By Sunita Lough, Commissioner, Tax Exempt/Government Entities Division
CL-22-13, September 8, 2022
Given how complex tax issues can be, an important element we always take into consideration at the IRS is looking to make things simpler whenever we can. We want to minimize burden for taxpayers and organizations wherever possible while still meeting the tax law requirements established by Congress.
In the IRS organization I lead, Tax-Exempt and Government Entities (TE/GE), we have a great example of this. We work to ensure that exempt organizations comply with the tax rules while also trying to minimize the burden on organizations to show they are in compliance. A great example of this balancing act is the Form 1023-EZ, which we launched in 2014 to help small charitable organizations seeking federal tax-exempt status. Let’s take A Closer Look at the past, present and future of the Form 1023-EZ and the continuing benefits it provides to those small organizations.
In Fiscal Year (FY) 2014, TE/GE’s Exempt Organizations (EO) Division had a backlog of over 75,000 open exemption applications, mostly Forms 1023, Application for Recognition of Exemption Under Section 501(c)(3), some of which had been waiting over a year for agent review. The backlog showed the need for a more effective process to work these applications.
We undertook an in-depth review of the application process to see how we could reduce burden on applicants and achieve business efficiencies. As a result, the team recommended the creation of Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3). This new, shorter electronic application form, released for use on July 1, 2014, simplified the application process for smaller charities and enabled our employees to focus our resources on applications that are more complex.
Since its inception, the use of Form 1023-EZ has grown, accounting for more than 65% of the approximately 110,000 determination requests we received in FY 2021. Form 1023-EZ approvals in FY 2021 were mostly organizations categorized as human services; education; arts, culture and humanities; and recreation and sports. Those organizations that were approved after filing the “long” Form 1023 were largely organizations categorized as religion-related; human services; education; and philanthropy, volunteerism and grantmaking foundations.
To be eligible to use Form 1023-EZ, organizations must have annual gross receipts of $50,000 or less and total assets of $250,000 or less. Because certain, more complex types of organizations aren’t eligible to use Form 1023-EZ, it’s important for charities to review the Form 1023-EZ instructions, which include a worksheet to help applicants confirm their eligibility. An eligible applicant completes and submits the two-page Form 1023-EZ electronically on Pay.gov.
When the IRS receives the Form 1023-EZ, our employees review it to determine whether the applicant has demonstrated they qualify for tax-exempt status. We send favorable determination letters to applicants that do qualify. When the information on the application indicates there may be complex issues or questions about qualification, we can refer questions or the entire case for additional development. We issue determination letters denying tax-exempt status if the application shows the applicant doesn’t qualify for exemption, and we return applications without a determination in other instances, such as if an applicant doesn’t respond to requests for additional information.
Benefits of a streamlined application
Form 1023-EZ has reduced the burden on the smallest organizations applying for tax-exempt status and increased the efficiency of the Exempt Organization division’s operations. Form 1023-EZ is a two-page form, much easier and quicker for an entity to complete than Form 1023, which is 14 pages long and has 11 additional pages of schedules that must be completed in certain cases. An applicant using the long form also must gather and submit attachments with their application, including copies of their organizational documents (such as articles of incorporation or a trust deed). Using Form 1023-EZ is also less costly for the applicant; the user fee for the Form 1023-EZ is currently $275 as compared to $600 for the Form 1023.
In FY 2021, our processing of the Form 1023-EZ required about 45 minutes per case on average, while Form 1023 required more than two and a half hours. The average days from receipt to case closure in FY 2021 were 94 for Form 1023-EZ and 138 days for Form 1023. These increased efficiencies allow us to more effectively manage inventory and provide more timely processing, not just for small organizations, but for all applicants.
Due to the efficiencies gained through the Form 1023-EZ, more resources can be put into examining organizations. Examinations allow us to verify whether organizations approved on application in fact operate for exempt purposes. Congress helped us greatly with the Inflation Reduction Act of 2022 by providing much-needed funding that will allow us to strengthen examinations and help with our work in this area. The investment of these important resources is designed to support honest, compliant taxpayers who follow the law.
Addressing risks of a streamlined application
In implementing Form 1023-EZ, we carefully evaluated the risks associated with the streamlined application that, like many tax returns, reflects the representations of the taxpayer. We address these risks by providing educational materials on IRS.gov, issuing instructions for Form 1023-EZ, and maintaining a pre-determination review process and a post-determination compliance program.
For the pre-determination reviews, we request additional information from a sample of the Form 1023-EZ applications. Using data-driven methods, we also conduct “post-determination” examinations of organizations approved on Form 1023-EZ that have been in operation for a year or more. I’m pleased to report that in 75 percent of these exams, we didn’t need to propose any changes to the organization’s operations in order for them to maintain exempt status. That’s an even better outcome than for organizations that file the long form, where no changes are needed in 67 percent of organizations after an exam.
Eight years later, we’re still working to improve the application process for small organizations. As we gather statistical information, we identify new potential risks and explore additional ways to mitigate risks, including revision of the form where appropriate. In January 2018, we changed Form 1023-EZ to require a brief description of planned or actual activities, as suggested by the National Taxpayer Advocate. The form was also modified to add questions to assist taxpayers in confirming eligibility to use the Form 1023-EZ requiring specific responses on the level of the organization’s gross receipts and assets, and confirmation that the applicant is not applying for recognition as a church, school, or hospital.
We also want to continue making sure we have all the information we need to make a sound judgment about organizations using Form 1023-EZ to apply for exempt status. Since we launched this streamlined application, applicants and the IRS have saved time and effort by forgoing the attachment of organizational documents as required on Form 1023. But based on our experience and stakeholder comments, we will consider adding the organizational documents to Form 1023-EZ. Although this would expand an otherwise streamlined process, the documents may help further ensure the accuracy of the applications.
In TE/GE, we are committed to succeeding in our mission to provide our customers with top quality service by helping them understand and comply with tax laws and to protect the public interest by applying the tax law with integrity and fairness to all. We will continue to balance the efficient and timely processing of applications, the burdens on small organizations, and the risks of noncompliance with Form 1023-EZ and continue to identify process improvements in the future.
Throughout this, reducing burden to help tax-exempt organizations is a central part of our efforts.
Commissioner, Tax Exempt/Government Entities Division