Form 1023-EZ and the Streamlined Process for the Federal Income Tax Exemption: Is the IRS Slashing Red Tape or Opening Pandora's Box?

Abstract

On July 1, 2014, the Internal Revenue Service (IRS) released Form 1023-EZ, a streamlined version of the application required of all organizations seeking federal tax-exempt status. Form 1023-EZ requires dramatically less time to complete and represents a radical change to a decades-old process. It is expected that approximately seventy percent of the 80,000 organizations annually applying for tax-exempt status will be eligible to use Form 1023-EZ. The IRS expects that Form 1023-EZ will more efficiently provide determinations to applicants, preserve accuracy, and enable the IRS to focus on back-end compliance. Yet several commentators, including, perhaps counterintuitively, representatives of large consortiums of nonprofits, have decried Form 1023-EZ as an IRS misstep.

The current process of obtaining tax-exempt status is needlessly onerous and can be especially burdensome for small organizations. Form 1023-EZ’s release at least partially addresses these concerns while simultaneously alleviating IRS budgetary pressures. The benefits of allowing organizations to quickly obtain tax-exempt status outweigh the hypothetical benefits of obtaining governance expertise by filing the more cumbersome Form 1023. It is no surprise that many existing nonprofits are opposed to Form 1023-EZ since its adoption will result in increased enforcement for all nonprofits, both new and old, and will increase the overall number of 501(c)(3) organizations. This protectionist position, though understandable, ultimately harms the charitable sector. Existing nonprofits should thrive because they accomplish their charitable missions more efficiently than their peers, not because their potential peers are excluded.

Keywords: Form 1023, Form 1023-EZ, Tax-Exempt, Exempt Organizations, Nonprofit

JEL Classification: K34, K23