IRS Form 1023-EZ

In 2014, the IRS radically streamlined its application and approval process for certain organizations seeking tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. In doing so, it ignored strong opposition and warnings expressed by its own Advisory Committee on Tax Exempt and Government Entities, the National Association of State Charity Officials (state regulators of nonprofit entities), and the National Council of Nonprofits, among others. The IRS made the change for management reasons of reducing a large backlog of applications for tax-exempt status as 501(c)(3) charitable nonprofits. As a result of the adoption of the Form 1023-EZ, virtually every entity that applies using the Form 1023-EZ receives tax exempt status – thanks in part to erroneous approvals at rates of 37, 26, and 42 percent during 2015, 2016, and 2017, respectively. And the IRS’ primary obligation of preventing ineligible organizations and perhaps bad actors from receiving and exploiting tax-exempt status for personal gain is being shirked with every application processed. IRS Form 1023-EZ should be withdrawn immediately.

Why It Matters

By using the new Form 1023-EZ, organizations applying under the streamlined procedures are not required to submit information proving that they qualify for tax-exemption. According to the Taxpayer Advocate (Annual Report to Congress, FY 2017), “the new procedures do not require applicants to submit their articles of incorporation or bylaws to ensure they are properly organized and have adopted the appropriate charitable purpose clause as well as protections against misuse of funds.”

From the perspective of the National Council of Nonprofits, three overarching concerns arise under the Form 1023-EZ application and review process:

1. Public trust. Protecting public trust is essential for nonprofits to operate. The new form will cause distrust as sham operators secure tax-exempt status.
2. Responsibility. If the IRS abdicates its assigned duty as gatekeeper, then who will determine whether applicants legitimately deserve charitable status?
3. Concern for taxpayers. The IRS’ intentional shift from preventive front--end enforcement to reactive back-end is like saying, “We’ll enforce after a car wreck,” instead of doing its best to keep ill-prepared -- or worse – impaired drivers off the road.

Where We Stand

“The IRS’ primary obligation of preventing ineligible organizations and perhaps bad actors from receiving and exploiting tax-exempt status for personal gain is being shirked with every application processed. IRS Form 1023-EZ should be withdrawn immediately.”

Comments on the Discussion Draft: The Taxpayers First Act, National Council of Nonprofits, April 6, 2018

Status

The National Council of Nonprofits and National Association of State Charities Officers submitted comments to the House Ways and Means Subcommittee on Oversight recommending it include a provision in the bipartisan Taxpayers First Act revoking the existing IRS Form 1023-EZ and instructing the IRS to replace it, after consultation with charitable organizations, foundations, and state charities officers, with a streamlined form that continues to collect essential information that will better protect the public from scam artists and ensure that the IRS grant tax-exempt status only to eligible organizations. The full House Ways and Means Committee Subcommittee voted unanimously to pass a revised version of the Taxpayers First Act on April 11, 2018, but the Committee has not addressed the Form 1023-EZ.

Additional Resources

• Letter of the National Council of Nonprofits on Hate Group Hearing, submitted to House Ways and Means Subcommittee on Oversight, October 4, 2019.
• Nonprofits Applaud Steps to Promote Public Trust, But More Action Is Needed, National Council of Nonprofits, Press Release, April 11, 2018.
• Comments on the Discussion Draft: The Taxpayers First Act, National Council of Nonprofits, April 6, 2018.
• Comments Regarding The Taxpayer First Act, National Association of State Charity Officials, April 6, 2018
• Form 1023-EZ, Adopted to Reduce Form 1023 Processing Times, Increasingly Results in Tax Exempt Status for Unqualified Organizations, While Form 1023 Processing Times Increase, Taxpayer Advocate Service FY 2017 Annual Report to Congress, January 10, 2018.
• Comments to the Office of Management and Budget, National Council of Nonprofits, April 30, 2014.
• Letter to the Internal Revenue Service, National Association of State Charity Officials, May 23, 2014
• Comments to the Internal Revenue Service, National Association of State Charity Officials, May 23, 2014.