Applying for Federal Income Tax Exemption?

Most organizations seeking exemption from federal income tax under Section 501(c)(3) are required to complete and submit Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, which is filed with the Internal Revenue Service (IRS). 

Form 1023 is very lengthy and requires information such as the purpose, information on the board/officers, compensation practices, etc.  The processing of Form 1023 by the IRS can take up to 180 days.  

Certain organizations, however, are eligible to file a much less cumbersome version—Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.  The instructions to Form 1023-EZ include an eligibility worksheet that organizations can use to determine if they can use this streamlined form.  A few requirements within the eligibility worksheet are:

• Projected annual gross receipts must not exceed $50,000 in any of the next three years.
• Actual annual gross receipts must not have exceeded $50,000 in any of the past three years.
• Total assets must not exceed $250,000.
• The organization must not be a foreign organization, LLC, successor to a for-profit entity, church, school or hospital.
• The organization must not request classification as a supporting organization or a private operating foundation.
• The organization must not maintain or plan to maintain one or more donor-advised funds.

Form 1023-EZ can only be electronically filed, and a user fee is required to process the application.  Previously, you could expect to be contacted within 90 days from the date you submit the application.  

Recently, the IRS Tax-Exempt and Government Entities Division issued a memorandum (IRM 7.20.9) updating its procedures for processing applications, including the following modifications to the time frame for which it assigns cases to review Form 1023-EZ:

• Cases are assigned to a tax examiner within 11 workdays from the submission date.
• A specialist will respond to a request for involvement within two workdays.
• Pre-determination review and tax examiner referral cases are assigned to a specialist within 15 workdays from the submission date.

For further information or with any questions, please contact a member of our Schneider Downs team.