In July the IRS introduced Form 1023-EZ, a streamlined application for federal recognition as a 501(c)(3) public charity. The new form was three pages long, was to be filed electronically, and required no narrative description of the applicant’s activities, no proposed budget, no governance documents, and no founding board minutes. The full Form 1023, which the new form did not replace but ran alongside, remained twenty-six pages plus required schedules and supporting documentation.
The 1023-EZ was available to organizations that expected gross receipts under $50,000 in each of the next three years and had assets under $250,000. The IRS estimated that this would cover roughly seventy percent of all new 501(c)(3) applications.
Why the IRS introduced it
The proximate driver was the application backlog. After the 2013 controversy, the determinations office was processing applications more slowly than ever, and the queue had reached roughly 60,000 pending cases. The 1023-EZ was, in effect, an admission that the agency could no longer perform substantive review on the volume of incoming applications and would instead rely on attestation.
The agency’s public framing emphasized administrative efficiency and reduced burden on small applicants. The estimated processing time for a 1023-EZ application was two to four weeks, compared to nine to twelve months for a full 1023. By the end of the first year, the streamlined form was being used in about two-thirds of all new applications.
Approval rates climbed past 95 percent
The most controversial number in the program’s history was its approval rate. Internal Revenue Service data published in 2015 showed that 1023-EZ applications were being approved at a rate exceeding 95 percent. A study by the National Taxpayer Advocate the following year, which sampled approved applications and reviewed the underlying state-level corporate filings, found that a meaningful share of approved organizations did not in fact meet the legal requirements for 501(c)(3) status — some had governance structures that violated the inurement prohibition, others had purposes that were not exclusively charitable.
The Taxpayer Advocate’s recommendation was that the IRS resume requiring at least summary information about activities and governance for 1023-EZ applicants. The agency declined.
The downstream effect on the sector
Practitioners in the nonprofit attorney bar reported a noticeable shift in client composition after 2014. Where previously most new 501(c)(3) clients arrived having already absorbed the discipline of preparing a 1023, post-1023-EZ clients increasingly arrived having received a determination letter without having engaged with the substantive requirements of exemption. Compliance work moved upstream into the operational phase of the organization, often after problems had already developed.
State attorneys general and grant-making foundations responded by raising their own due-diligence requirements. Many large funders began requiring applicants to provide governance documents and demonstrate board independence as a condition of grant consideration — substituting private review for the federal review the IRS had foregone.