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The Impact of Form 1023-EZ

On July 1, 2014, the IRS released Form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code). The purpose of this form is to make it easier for smaller charities to apply for and receive tax-exempt status.

"This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well," said IRS Commissioner John Koskinen at the time. "The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work. Previously, all of these groups went through the same lengthy application process -- regardless of size," Koskinen said. "It didn't matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn't help the groups, the taxpaying public or the IRS."

The decision by the IRS to make it easier for smaller organizations to apply for and receive tax-exempt status has not been universally celebrated. Observers of the nonprofit sector warn of possible repercussions ranging from increased IRS oversight costs to outright fraud as it becomes easier to fly under the IRS radar screen. For now, I am content to wait and see how these issues play out. What I became curious about is whether or not this new form would dramatically increase the number of organizations applying for charitable status.

As you can see from the table below, there was quite a dramatic increase in new organizations receiving tax-exempt status after the new form was released. Although we cannot tell which organizations actually did apply on Form 1023-EZ instead of Form 1023, we can determine that roughly 70 percent of the new organizations were eligible to apply on Form 1023-EZ.

I must admit that when I initially looked at the early returns while doing other research last October, I was certain that we were in the End Times. It appears, though, that a lot of this activity was a clearing of the backlog of applications. Not only did things start to moderate towards the end of the year, but that trend has carried into the first four months of this year:

Yes, it is true that number of new organizations is up by a healthy percentage, but that has always been the case, and these increases are much more in line with what we have seen pre-release of the new form. We will continue to follow this topic with interest, but ten months after the introduction of Form 1023-EZ, it appears that a least part of the IRS aims have been accomplished. 

chuck-mclean.jpgChuck McLean, a founding employee of GuideStar, is responsible for conducting research for GuideStar and for customers interested in nonprofit sector data. He also works to identify new data sources and ways to present data effectively to GuideStar users. Chuck produces the annual GuideStar Compensation Report, which analyzes the salary and benefits of thousands of nonprofits throughout the country. He has over 15 years of experience as a teacher and researcher at various institutions of higher education. Chuck has been a member of numerous sector-wide committees and study groups, including the Commission on Accountability and Policy for Religious Organizations, and currently serves on the Research Council of the Association of Fundraising Professionals and the Aspen Institute Nonprofit Research Data group. A graduate of Christopher Newport University, Chuck also received an MS degree in Mathematics from the College of William and Mary.

Topics: Nonprofit Leadership and Practice