How Effective is IRS Form 1023-EZ? A Look at the Numbers

In July 2014, the IRS released Form 1023-EZ in an attempt to reduce a backlog of over 50,000 applications. Upon the form’s debut, there were a lot of questions regarding the form’s effectiveness, how long it would take, etc. Nine months later, we can happily report that Form 1023-EZ has really done what it was designed to do: to streamline the 501(c)(3) application process.

Let’s take a look at the facts, helpfully published by the IRS itself:

1) In April 2014, the IRS’s inventory of applications stood at 54,564. In September 2014, only three months after the release of Form 1023-EZ, that number was 4,791, a reduction of over 90%.

2) By December 26, 2014, the IRS received 20,103 Form 1023-EZ applications, about 49% of the total forms received (the original Form 1023 and the new Form 1023-EZ).

3) It takes the IRS less than 30 days to process Form 1023-EZ applications.

4) Currently, the IRS conducts a predetermination review of 3% of all Form 1023-EZ applicants. Read the full article for more information on how the IRS scrutinizes and reviews these applications.

5) 95% of all applicants filing Form 1023-EZ have received a determination letter.

Harbor Compliance works with hundreds of nonprofits each year. Here are some of our experiences to date:

1) Clients filing IRS Form 1023-EZ receive their determination letter in 2-4 weeks.

2) Clients filing Form 1023 (the original) have been receiving their determination letters in 2-3 months. This had been in the 6-12 month range as recently as the beginning of 2014.

3) As part of our nonprofit formation service, we review your eligibility for IRS Form 1023-EZ, and will file whichever form you’d like.

What does this mean for your nonprofit?

Using the IRS’s statistics, we can take a pretty good guess that Form 1023-EZ has been effective, at least as far as reducing IRS inventory. Applicants are also enjoying their 95% approval rate and 30-day turnaround time!

Based on our clients’ experience, the IRS has really stepped up their game in processing applications. When prepared correctly, Form 1023s are being approved just a couple months after being submitted. Form 1023-EZ has met our expectations, both in ease of filing, and time to approval.

Bottom line: If you’re considering becoming a 501(c)(3) nonprofit, there is no better time to apply for federal tax exemption. 

A word of caution: even though you may be approved as a 501(c)(3) nonprofit, the IRS does not plan to remove scrutiny from the application process. They are simply shifting it until a later date. Beginning 2016, the IRS will be ramping up its review of active entities, in order to ensure they are maintaining adherence to federal requirements.

Eligibility for Form 1023-EZ

If this is your first time learning about IRS Form 1023-EZ, hold on. Don’t go running off to apply just yet!

Not all nonprofit organizations are eligible to file Form 1023-EZ, and not every organization should. Please review our post on Understanding Your Eligibility for Form 1023-EZ.

So, if you’re starting a 501(c)(3) nonprofit, you have two options. First, you can do-it-yourself. Form 1023-EZ makes the 501(c) application itself relatively easy, but there are many other preparations to make before you start, including incorporating, drafting bylaws, opening bank accounts, etc. There are also a series of registrations that take place after you become a 501(c)(3), including fundraising registration and state tax exemption. Additionally, the potential for IRS review always lingers on the horizon. Having assistance in preparing Form 1023 or 1023-EZ, and helping you maintain compliance, is quite important to your future success! Read more on the subject here.

The second option is to have Harbor Compliance take care of all your state and IRS registrations. Not only will our specialists review your eligibility for Form 1023-EZ, but we’ll incorporate, draft custom bylaws, and give your organization a firm foundation for success. Visit our page, and sign up for our professional services here!