Understanding Form 1023EZ Application for Tax-Exempt Entities
Establishing a new nonprofit correctly is one of the most important steps a board can take to set themselves up for success and protect the future of the organization. There are many details in creating a nonprofit, and one of the most important is filing Form 1023 with the IRS to create your tax-exempt entity. For organizations that raise less than $50,000 in any of the first three years, there is a simplified form, Form 1023EZ. When filing this shortened form, it is essential to understand what you are filing and the potential liability if it is filed incorrectly.
Several years ago, the IRS estimated that 37% of the 1023EZ forms that were filed contained errors. These errors often went unchallenged, and sometimes an organization (or their legal counsel) would find the error and correct it in hindsight. Now, the IRS increasingly calls to verify information and request documentation when processing the application.
When you sign the 1023EZ to submit the paperwork, the statement you are agreeing to states that the form is correct under penalties of perjury. Therefore, signing this statement without having taken the time to fully read, understand, and fill the form out correctly puts you and your organization at risk. Unfortunately, many who sign documents electronically pay little attention to what they are signing. There are certain boxes that must be checked before it will submit, but checking the box without understanding what it says can get you into trouble.
1023EZ versus 1023
One of the biggest mistakes that can lead to an IRS audit is using the shortened form when you should have filed the full one. The indicator between the two is the projected revenue for the first three years for your organization, which must be under $50,000 per year. Over that amount indicates the need for the full form.
Organizations that file the 1023EZ stating revenue is less than $50,000 annually should be filing the 990-N (e-Postcard). If revenue is over $50,000 annually, the 990 or 990EZ must be filed and indicates the 1023 should have been filed. Previously this may have gone unnoticed, but more recently the IRS has started using algorithms to cross-check for organizations that filed both a 1023EZ and a Form 990 or 990EZ. While this combination doesn’t automatically mean you’ve done anything wrong, it will bring increased attention, possibly in the form of an audit.
Documentation
Part of filing the 1023EZ is filling out an eligibility worksheet. You are not asked to submit the worksheet, but you are asked to attest to the fact that you completed it in the final paperwork. This includes being sure you have completed three years of financial projections that show you expect to be under $50,000. Other boxes you will have to check in order to submit the form state that your organization has the appropriate articles of incorporation and bylaws including a purpose statement and a dissolution clause stating your assets will go to another 501(c)3 upon dissolution.
It is important you have the supporting documents when you file. If your organization is flagged for further review, the IRS could call and request copies of this paperwork. Do not fall into the trap of thinking you’ll have time to create it if/when they call.
“It is important you have the supporting documents when you file.”
Filling out the 1023EZ
To fill out the 1023EZ correctly and protect yourself if the IRS takes a closer look at your paperwork, follow these steps.
Read the form and the eligibility worksheet completely. Be sure you understand what boxes you are checking.
Complete the worksheet and all related information, including three years of financial projections.
File articles of incorporation, including the required purpose and dissolution clauses.
Write bylaws and initial policies, including a conflict of interest.
Have an organizational board meeting to adopt all the documents. At this meeting, vote to file 1023EZ, if applicable, so the decision is made by more than one person. Take minutes during this meeting as documentation of all these decisions.
Finally, file the 1023EZ.
Occasionally, an organization will receive more than expected in their financial projections and should have filed a 1023 full form. In that instance, the best course of action is to try to self-correct with the IRS. Call the and explain that the organization was more successful than anticipated and if you need to pay the difference in filing fees. Currently, this is not required, but having the call on record with the IRS will show the attempt to correct the error. It’s also best to inform the board of the call at the next meeting and record it in your meeting minutes, so your organization also has a record of the call being made.
Following all these steps protects you and your organization. It ensures accuracy in filing your Form 1023EZ and shows you have filed everything in good faith. If you have questions about your initial filing, we highly recommend consulting a nonprofit lawyer before filing to ensure everything is completed correctly for your organization.
