In the past, nonprofits seeking recognition as a 501(c)(3) charitable organization from the Internal Revenue Service (IRS) were required to file a 26-page Form 1023. In 2014, the IRS streamlined the process to allow small organizations to file a three-page Form 1023-EZ, instead. In order to qualify to use Form 1023-EZ instead of the long form, organizations must have less than $250,000 in assets and not expect their gross annual receipts to exceed $50,000 in the next three years.
With the advent of the 1023-EZ, the number of IRS-approved tax-exempt charities increased dramatically, and the IRS, in 2015, reported that 37 percent of charities filing with form 1023-EZ would not have qualified for charitable status if they had filed the more rigorous Form 1023. An analysis by The Chronicle of Philanthropy found 1,888 organizations exceeded revenue growth limitations within three years of filing the EZ form.
The streamlined 1023-EZ form removed many steps that encouraged prospective nonprofit leaders to perform the “due diligence” required to ensure their organizations serve a charitable purpose. Independent Sector encourages the IRS to work with the charitable community to revise the Form 1023-EZ to better guard against the possibility that ineligible organizations or bad actors might receive or exploit 501(c)(3) tax-exempt status.