Tag Archives: Form 1023

The 1023-EZ User Fee Is Now $275, Down from $400

If you’re considering starting a 501(c)(3) organization, and your organization is eligible to file Form 1023-EZ, there’s good news for you. Beginning July 1, 2016, IRS has reduced the 1023-EZ user fee to $275–down from $400.

This, of course, is great for anyone planning to file the 1023-EZ. That said, I’ve argued that the 1023-EZ process would improve with a little more oversight, and a lower user fee suggests that maybe that sort of change isn’t going to happen.

So, how do you know if your organization is eligible to file Form 1023-EZ? The Instructions for Form 1023-EZ include an eligibility checklist. The financial eligibility requirements to file Form 1023-EZ are:

  • The organization does not expect annual gross receipts of more than $50,000 in any of the next 3 years;
  • The organization has not had annual gross receipts of more than $50,000 in any of the past 3 years; and
  • The organization does not have total assets exceeding $250,000.

There are 26 items total on the eligibility checklist, so you’ll want to review the whole thing. If the IRS finds that your organization is ineligible to file 1023-EZ, it will reject your application and you’ll have to file a full 1023, so make sure you’re eligible prior to submission.

A woman punching a man in the face, which is not really how conflicts of interest work, thankfully.

Why Your Organization Needs a Conflict of Interest Policy

When I meet with a new 501(c)(3) organization client, one of the things I usually ask about is whether the organization has a conflict of interest policy. Usually, one of two things happens:

  1. “Yes, we do have a policy in place.”
  2. “A conflict of interest policy? What is that? Do we need one?”

No matter which answer I get, it’s okay. Conflict of interest policies are important, but it’s not hard to get one and adopt it. Let’s answer the questions in #2 up there to explain why this is a big deal. Continue reading

10 Tips For Writing an Effective Form 1023

For folks that are starting a 501(c)(3) organization, preparing Form 1023 is usually a pretty daunting task. I’ve prepared a few of these, and it can take significant time and work to really prepare the form properly. Ideally, you want to get the application through on the first try, and limit the amount of follow-up and supplemental information you have to provide. There’s no guarantee or magic formula for getting your 1023 approved (and approved quickly), but there are things you can do to improve your chances:

#1: Write a complete, detailed response to Part IV, Narrative Description of Your Activities.

Here’s the most important question on the application:

Part IV

You’ll want this description to be as complete as possible; the way I like to think about it is that you want to give the IRS reasons to approve your application. Here’s what you need to work through:

  • What does your organization do–past, present, and future? If you’re a really new organization, and you haven’t done much, that’s okay, you’re just going to have an answer that is more forward-looking.
  • Use the 4 Ws & 1 H: Who performs your activities? What are the activities? When do you perform the activities? Where do you perform the activities? How do you perform the activities. The IRS suggests this approach, and I think it makes a lot of sense.
  • Align your activities with your charitable purposes. Remember, 501(c)(3) organizations have to be organized for one (or more) specific purposes: charity, education, literary, religion, science, testing for public safety, fostering national/international athletic competition, and preventing cruelty to children/animals. Your activities should be fulfilling those purposes.
  • Take the opportunity to brag about what you do. This is a great chance to tell people what you do–if you’re approved, this is public record. I don’t know that many people will look at your completed Form 1023 after approval, but to the extent people do look at it, it gives you a chance to tell the public what you do.

#2: Make sure you attach answers whenever necessary.

Most of us are used to filling out IRS forms–fill in the blanks, check the boxes, and you’re done…Form 1023 isn’t like that. Often, the form will ask you to attach answers that explain in greater detail. Here’s an example:

Attach stuff

When the form tells you to “explain” or “describe,” you’ll need to attach an answer to your application.

Extra tip: When I prepare a 1023, I answer the questions on the form, and as I answer the questions, I make a list of every additional response I have to attach. When I finish preparing the form, I use the list to make sure I didn’t miss any needed responses. This has been effective for me, and it might help you not miss anything as well.

#3: Provide supporting documentation.

If you’ve produced documents to accomplish any of your exempt purposes, include that material. Provide an annual report to your donors? Have an application for your scholarship program? The IRS often looks for these sorts of documents, and if you’ve got them, it’s helpful to include them.

That said, don’t provide anything you wouldn’t release to the public.

#4: Look up terms that the IRS defines for you.

If you look through Form 1023, you’ll notice there a lot of bolded terms. Any time you see a term in bold, that means that the IRS has a definition for that term in the Instructions for Form 1023. The instructions are a separate document from the form itself. Here’s an example:

Compensation Question

Notice that the word “compensation” is in bold. If you went into the instructions, you could find a definition for compensation. Lo and behold, here it is:

Compensation Definition

Notice that “compensation,” for our purposes here, goes way beyond salary or wages, and includes some items you might not have otherwise thought of. This is why I suggest that even if you think you know what a word means, if you’re doing your first 1023, you should look up just about every bold term, so that you understand the question you’re answering.

#5: Read the first few pages for changes or adjustments to the form.

Updating any document, I suspect, is kind of a pain for the IRS. So, instead of releasing a new form each time they make a change, they sometimes put changes to the form at the beginning of the form. Unfortunately, most people skip right over that stuff and get to the first page of the form. Don’t do that! You’re only going to guarantee yourself follow-up questions from the IRS (or other problems).

For instance, as I look at the form today, here are the changes mentioned in the first couple of pages before the form itself actually starts:

  • There’s a new mailing address to send the application to; the one listed on page 28 is not the correct address (that seems important);
  • Advance rulings are no longer available, even though the form says they are;
  • The amount of financial data you must provide has changed;
  • You should skip certain lines in Part X about public charity status; and
  • The user fees have increased.

Those changes are significant; missing something like that could cause some problems and delays for your application.

#6: Make the best financial projections you can in Part IX.

For a new organization, completing Part IX (the financial data section) can be very difficult. New organizations don’t have a lot of data, but the IRS requires them to make projections. Your projections don’t have to be perfect, but they do need to be made in good faith.

But how can you make good faith projections? First, do some research–are there similar organizations to you that might be willing to help you make projections? Second, consult with professionals that have experience with nonprofit budgeting–an accountant who works with nonprofit organizations might be particularly helpful here. Additionally, if you or others in the organization have experience with budgeting, that should help as well.

Also, doing these financial projections is a useful exercise, and you should treat it that way. You should do some financial planning as part of the startup process, and you should know how much money you need to raise to fund your work.

#7: Include your organizing documents.

There are a few different types of organizations that can apply, most commonly nonprofit corporations and trusts. For a corporation, there are two important documents to submit: your articles of incorporation (or something similar–the exact terms might vary from state to state) and your by-laws. You’ll also need to include any amendments made to these documents.

The IRS uses these documents to determine if your organization is set up in compliance with the requirements of 501(c)(3) organizations. In particular, they’ll be looking for language that limits your organization’s activity to the 501(c)(3) exempt purposes we discussed earlier and that requires the organization’s assets be given to another 501(c)(3) organization when your organization dissolves.

#8: Don’t forget the schedules.

Form 1023 contains eight different schedules that might apply to your organization. Here are the schedules:

  • Schedule A: Churches
  • Schedule B: Schools, Colleges, and Universities
  • Schedule C: Hospitals and Medical Research Organizations
  • Schedule D: Section 509(a)(3) Supporting Organizations
  • Schedule E: Organizations that Have Not Filed Form 1023 Within 27 months of Formation
  • Schedule F: Homes for the Elderly or Handicapped and Low-Income Housing
  • Schedule G: Successors to Other Organizations
  • Schedule H: Organizations Providing Scholarships, Fellowships, Educational Loans, or Other Educational Grants to Individuals and Private Foundations Requesting Advance Approval of Individual Grant Procedures

Of course, not all of these schedules will apply to your organization, and it’s entirely possible that none of these schedules will apply, but if one (or more) of these applies, make sure to complete each schedule that does.

#9: Don’t release any social security numbers in the application.

I have no idea why this is a problem–the form never asks you for a tax ID other than the nonprofit organization’s–but the IRS reports that SSNs show up fairly regularly in applications. SSNs from directors, officers, volunteers, staff, and donors have shown up in applications. They should not be in there, and they certainly shouldn’t be released publicly, so do not include them. Simple as that.

#10: Use the checklist to make sure you’ve got everything.

At the end of the application, there is a checklist reviewing everything that you need to submit. It’s there to help you–take advantage of it! You’re much better off finding anything you missed before submitting rather than having the IRS request it later.

Photo credit, Kaitlin Gentry, via Unsplash.com, licensed under CC-0

Form 1023-EZ: Is It Working?

Short answer: it depends on what you mean by “working.”

Not a very satisfactory answer, is it? As much as I wanted a 10-word blog post, we’ll have to go a bit longer to really answer this question.

The 1023-EZ was introduced a little under 2 years ago to help deal with the tremendous backlog of tax-exemption applications facing the IRS. The idea was that small organizations didn’t really need a full review. Those organizations could fill out a shorter form and get a decision much more quickly. This would free up the IRS’s staff to scrutinize full 1023s more closely.

For what it’s worth, I’m a big fan of the IRS doing some triage here. The IRS was getting crushed by applications in the past, and it makes sense for the IRS to focus its efforts on the biggest organizations. Also, the effort needed to complete a full Form 1023 is a burden on small organizations. The IRS estimates that it takes 15.5 hours to properly prepare the full Form 1023. Form 1023 itself is 12 (fine, 11.5) pages, plus the 8 possible schedules that may also be required. Form 1023 is difficult to prepare well, and it can be tough for a small organization.

What Form 1023-EZ is doing well

Speed of review. The IRS turnaround times for both Form 1023-EZ and Form 1023 applications have dropped considerably. The IRS used to have a webpage showing the average age of its pending applications, but it has retired that, instead asking that you follow-up within 90 days for a 1023-EZ or 180 days for a full 1023. That’s much faster than the turnaround before the 1023-EZ came along. This is great for applicants and the IRS.

Client satisfaction. The Journal of Accountancy reports that overall satisfaction regarding the process was at 87% for 1023-EZ users and 72% for 1023 users. Further, 1023-EZ users reported more significantly more satisfaction with the time and ease of completing the application, the length of the process, and the ease of understanding the application than 1023 users.

What Form 1023-EZ isn’t doing well

Compliance. Organizations currently attest to numerous key things regarding compliance:

  • That the organization has the appropriate organizing document for its type of entity (articles of incorporation for a nonprofit corporation, for instance),
  • That the organization’s purposes are limited to one or more of the exempt purposes under Section 501(c)(3),
  • That the organization is not allowed to engage–except as an insubstantial part of its activities–in activities that do not further one or more of the exempt purposes under Section 501(c)(3),
  • That the organization’s organizing document requires that the organization will give its assets to another 501(c)(3) organization or the government upon dissolution,
  • That the organization won’t support or oppose candidates for office,
  • That the organization’s net earnings won’t be given to the organization’s insiders,
  • That the organization will not engage in a trade or business outside of its exempt purposes,
  • That if the organization attempts to influence legislation, it will only do so as an insubstantial part of its activities, and
  • That the organization will not provide “commercial-type insurance.”

At present, the IRS does not require the submission of organizing documents or corporate by-laws in order to review the organization’s compliance with these requirements. Additionally, some of the language here may by tough for the leadership of a small nonprofit to understand. For instance, what is “an insubstantial part” of an organization’s activities? I have clients ask that question fairly regularly, because it’s a term of art and they aren’t familiar with it.

A “gotcha” approach to compliance. The IRS has said that it will do more audits of organizations in order to check for compliance. I’d prefer the IRS check for compliance at the beginning of the process rather than auditing an organization that filed a 1023-EZ only to find out they are non-compliant. Will such an organization have a chance to become compliant? What will that process look like? What about the organization’s donors? What about back taxes, interest, and penalties for a non-compliant organization?

Uncertainty for organizations. When I work with clients that file a 1023-EZ, one question almost always pops up: what if we go over $50,000 in annual gross receipts? For many small organizations, those initial budgets are made in good faith, but sometimes those budgets are the product of educated guesses. It isn’t clear right now what happens if an organization exceeds the limit–should an organization that grows beyond its projections stifle its growth to avoid trouble with the IRS?

Potential for misuse. The 1023-EZ process involves fairly light oversight, so I’m sure some organizations are tempted to claim 1023-EZ eligibility to take an easier path to exemption. By tightening the oversight of the 1023-EZ process a little bit, the potential for misuse could be reduced.

How could the process be better for Form 1023-EZ users?

My suggestions would probably add some complexity and some additional turnaround time to the Form 1023-EZ process. I’m not sure I’d improve IRS user satisfaction by making these changes! By making the process “better,” I’m suggesting that a process that is still easy for small organizations to manage while allowing the IRS to find compliance problems, letting the organizations correct the problems, and getting the organization started on the right track.

So, what do I have in mind?

Require submission of organizational documents. Rather than requiring attestation to the organization’s purposes and dissolution clauses, require the organization to submit them. The organization already has to create the documents, so there’s no extra time spent for the organization. It is relatively easy to get documents into a PDF format, and reviewing them shouldn’t take that much extra time for the IRS.

Require the submission of a 3-year budget. Again, organizations have to say they don’t expect annual gross receipts of over $50,000 those first 3 years. With that in mind, do their budgets make sense? For instance, an organization that plans to hire a staff member probably can’t have a year with less than $50,000 in gross revenue and hope to survive. The IRS could follow-up on an unrealistic budget and find out if a full 1023 would be more appropriate.

Issue guidance for organizations that exceed the $50,000 limit. I suspect that the IRS is watching 990-EZ filings to see if organizations that applied with Form 1023-EZ exceeded the $50,000 limit. The IRS should do that. But what if an organization exceeds the limit? It’s not clear what would happen. Would the IRS revoke the tax-exempt status of those organizations? Maybe, although I think that’s excessive. I would expect the IRS to require a full 1023 (and the full user fee), but that’s a guess. Until the IRS has guidance, we won’t know for sure.

Form 1023-EZ has unquestionably made application for tax-exempt status more convenient, even for organizations that don’t qualify for it. Still, if we’re willing to sacrifice some of the convenience, we could achieve a more effective review process.

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Form 990 Deadline Looms for Calendar-Year Organizations

For organizations that use the calendar year as its fiscal year, the deadline for filing your annual information return (on Form 990, or some variant of it) is fast approaching: May 16, 2016. Let’s look at some of the basics of annual information return reporting for 501(c)(3) organizations:

 Which version of Form 990 do I file?

There are three main variants for Form 990:

  • Form 990, for most organizations with gross receipts of $200,000 or more OR total assets of $500,000 or more;
  • Form 990-EZ, for most organizations with gross receipts of less than $200,000 AND total assets of less than $500,000;
  • Form 990-N (e-Postcard), for most organizations with gross receipts under $50,000.

Private foundations have their own 990, the 990-PF, and black lung trusts also have their own variant, the 990-BL.

Don’t forget that your filing may be more than just the form itself–you may have additional schedules to fill out as well. If you’re working on these forms, be careful; make sure you get all the schedules you need as well–and you may want to have a professional work on it anyway.

If you qualify for 990-N (e-Postcard) filing, there is no paper form; the form is submitted electronically through the IRS website. If you’ve filed a 990-N before, that’s a new thing–the IRS had accepted them through the Urban Institute, but that changed at the end of February 2016.

There are still some organizations that are exempt from filing Form 990, and the IRS has a list of those exceptions. If your organization is of a type on that list, make sure you review the list closely to ensure that you don’t have to file something else instead. For instance, the list includes stock bonus, pension, or profit-sharing trusts that qualify under section 401 of the Internal Revenue Code. However, that entry also indicates that those trusts should file Form 5500, so be careful to make sure you don’t have some other reporting requirement.

When do I have to file?

Form 990 is due by the 15th day of the 5th month following the close of your fiscal year. If your organization’s fiscal year is the calendar year, that usually means May 15 of the following year. This year, May 15, 2016 happens to fall on a Sunday, so the deadline falls on the following Monday, May 16. If you have a different fiscal year, you’ll need to calculate it from the end of your fiscal year.

What if I miss required filings?

If you don’t file for 3 consecutive years, the IRS will automatically revoke your organization’s tax-exempt status. If that happens, the organization will no longer be tax-exempt starting from the due date of the third missed return. If the organization was a 501(c)(3) organization prior to revocation, any contributions you receive after revocation will no longer be tax-deductible for your donors, which can be a very big mess.

If your organization is automatically revoked, it is significant work to have the tax-exempt status reinstated. If this happens, you have to file an application to have your organization’s tax-exempt status reinstated. Depending on the circumstances, this can be a lot of work–in one case, I had an organization that had to file a new 1023, 990-EZs for each of the missing years, and a statement explaining why the failures occurred and how the failures would be prevented in the future. Short version: make sure the return gets filed each year!

If your organization needs an extension, it can apply for one using Form 8868.

Remember, Form 990 is a public document, and it tells the public a lot about your finances. It should be completed carefully and accurately. However, it also gives you some opportunity to brag about the projects you’ve completed, so you really can use it as an opportunity to show off your organization’s work.

Note: a version of this post originally appeared on my firm’s website, attorneykevinkelly.com, and has been updated for publication here.

Photo credit: Mari Helin-Tuominen, via unsplash.com, licensed under CC0