Form 1023-EZ (1023EZ) Application for 501(c)(3) Pros & Cons

The Streamlined Application for Recognition of Exemption, better known as Form 1023EZ Form 1023-EZ, is the IRS's attempt to make 501c3 501(c)(3) tax-exempt status feel like an online pizza order. This simplified IRS application for nonprofit organizations turns what used to be a detailed review into a three-page form filed through Pay.gov. You check a few boxes, sign under penalty of perjury, and promise you didn't lie. The IRS mostly takes your word for it, with minimal review and rare human oversight.

It was designed to simplify the 501c3 501(c)(3) application process for very small charities, but in practice it opened the floodgates for unqualified or poorly planned organizations to slip through. If you're serious about long-term tax exemption and credibility, you need to understand what this shortcut really means, and why using Form 1023EZ Form 1023-EZ might save time now but cost you later.

What Is Form 1023EZ Form 1023-EZ and Does My Organization Qualify?

When the IRS released its short and "easy or EZ" version of the Form 1023 (Form 1023EZ Form 1023-EZ the Application for Recognition of Tax Exemption under the 501c3 501(c)(3) section of the Internal Revenue Code), it quickly became a bad joke and a failure on so many levels that I don't even know where to begin.

In theory, most nonprofit organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible to use the Form 1023EZ Form 1023-EZ. This does not include churches, schools, hospitals, and many other types of organizations. Even if you do qualify, it doesn't mean that you won't need compliant organizing documents such as bylaws and conflict of interest policy.

The IRS 501c3 501(c)(3) compliance requirements stay the same and even more so.

There are many problems with Form 1023EZ Form 1023-EZ, and the IRS pushed it out the door faster than anyone expected. It's been in effect for years, and while it simplified the process, it also opened the door to a wave of unqualified and short-lived nonprofits. The result is a cluttered sector filled with paper organizations that never deliver real public benefit, diluting credibility and diverting funds from legitimate charities. With $275 and a few clicks, anyone can now claim to be a nonprofit and start soliciting donations, tax-free.

• You can download the Form 1023EZ Form 1023-EZ PDF from here.
• You can download the Form 1023EZ Form 1023-EZ Instructions PDF from here.

Who Should File the Form 1023EZ Form 1023-EZ?

The simple and the only answer is minnow sized nonprofit organizations that don't need any grants and very little money. Examples of these organizations would be small animal rescue organizations, little sports leagues for toddlers and alike. Almost every other type of nonprofits who are hell-bent on using the EZ form fall under misinformed or fraudulent intent category.

Form 1023 (Long Version) vs. Form 1023EZ Form 1023-EZ

The long version of the Form 1023 is long for a reason. Sure it has its goofs and desperately needs to be revised even with the latest 2020 revision and taking it online, but it's an education for the budding organizations that you CANNOT get from the Form 1023EZ Form 1023-EZ version.

It goes through many many scenarios and asks many questions to determine the applicant eligibility and intentions, while educating them with tax laws and pitfalls. Many applicants have ditched the idea of forming a nonprofit organization just reading half way through the form and they actually have made the right decision, saving themselves the application fee and heartaches down the road.

Assuming that you've read my guide on starting a nonprofit 501c3 501(c)(3) organization, you already should know that running a nonprofit organization is not for everyone, not even by a long shot, and the Form 1023EZ Form 1023-EZ makes it unrealistically easy for everyone to take a failing crack at it. By using the Form 1023EZ Form 1023-EZ you might get approved faster but fail you will. Mark my words.

On paper, Form 1023EZ Form 1023-EZ looks like a faster, cheaper path to exemption. In reality, it cuts the very corners that make a nonprofit credible.

What Are the Downside of the Form 1023EZ Form 1023-EZ?

Since the roll out of the 1023-EZ, grant and funding foundations are adopting safeguards and adding anti 1023 EZ practices to their application approval process. Some are outright asking whether you filed using the EZ form or the complete version. The level of fraud that exists in these shell organizations who used the 1023 EZ is staggering and States and funders are ramping up their scrutiny.

One of the disqualifying clauses for Form 1023EZ Form 1023-EZ is maintaining donor advised funds, accounts where donors can tell you how and when to spend the money while still claiming an immediate tax deduction. If your organization expects to receive foundation grants, restricted donations, or any funding that comes with reporting requirements, you already outgrew the EZ form. You need the full Form 1023, because that is the only one that proves you actually understand what fiduciary responsibility means.

27-Month Tax-Exemption Backdating Rule Doesn't Apply to Form 1023EZ Form 1023-EZ

Nonprofits generally have 27 months from the date of incorporation to apply for tax exemption using the form 1023. If that 27 months has passed, the long form 1023 has an option to complete Schedule E and ask the IRS to backdate exemption status to the incorporation date. Form 1023EZ Form 1023-EZ does not have this option and if the 27 months has passed, you may end up paying taxes on all the revenue for 3 years.

Form 1023EZ Form 1023-EZ Significantly Increases the Odds of an IRS Audit

The main reason mentioned by the IRS for creating this form is to decrease application review time by shifting the attention from reviewing applications to auditing nonprofit organizations. Who do you think they will audit first? An organization that filed the long 1023 form and has given every detail about their existence and plans, or the organization that is virtually untested and unknown on every aspect?

Organizations Tend to Underestimate Their Income on Form 1023EZ Form 1023-EZ

Almost 7 out of 10 applications that I review has intentional and illegal budget miscalculation and people do it to get away with paying $325 less for the application fee. One of the qualification clauses on the Form 1023EZ Form 1023-EZ is that your organization CANNOT have more than $50,000 gross income in ANY given year for the next consecutive three years after filing your application.

Pay close attention to the 3 years requirement because it does not include the current tax year that you're applying. From my experience, a large majority of nonprofit organizations that budget and receive less than $50,000 a year will fail in the first two years and will dissolve the organization. The reason for that is that they have a dream of doing something but don't have the ability to raise the funds or the comprehension that helping others requires money.

You simply cannot run a Falafel Stand with $50,000 gross income let alone a nonprofit organization. Let's assume you have a falafel stand and you sell 60 falafels a day at $4 apiece. Your gross income based on 5 days a week for one year is $60,000! That's even assuming that you have no rush-hour and you don't live in New York City.

Misusing Form 1023EZ Form 1023-EZ Can Lead to Serious Legal Trouble

The Form 1023EZ Form 1023-EZ makes it a fool-proof way of obtaining federal 501c3 501(c)(3) tax exemption status virtually overnight and start collecting tax deductible donations from unsuspecting donors for your own benefit. Not only has the Form 1023EZ Form 1023-EZ made the dishonest applicants grow exponentially, the EZ version of the form 1023 has created a secondary nightmare of enabling marketing crooks to pitch their tax exemption services to honest unsuspecting applicants who don't know any better.

The Kind of 501c3 501(c)(3) Applicants Drawn to Form 1023EZ Form 1023-EZ

The day dreamers will benefit greatly from this form as it takes a mere 20 minutes to go from idea to full tax exemption. The fact that they will fail within the first few months and will lose the $275 application fee is trivial. Many of the applicants who choose to use the Form 1023EZ Form 1023-EZ are literally illiterate folks who are incapable of writing a Narrative Description of Activities for the real Form 1023.

These are the organizations that don't have a clue what they're going to do, how much money they need, and what actual purpose they're going to serve. Narrative Description of activity is basically the business plan of the nonprofit and by not having any plans, they are just hoping that everything magically will fall in place. How do I know? They call me all day long. Thanks to the IRS, I won't have to deal with this bunch any more.

Nonprofit Organizations That Do Not Qualify for Form 1023EZ Form 1023-EZ

Besides the $50,000 revenue cap and $250,000 assets limitation which I mentioned at the start of this article, the following types of nonprofits do NOT QUALIFY to apply for tax exemption using the Form 1023EZ Form 1023-EZ as well:

• Nonprofits that were formed under the laws of a foreign country or have their mailing address outside the United States
• Nonprofits that are not corporations such as an LLC
• Organizations that are formed as a for-profit entity
• Nonprofits who have had a tax exemption and their exemption was revoked
• Churches and association of churches
• Schools, colleges, and universities of any kind
• Hospital or medical research organization
• Agricultural research organization
• Cooperative hospital service organization
• Cooperative service organizations
• Charitable risk pool organizations
• Supporting organization
• Organizations that provide credit counseling activities such as budgeting, personal finance, financial literacy, or other consumer credit
• Nonprofits that have or will invest 5% or more of your total assets in securities or funds that are not publicly traded
• Environmental nonprofits that sell, or intend to sell carbon credits or carbon offsets
• Health Maintenance Organizations (HMOs)
• Accountable Care Organization (ACO), or an organization that engages in, or intends to engage in, ACO activities
• Organizations that do or intend to maintain one or more donor advised funds
• Nonprofits that are organized and operated exclusively for testing for public safety
• All private operating foundations

Final Verdict: Why You Should Avoid the Form 1023EZ Form 1023-EZ

I could go on and on, but the honest verdict on the Form 1023EZ Form 1023-EZ is that the only honest organizations that could possibly benefit from this short exemption application form are the very, very, very, small animal rescue organizations and alike that don't need big funds. If you are not feeding stray dogs and cats in streets, look the other way and use the long version of the Form 1023. Don't use the Streamlined Application for Tax-exemption, the EZ route may look faster and cheaper, but it rarely ends well.