Monday, February 2, 2015

When the 1023EZ may not work for you

Ever since the IRS released the new short form application for filing for charitable status, my inbox has overflowed with requests to help people file it.

The first thing I have to say to all of you is:


There are some specific areas that may require you to file the long form application instead, and there are some implied drawbacks.

The two areas that sentence applies to are organizations already incorporated as LLCs and organizations that envision grants as a primary income stream.

Part II of the instructions specifically prohibits LLCs from filing using a 1023EZ, although they can apply using the long form. Sole proprietorships, partnerships and "loosely affiliated groups of individuals" are excluded as well.

Of perhaps greater importance to most of the people contacting me is the $50,000 annual revenue restriction for the first three years

For organizations hoping to access grant funding, the 1023EZ simply doesn't indicate or require enough basic verified data that is available in the public domain to satisfy the background checks required by most grantors or institutional funding sources. (The EZ does not require any sort of verification of your claim that you will not exceed the 50K threshold, such as the financial projection worksheet in the standard 1023.)  Just remember that when you file, you are "attesting", i.e. making a legally binding statement that you are not going to exceed the revenue cap.

While it is probably true that nearly all new organizations will not exceed the revenue cap in their first three years, and thus are only required to file the 990-N (postcard) report, that document is not accepted by grantors, again because it doesn't require or report enough data to make a determination about your effectiveness or financial integrity.

If you exceed the cap and have filed a long form 1023, no  harm, no foul. If you have applied and been approved using the EZ, the IRS might have a problem, or more accurately, you might have a problem with them.

There are also certain mission categories that require more information to be submitted to the IRS than is contained in the short form application. These include, but are not limited to, charitable risk pools, credit or financial education or assistance, schools, colleges and universities, organizations with donor advised funds and churches or church associations.

Having said that, some organizations are quite well-qualified to use the short form. One that comes to mind is a group that wanted to provide cross-translated children's books to ESL students, i.e. have the child's native language story books contain the English translation displayed under the native language text, and make those books available as videos or PowerPoint presentations to any bona fide community organization, library or educational institution that needed them. The translations were all being done by qualified volunteers, so their initial capital needs were quite low.

Of course after the three year qualifying period, should your organization suddenly come into significant funding, you can file the long form 990 and provide the appropriate reporting to satisfy the IRS as well as donors.

I do provide an initial feasibility study that can help you decide if your organization should file the EZ, as well as a review of your prospects for survival through those first critical three years.  For more information visit and click on the consulting link.

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