New 1023-EZ Form Released: Streamlines Process for Eligible Small Charities to Apply for IRC Section 501(c)(3) Tax-Exempt Status and Seek Retroactive Reinstatement

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By Richard Fox

On July 1, 2014, the IRS issued Form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code), along with instructions and a detailed Revenue Procedure (Rev. Proc. 2004-40) that sets forth the rules for the use of the form and an Information Release (IR-2004-77).  Beginning immediately, certain eligible smaller charities seeking tax exemption under IRC§ 501(c)(3) can use the 3-page Form 1023-EZ to see tax exempt tax from the IRS rather than the lengthy and complicated Form 1023, which is a 26-page form that consists of a 12-page “core form” plus eight potentially-applicable schedules and a checklist.  The IRS estimates that up to 70% of new charities will be able to use the Form 1023-EZ, and anticipates that the use of Form 1023-EZ for small charities and the existing Form 1023 for larger charities, will enable the IRS to more quickly process all exemption applications.  In its news release accompanying the Form 1023-EZ, the IRS indicates that it currently has more than 60,000 exemption applications in its “backlog,” many of which have been pending for nine months or more.

“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. “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.”   Following feedback this spring from the tax community and those working with charitable groups, the IRS refined the 1023-EZ previously issued in draft form, including revising the $50,000 gross receipts threshold down from an earlier figure of $200,000.  "We believe that many small organizations will be able to complete this form without creating major compliance risks," Koskinen said. "Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do."

In order to use the Form 1023-EZ, and organization must certify that it meets 26 criteria that are set forth in a “Form 1023-EZ Eligibility Worksheet” that accompanies the instructions to the Form 1023-EZ.  While each organization will have to review all 26 criteria to make sure that they are able to use the new form, the most relevant of these 26 factors for most organizations are: (i) that the organization must not project having annual gross receipts in excess of $50,000 in any of the next three years (or the past three years, if the organization was in existence); and (ii) that the organization does not have total assets in excess of $250,000. Certain specified organizations, however, such as foreign charities, schools, churches and supporting organizations, are not eligible to use the new form.  If the Form 1023-EZ may be used, the applicant organization must provide basic information about the organization, including: (i) contact information for the organization; (ii) the names and mailing addresses of all directors, officers, and trustees; (iii) information about the structure of the organization, including date and state of incorporation as well as certification that the organization’s governing documents limit the organization’s purposes to those described in Internal Revenue Code Section 501(c)(3), require the organization to engage in activities that further its exempt purpose, and on dissolution of the organization, that any remaining assets will be used for 501(c)(3) purposes; (iv) classification of the organization as “charitable,” “educational,” “religious,” “scientific,” etc.; (v) certain other information about the organization’s activities, including confirmation that the organization will not engage in political campaign activities; and (vi) classification of the organization as a “public charity” or a “private foundation.”  Unlike the Form 1023, there is no requirement that the organization submit a detailed narrative of its activities to support exemption.

The Form 1023-EZ can be filed electronically only through www.pay.gov, although the IRS does provide a sample of a paper Form 1023-EZ on its website.  During the filing process, the Form 1023-EZ must be electronically signed under penalties of perjury by an individual authorized to sign for the organization.  When filing Form 1023-EZ, organizations are required to pay a $400 “user fee” by automatic debit from a bank account or by credit or debit card.  Once tax exemption is granted to an organization filing Form 1023-EZ, the exemption will generally be retroactive to the date that the organization was formed if the Form 1023-EZ was filed within 27 months of the creation of the entity, or retroactive to the date that the Form 1023-EZ is filed if it was filed more than 27 months after formation.

Organizations whose tax exemption has been automatically revoked for not filing Form 990, Form 990-PF, Form 990-EZ, or Form 990-N for three consecutive years can use the Form 1023-EZ to request retroactive reinstatement of exemption within 15 months of such revocation if it was eligible to file Form 990-EZ or Form 990-N in each of the three years in which it failed to file.  Because the Form 1023-EZ has lower filing thresholds than the Form 990-EZ (which can be used if the organization had gross receipts of less than $200,000 and total assets of less than $500,000), most organizations that will meet the filing thresholds for filing the Form 1023-EZ will be able to use it to request retroactive reinstatement of exemption. 

Further details on the new Form 1023-EZ application process can be found in Rev. Proc. 2014-40, which was posted on July 1, 2014 on IRS.gov.  The “Form 1023-EZ Eligibility Worksheet” can be found at irs.gov/pub/irs-pdf/i1023ez.pdf. and the eligibility to use Form 1023-EZ is set forth in Section 2 of Rev. Proc. 2014-40. 

Reminder for Reinstatement of Revoked Exemption for Organizations Failing to File Forms 990 for Three Consecutive Years

Under IRC § 6033(j)(1), enacted under the Pension Protection Act of 2006, the tax-exempt status of a tax-exempt organization is automatically revoked if the organization fails to file the required annual return (Form 990 or Form 990-EZ) or notice (Form 990-N) for three consecutive years.  Since its enactment, over 275,000 tax-exempt organizations have lost their tax exemption status under IRC § 6033(j)(1). The IRS had previously issued Notice 2011-44, 2011-25 IRB 883, and Notice 2011-43, 2011-25 IRB 882, which provided guidance to obtain the retroactive reinstatement of exemption with respect to organizations that lost their tax-exempt status for not filing returns or notices for 2007, 2008, and 2009.

On January 2, 2014, the IRS issued Rev. Proc. 2014-11, 2014-3 IRB, which modifies and supersedes its earlier notices, to provide procedures for retroactively reinstating the IRC § 501(c)(3) tax-exempt status of organizations that had that status automatically revoked under IRC § 6033(j)(1) for the failure to file the required annual returns or notices for three consecutive years. The guidance provided under Rev. Proc. 2014-11 can be summarized as follows:

• Under a “Streamlined Retroactive Reinstatement Process,” organizations eligible to file a short form (Form 990-EZ) or postcard return (Form 990-N) are eligible for streamlined reinstatement procedure as long as a new application for exemption (Form 1023 or Form 1024) is submitted not more than 15 months after the organization’s revocation of its exempt status.  These organizations, if otherwise eligible, may use Form 1023-EZ.

• Those organizations not eligible for streamlined process (because they do not file Form 990-EZ or Form 990-N) may apply for retroactive reinstatement but the process is more involved, including demonstrating reasonable cause for earlier non-filing, and depends on whether the new application for exemption is submitted within or beyond 15 months from the date of the organization’s revocation of its exempt status:

• If the application is submitted within 15 months of revocation, reasonable cause need only be shown for at least one of the three consecutive years in which the organization failed to file. 

• If the application is submitted more than 15 months after revocation, reasonable cause must be shown for all three years during which the failure to file occurred.

These organizations cannot use Form 1023-EZ, but must use Form 1023. 

• An organization that cannot qualify for retroactive reinstatement of its exempt status under any of the procedures described above may apply for reinstatement of its tax-exempt status effective from the date on which the organization files its new application for exemption.   These organizations, if otherwise eligible, can use Form 1023-EZ.

Background

In general, IRC § 6033(a)(1) requires an organization exempt from tax under  IRC §  501(a) (which includes a tax-exempt organization described in IRC § 501(c)(3)) to file an annual tax return. Most small organizations (other than private foundations or IRC § 509(a)(3) supporting organizations) whose annual gross receipts are normally not more than $50,000 ($25,000 for taxable years beginning before January 1, 2010) are not required to file an annual return, but are required to file an annual notice, Form 990-N, instead.  An organization may file Form 990-EZ if the organization has gross receipts of less than $200,000 and total assets of less than $500,000 at the end of the taxable year. These dollar thresholds are subject to change.

The Pension Protection Act of 2006, Pub. L. No.109-280, 120 Stat. 780, § 1223 (2006), added IRC § 6033(j) to the Internal Revenue Code, effective for taxable years beginning after 2006.  IRC § 6033(j)(1) automatically revokes the tax-exempt status of any tax-exempt organization that fails to file a required annual return or notice for three consecutive years. Revocation under IRC § 6033(j)(1) is effective on and after the date set by the IRS for the filing of the third annual return or notice.  In accordance with IRC § 6033(j)(1), the IRS is required to maintain and publish a list (“revocation list”) of all organizations that have had their tax-exempt status revoked and the IRS updates the revocation list monthly. The IRS also mails a letter (“revocation letter”) to the last known address of each organization on the revocation list to notify the organization that its tax-exempt status has been revoked under IRC § 6033(j)(1).

IRC § 6033(j)(2) provides that any organization that has had its tax-exempt status automatically revoked under IRC § 6033(j)(1) must apply to the IRS in order to obtain reinstatement of its tax-exempt status. If the application for exemption (Form 1023 or Form 1024) is approved, the effective date of the organization's reinstated tax-exempt status generally will be the post-mark date of the application and, therefore, will not be retroactive to the date on which the organization’s exempt status was revoked. However, IRC § 6033(j)(3) provides that if, upon application for reinstatement, an organization “can show to the satisfaction of the Secretary evidence of reasonable cause for the failure described in [section 6033(j)(1)], the organization's exempt status may, in the discretion of the Secretary, be reinstated effective from the date of the revocation.”

Guidance in Rev. Proc. 2014-11

Streamlined Retroactive Reinstatement Of Tax-Exempt Status For Small Organizations That File New Application for Exemption Within 15 Months Of Revocation

Under what Rev. Proc. 2014-11 calls the “Streamlined Retroactive Reinstatement Process,” an organization that was eligible to file either Form 990-EZ or 990-N for each of the three consecutive years that it failed to file, and that has not previously had its tax-exempt status automatically revoked pursuant to IRC § 6033(j), may apply to have its tax-exempt status retroactively reinstated effective from the revocation date if completes and submits a new application for exemption not later than 15 months after the later of the date of the revocation letter or the date on which the IRS posted the organization's name on the revocation list. To facilitate processing, organizations should write “Revenue Procedure 2014-11, Streamlined Retroactive Reinstatement” on the top of the application. These organizations, if otherwise eligible, may use Form 1023-EZ.

If an organization files an application for exemption as described above and its application is approved, then for purposes of IRC § 6033(j), the organization will be deemed to have reasonable cause for its failures to file Forms 990-EZ or 990-N, as applicable, for three consecutive years and it will be reinstated retroactively to the revocation date. The IRS will not impose the penalty under  IRC § 6652(c) for the failure to file annual returns for the three consecutive taxable years for which the organization was required, but failed, to file Form 990-EZ, if the organization that is retroactively reinstated files properly completed and executed paper Forms 990-EZ for all such taxable years. For any year for which the organization was eligible to file a Form 990-N, the organization is not required to file a prior year Form 990-N or Form 990-EZ for such year. The Forms 990-EZ must be mailed to the following address:

Department of Treasury
Internal Revenue Service Center
Ogden, UT 84201-0027

The organization should write “Retroactive Reinstatement” on the Forms 990-EZ.

Retroactive Reinstatement Of Tax-Exempt Status by Organizations Not Eligible for Streamlined Process That File New Application for Exemption Within 15 Months Of Revocation

Those organizations that are not eligible for the streamlined process described above (because they were not eligible to file Form 990-EZ or Form 990-N) may apply for retroactive reinstatement of its tax-exempt (using Form 1023, not Form 1023-EZ) if it does all of the following:

• Completes and submits the appropriate new application for exemption not later than 15 months after the later of the date of the revocation letter or the date on which the IRS posted the organization's name on the revocation list.  To facilitate processing, organizations should write “Revenue Procedure 2014-11, Retroactive Reinstatement” on top of the application.

• Includes a “Reasonable Cause Statement.” The organization must establish reasonable cause with respect to its failure to file a required annual return for “at least one of the three consecutive years in which it failed to file.” To establish reasonable cause, an organization must establish that it exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements. In determining whether the organization establishes reasonable cause, the IRS will take into account all pertinent facts and circumstances.  The Reasonable Cause Statement must provide all of the facts that support a claim for reasonable cause for failing to file a required annual return, including a detailed description of all the facts and circumstances that led to the failure, the discovery of the failure, and the steps that have been or will be taken to avoid or mitigate future failures.  The following factors would weigh in favor of finding reasonable cause (with no single factor being either necessary or determinative):

• The organization's failure was due to its reasonable, good faith reliance on erroneous written information from the IRS, stating that the organization was not required to file a return, provided the IRS was made aware of all relevant facts;

• The failure to file the return or notice arose from events beyond the organization's control (“impediment”) that made it impossible for the organization to file a return or notice for the year;

• The organization acted in a responsible manner by undertaking significant steps to avoid or mitigate the failure to file the required return or notice and to prevent similar failures in the future, including, but not limited to—

• Attempting to prevent an impediment or a failure, if it was foreseeable;

• Acting as promptly as possible to remove an impediment or correct the cause of the reporting failure, once the failure was discovered;

• After the failure was discovered, implementing safeguards designed to ensure future compliance with the annual tax reporting requirements; and

• The organization has an established history of complying with its annual tax reporting requirements (if any) and/or any other applicable reporting or other requirements under the Internal Revenue Code.

The Reasonable Cause Statement must also include an original declaration, dated and signed under penalties of perjury by an officer, director, trustee, or other official who is authorized to sign for the organization in the following form:

I, (Name), (Title) declare, under penalties of perjury, that I am authorized to sign this request for retroactive reinstatement on behalf of [Name of Organization], and I further declare that I have examined this request for retroactive reinstatement, including the written explanation of all the facts of the claim for reasonable cause, and to the best of my knowledge and belief, this request is true, correct, and complete.

• Files properly completed and executed paper annual returns for all taxable years in the consecutive three-year period for which the organization was required, and failed, to file annual returns (and for any other taxable years after such period for which required returns were due and not filed). The annual returns must be mailed to the following address:

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0027

• Includes a statement with the application for exemption confirming that it has filed the annual returns in the consecutive three-year period for which the organization was required, and failed, to file annual returns (and for any other taxable years after such period for which required returns were due and not filed).

The IRS will not impose the penalty under IRC § 6652(c) for the failure to file annual returns for the three consecutive taxable years for which the organization was required, but failed, to file annual returns, if the organization's application for exemption is approved, and the organization is retroactively reinstated effective from the revocation date. The organization should write “Retroactive Reinstatement” on the annual returns.

Retroactive Reinstatement For Organizations That File New Application for Exemption More Than 15 Months After Revocation

An organization that applies for reinstatement of its tax-exempt status more than 15 months from the later of the date of the revocation letter or the date on which the IRS posted the organization's name on the revocation list may have its tax-exempt status retroactively reinstated effective from the revocation date only if it satisfies all the requirements set forth above under “Retroactive Reinstatement Of Tax-Exempt Status by Organizations Not Eligible for Streamlined Process That File New Application for Exemption Within 15 Months Of Revocation,” except that it must provide the Reasonable Cause Statement with respect to its failure to file a required annual return for all three years that it failed to file such annual returns (not just for at least one of the three consecutive years in which it failed to file).   The organization must use Form 1023, not Form 1023-EZ.

The IRS will not impose the penalty under IRC § 6652(c) for the failure to file annual returns for the three consecutive taxable years for which the organization was required, but failed, to file annual returns, if the organization's application for exemption is approved, and the organization is retroactively reinstated effective from the revocation date.  The organization should write “Retroactive Reinstatement” on the annual returns.

Reinstatement Of Tax-Exempt Status From Post-Mark Date of New Application for Exemption for Organizations Not Qualifying for Retroactive Reinstatement

An organization that cannot qualify for retroactive reinstatement of its exempt status under any of the procedures described above may apply for reinstatement of its tax-exempt status effective from the post-mark date of its new application for exemption by completing and submitting the appropriate application to the IRS.  Thus, the exemption in the case is retroactive only to the date on which the new application for exemption is filed, not to the date of revocation. To facilitate processing, the organization should write “Revenue Procedure 2014-11, Reinstatement Post-Mark Date” on the top of the Application. These organizations, if otherwise eligible, may use Form 1023-EZ.