regulations. There’s also a book available on Amazon by NOLO Press titled How to Form a Nonprofit Corporation in Any State.   (While you are there, sign up to raise funds for HSI with Amazon Smile.  It is fast and doesn’t cost you anything-ever!)

Another resource that may help your cause not only for state incorporation but also for future endeavors might be seeking legal advice. Obviously an attorney costs more than a book plus shipping and handling from Amazon, but you can find people that have been through this process before, who know the boundaries and way through the system.

Tax Exemption or Fiscal Sponsorship

You will need to complete the IRS Form SS-4 to receive an EIN so that you can open a bank account.

Also, for the IRS to acknowledge your organization it must be structured as a corporation, trust or an association. Once this is established, you will need to complete an IRS Form 1023 or 1023-EZ. Then you wait. It could take the IRS anywhere from three weeks to twelve months to get back with a decision.


Social entrepreneur starting a nonprofitIt is possible to shorten the amount of time you spend waiting to access tax-exempt funds by applying for and receiving fiscal sponsorship. A fiscal sponsor, such as HSI, supports the charitable activities of an organization by allowing access to its own 501(c)(3) tax-exempt status. Donors may make tax-exempt contributions to the sponsor to support your work.  The fiscal sponsor accepts certain liabilities for the charitable work you do.

Getting Started

Humanitarian Social Innovations offers assistance along several startup pathways for non profit organizations.  

Join our startup workshop series.paths to innovation, nonprofit

Not only will you gain the information you need, but you will also create some important take-aways from each session. You will meet people who can answer your questions and be a sounding board for your ideas. Plan to bring team members!  You will be able to synergize throughout the workshop and team discounts apply!

  1. Changing the World: Paths to Social Impact-August 13-Come away with a business structure and path forward that will best meet your goals.
  2. Building a Strong Foundation: Mission, Vision and Values-September 10-Walk out of this workshop with a draft mission, vision and core values for your organization.
  3. Board Selection and Governance-October 8-Enter with a long list of potential board members and leave with a short list (or smart list!) and your board governance documents.
  4. Meeting Your Legal Obligations: All-Access Pass to a Helpful Attorney-November 12-Explanation of your legal obligations, Q & A time, and the opportunity to work on your own documents with an attorney as your tutor.
  5. Get Out There: Building a Manageable and Cost-Effective Website-January 14-You will build a website-no prior skill needed!

Eventbrite - Changing the World: Paths to Social Impact
Hop Into the Incubator or Apply for Fiscal Sponsorship

If you would like a more customized experience, sign up for Humanitarian Social Innovations’ Incubation program.  Set your goals at the start and enjoy our one-on-one partnership with you as you systematically meet them and begin to see the impact of your work.

Perhaps  you are ready for fiscal sponsorship and are looking for a fiscal sponsor to support your charitable activities. If so, contact HSI for an initial interview and an application.  

Email today!  office@humanitariansocialinnovations.com

 


What Can Fiscal Sponsorship Do For Your Organization?

How can your new organization meet its goals and expand its community outreach? Fiscal sponsorship could be your answer.

Fiscal sponsorship is a formal arrangement in which a 501(c)(3) public charity sponsors a project that lacks exempt status, allowing that project to seek grants and solicit tax-deductible donations under the sponsor’s exempt status. At HSI, this includes tax exemption paperwork and marketing outlets. Using a fiscal sponsor satisfies IRS requirements, while allowing the organization to make its own decisions on how to charitably use its contributions.   

How do I know If Fiscal Sponsorship Is Right For My Organization?

Newly formed nonprofits can benefit greatly from fiscal sponsors, especially in their incubation stage, as they are trying to raise enough money to file an IRS tax exemption and begin programming. Fiscal sponsorship provides programs that are not tax-exempt with a fluent path to revenue, which the organization may not otherwise be in a position to receive.

 

Keep in Mind:

  •   Donors may not claim a tax deduction unless they itemize deductions and donate to an organization that is recognized by the IRS as tax-exempt pursuant to IRS Code Section 501(c)(3) (National Council of Nonprofits).
  •  The guidelines of most private foundations explicitly require grantees to be recognized as tax-exempt by the IRS. Consequently, groups that are not formally recognized by the IRS as tax-exempt are generally not eligible for grants from private foundations (National Council of Nonprofits).
  •   Fiscal sponsorship can help newly formed nonprofits test-drive their ideas to determine whether there is a market or a desire among the public to fund the end product (National Council of Nonprofits).
  •   Some programs remain in a fiscal sponsorship relationship for a long time, as they can best achieve their mission in this structure. (National Council of Nonprofits).
  •   Some organizations – including those that are tax-exempt – find that outsourcing their administrative responsibilities to a fiscal sponsor, whether back-office tasks, or those relating to fundraising and disbursement of funds, is the right business model for them. This structure might be particularly well-suited for all-volunteer organizations (National Council of Nonprofits).

 

HSI offers fiscal sponsorship to charitable projects, grassroots movements or startup nonprofits looking to make an impact on humanity. If your organization needs connection to resources to empower you and maximize your organization’s impact, contact office@humanitariansocialinnovations.com for information about our application process.