Monday, March 2, 2015

1023-EZ: Why we chose the EZ path.

Last year, the IRS introduced a new, faster way for non profits  to get their 501(c)(3) public charity determination.  What used to take months and required a lot of documents and planning (270 days backlog, a three year business plan and a lot of scrutiny) can now be accomplished in as little as under two weeks for entities that qualify. This of course concerns only the charities that meet certain criteria. There's a limit as to the value of assets they own;  at the moment of filing they have to anticipate to not bring more than 50 thousand dollars annually in the fiscal year that they file and the two years after that; they may not engage in certain activities and not be an LLC and not be formed from an existing for profit business, among other requirements. The IRS has a worksheet for nonprofits so they can check if they qualify. The process itself is done online through the website. Remember, that you will not get a downloadable version of the form at the end for your records. As 501(c)(3) charities are required to make certain types of documents available to the public, such as the form used to obtain the status and three years worth of tax returns, the IRS advised us to print a copy of every page as we fill it out. If you don't, you may have to order a copy from the IRS and pay the applicable fee. As soon as the new form was released, plenty of tax professionals and attorneys raised their concerns. They feared that the form, that doesn't require you to disclose any information about your mission will create a host of second class entities, as they donors and grant makers will fear it; that it may open the door to plenty of abuse- as people may be eager to certify that the only plan to bring in 50 thousand a year, when they intended much more from the get go; that the information submitted will not not be subject to auditing and screening, and places the culpability for any misstatements on whoever signs the form (and such misstatements may get the status retroactively revoked). We will of course not know what the IRS practice is until these types of entities have been around for a while- this is the first year that they have been around and filed their returns. I must say, being aware of some of those and other considerations, I opted for our nonprofit to file the 1023 EZ instead of the "full form", 1023, and here's why.

 At the time we applied, we've been around for almost two years, as a "fiscally sponsored" nonprofit. This means, that through an agreement with a similarly focused 501(c)(3) they were collecting donations and applying for grants for our benefit. At the same time, we've struggled to put together a 3 year business plan that would pass all the IRS checks quickly and not get stuck in the system. All my board members were in fear of missing something or not addressing some aspect of our mission, that would get us delayed or denied. The business plan grew into an extremely elaborate document for a lot of contingencies and suddenly, from a small, local charity that wanted to operate a wheelchair app and do some ADA training the document became a behemoth, the proposed structure kept expanding and we were not even done. I had people stress out and quit over getting this document done and doing it right. And I don't think that foreseeing every possible way that this can over the next three years is not what IRS intended either. I also had no problem with the 50 thousand limitation- as I would be happy at that point to have 50 thousand to budget- at least we'd have some money to launch our programs with. The critics say that any non profit, just like any business may come into money they did not expect, two, three years down the line. Trying to predict that the organization will not get more at that point is pure speculation. But I say- so is trying to figure out a "big" form business plan for three years, especially since you have no to little money to start with. If it so happens that our non profit takes off in year three in a way we didn't expect- it will not mean that we have to give it back or are in trouble with the IRS, or even that we have to avoid big opportunities should they become available down the line. So far we had virtually 0 dollars in year one and 0 in year two, as we are just now about to start our fundraising and grant writing activities. Turns out, that being fiscally sponsored by a charity that has been around for ten years, but has little to no grant application history is not that helpful to us either.

Here's a primary consideration for us, even if 1023EZ would render us a "second class" charity, which I don't think it does- at least we'd be doing it on our own.  I just couldn't let this "fiscal sponsorship" situation continue much longer. Our grant writer has determined it's a wasted effort for her to apply for any more grants until we get our own status. Submitting applications for essentially two organizations with two distinct histories was frustrating to her and didn't really produce any results. In a normal circumstance - an organization that's been around for 10-11 years would have given us a boost. One that is not very active or visible, does not- it slows us down and becomes suspicious. I also couldn't allow for us to not be present in charity listings like the IRS Masterfile and Guidestar. It happened before, that people who didn't understand that we were "covered" under another nonprofit's status accused of trying to tun a scam operation after trying (and failing) to find our 501(c)(3) status.

Most importantly, we are now a 501(c)(3) status like just all the other charities big and small. There's no indication either on IRS website or systems like Guidestar or Greatnononprofits, or that we are any different. We can fundraise on our own and have our own grant strategy. For weeks before filing I've been reading that the determination letter will include information about the form used to obtain status, but that's also not true. It seems the only way the way the type of form used to obtain the status is when the form itself is requested to be revealed to the public. If you ask me, the tax return known more colloquially as the "e-postcard" is potentially far more damming.   Tax exempt entities big and small can use it to certify that they grossed not more than 50 thousand that year. They don't give any specific financial information and in turn end up on a perfectly accessible, searchable list.

Here are some considerations that I also think are important. We've been around for two years, we were not formed a month ago. We have strategies and plans and products that we were working on before we chose the form 1023 EZ over 1023.  And I think that having our own body of work to rely on that we gladly share with the public can offset whatever "bad impression" the EZ form may give. First and foremost it empowered us to get started on the big ideas we'had but felt felt constrained by having somebody else's status. I don't think that the EZ form is something small non profits should fear- I think it may give them opportunities, options, energy and ideas. Everything else is speculation.


  1. Although, Guidestar, etc. do not indicate the application form used, the IRS is using different approval letters for form 1023-EZ filers. Successful public charity EZ applicants receive Form Letter 5436, rather than FL 947, which is sent to long-form 1023 filers. If a grantor asks for a copy of your 501(c)(3) letter, they will know which application form you filed. The IRS has issued assurances that contributors may rely on a determination letter issued to an EZ applicant to the same extent as a determination letter issued to a long-form 1023 applicant. For more information about Form 1023-EZ, visit my 1023-EZ FAQs at

    1. One interesting caveat though. "Letter 5436" is an annotation that appears at the very bottom of the page as if to de-emphasize its prominence. First "spoilers" of what EZ may contain before the form was released indicated it would prominently identify the form type itself. Not that it matters either way as the form itself is subject to the required public disclosure and may be reviewed by anyone for any purpose. Yes, IRS does instruct that the two types are functionally equivalent, but the concern is with practice, not theory- will grantors and estate attorneys trust an organization that wasn't vetted properly and is potentially at a greater risk due to revocation due to material misstatement - which is retroactive.