Nonprofit Organizations: Applying for Tax Exempt Status

After the previous steps, as described in prior blog posts, it is now time to apply for tax exempt status. This process can be done in one of two ways. An organization may apply for tax exempt status using the 1023 form or the 1023EZ form. If your organization meets the requirements for 1023EZ, this step is a no brainer. You do the 1023EZ because of its simplicity.

An organization may use the 1023EZ, if it meets certain criteria. These criteria include but are not limited to (1) the organization is not expected to gross more than $50,000 in the next three years; (2) it is not a foreign entity; (3) it is not a successor to a for-profit entity; (4) it is not a school, church, or hospital; (5) it is not a 509(a)(3) supporting organization; (6) it is not classified as a private operating foundation. Organizations that are ineligible to apply with 1023EZ are relegated to 1023.

Form 1023 is a time consuming document for even attorneys to complete. The IRS estimates it will take at least 15 hours to learn complete 1023. That does not include the nearly 90 hours of necessary record keeping time. Plus, the IRS requires that particular schedules be completed depending on the nature of the nonprofit organization. Each schedule can take between 30 minutes to 2.5 hours. Sometimes multiple schedules need to be filled out. Thus, the process can end up being a weeks long affair for someone unfamiliar with the forms.

On the other hand, the 1023EZ is much more efficient in getting the request for tax exempt status before the IRS. The IRS estimates that the 1023 will require approximately 9 hours of time to complete. Obviously, this still requires a significant amount of time, but is much more manageable.

Each application for tax exempt status, whether the 1023 or the 1023EZ, requires a user fee to accompany it. The user fee for the 1023 is $850. The user fee for the 1023EZ is $400. From a simple cost perspective, the 1023EZ is the preferable way to go.