The IRS’s recent Rev. Proc. 2018-5 included a number of updates and changes to the procedures for the IRS’ issuing of determination letters for exempt organizations pursuant to a filed Form 1023 or 1023-EZ Application for Recognition of Tax Exemption. Among the most significant and impactful changes are those related to the User Fees and to the questions asked on the streamlined Form 1023-EZ.
Streamlined and Reduced User Fees
Previously, exempt organizations faced a 3-tiered user fee system for filing a 1023-family application. A streamlined Form 1023-EZ cost $275 for filing with the IRS. If an organization expected to have no more than $10,000 in gross revenue for the first four years combined, it could pay a reduced filing fee of $400, otherwise the full filing fee was $850.
Now, the Form 1023-EZ user fee remains $275. The two other tiers, on the other hand, have been combined into a flat $600 user fee for all Section 501 applications other than the 1023-EZ.
Additionally, the user fee for an application for a group exemption letter has been reduced from $3,000 down to $2,000. There is still an additional user fee requirement for when an organization submits an initial application for exemption along with a request for a group exemption determination letter.
Form 1023-EZ not as EZ
The IRS Form 1023-EZ Streamlined Application for Recognition of Tax Exemption had previously been very straightforward, with the statutory requirements for a Section 501(c)(3) set forth in a user-friendly form, requiring affirmations via opt-in checkboxes that the applicant complied with all requirements for exempt status.
The most significant change is the requirement to “Briefly describe the organization’s mission or most significant activities.” Rather than a checkbox, the form now contains an open-ended field for such a description. That field by itself adds to the form’s complexity, given how streamlined the former application used to be. However, arguably the most difficult restriction on this new requirement is: to provide a description in 250 characters or less! Thus, exempt organizations seeking a determination letter now must be able to describe their mission or their significant activities (note the disjunctive) with words scarcely as long as a tweet.
It has been, and still is, the case that exempt organizations applying for a determination letter with Form 1023-EZ must not: 1) have annual gross receipts in excess of $50,000 in the new 3 years; and 2) be a church, school, or hospital. The new Form 1023-EZ makes this requirement explicit, by asking whether the applying exemption organization is “applying for recognition as a church, school, or hospital (described in section 170(b)(1)(A)(i), (ii), or (iii) of the Internal Revenue Code).” Those topics are still covered in the eligibility worksheet, but the new Form 1023-EZ highlights these eligibility determinations as part of the actual form-filling workflow itself.
In short, the new year brought some new changes to the 1023-family of IRS forms and applications. Their changes streamlined some aspects of the process, and complicated others. It is advisable to review the applicable forms carefully for how those changes may impact an exempt organization applying for recognition of its exempt status. And, of course, the applicant should have a description of its mission that will work for either the IRS or Twitter – or both!