Why file 1023

All organizations are eligible to file using form , but why are some strictly prohibited from using the EZ? Often the circumstances revolve around the issue of charitable contribution. Form asks for proof of finances for certain types of organizations that have a substantial amount of money coming in a year. This is to protect the organization and the people within the organization of misuse of funds and corruption.

Organizations that are formed or conduct business outside of the United States are required to file the standard form due to tax risk issues. Organizations formed in foreign countries or that operate outside of the United States are normally not tax deductible as charitable contributions unless there is a treaty between that country and the United States, therefore, they must file the long form.

The long form will help protect investors and clear up tax related issues. Another reason that an organization may have to use the long form is because of its history with the IRS. You might be surprised to find this point listed as a con instead of as a pro. But we feel strongly about this point. Starting a successful nonprofit is NOT a do-it-yourself project.

It starts with a good business plan, but it has to be one that is compliant with state and federal law. Very few would-be social entrepreneurs are experts in the complexity of nonprofit tax law.

With the introduction of Form EZ, tens of thousands of new nonprofits have gotten started with virtually no understanding of the issues they face, or the significant liability and risk associated with non-compliance. It encourages fraud. Ever since there has been a federal tax code, con artists and hucksters have looked for ways to manipulate it for their benefit.

Many have attempted over the years to set up sham charities to take advantage of good-hearted people, only to pocket the money for themselves. The complete Form process at least provides a formidable barrier to fraud. Not so much with Form EZ. Most applications are computer-approved. That is not a good thing.

We mentioned the Taxpayer Advocates office at the beginning of this article. The idea of a simpler process originated with them, but they never intended for the process to become a rubber-stamp. It encourages unscrupulous companies. When Foundation Group opened its doors almost 24 years ago, we were the first specialty tax firm in the US to provide nonprofit formation services to new nonprofits nationwide.

Since that time, there have been others to come along, some good, and many not-so-good. We know because we regularly shop them. It amounts to malpractice and it takes advantage of the lack of understanding that many startup founders have regarding tax compliance. States have had to step into the gap. But given that over 50, nonprofits successfully used Form EZ in , that means that 47, were not thoroughly evaluated. As a result, the states have aggressively ramped up examinations and audits of small nonprofits out of concern that the IRS is not fulfilling its duty to oversee the nonprofit community.

It is negatively impacting grant funding opportunities for small nonprofits. Since Form EZ was released, many grant-making foundations have adopted policies against accepting grant applications from nonprofits that received c 3 status using the streamlined process.

They understand that these charities have not been sufficiently vetted at the federal level and will not fund them. We advise all of our clients that qualify to file Form EZ to use the standard full process if they even think they might seek grant funding at some point. The full Form process has been described as a gauntlet, but it serves a great purpose. As someone who generally despises red tape, I struggle a little bit saying that. But having worked with many thousands of clients over the years, the extended process and documentation necessitates a more deliberate approach.

It allows time for nonprofit founders to evaluate their business plan against the realities of tax compliance, and to tweak, trim, and adjust it to make it work most successfully. And since it requires a real IRS review, the applicant, donors, and grant-makers alike can have confidence that this organization is a legitimate c 3 charity. In fact, we use Form EZ with our clients that are well-suited for it. But even with those clients, we take the time to work with them to ensure their organization is established according to compliant, best-practice.

Understanding the extent of the problems associated with the streamlined process, however, will hopefully result in more small charities opting to invest in their future by taking the longer road.

He is registered with the IRS as an Enrolled Agent and specializes in c 3 and other tax exemption issues. Thanks in advance. Technically, you cannot convert an existing c 4 into a c 3. It would require a new organization to be formed as a c3, and the c4 wound down. Let us know if you need help. Definitely no! Changes to governance must be reported to the state on your annual corporate report, and to the IRS on your annual Form Never attempt to refile Form While the procedures for obtaining a determination letter by submitting a Form application may differ from those for obtaining a determination letter by submitting a Form —EZ applica- tion, grantors and contributors may rely on both determination letters to the same extent.

Sorry for the response delay. Rev Proc simply codifies that a determination letter issued via Form EZ is just as valid for IRS purposes as one issued via Form long version. Grant funding, especially from private foundations and companies, is a very different matter and highly subjective. Many such funders do not trust that EZ filers have been properly vetted by the IRS, despite have a letter of determination in tow.

We agree. In your comments, you say that by filing a EZ it may make it harder to obtain grant funding. How does anyone know how the non-profit filed for tax-exempt status whether the or EZ? Very helpful and easy to understand. My nonprofit gets approved by the IRS.

The non-profit is now a federal tax-exempt charity and donors can begin deducting their contributions to the nonprofit on their tax returns. Year four, because of successful fundraising gross receipts exceed seven figures. Year ten the nonprofits is operating as 10 million dollar charity.

The EZ Form seems to say get your tax-exempt status the easier, faster way and stay micro for three years and after three years grow as big as you can? Organized as an LLC. A successor to or controlled by any organization which has had its own tax-exempt status revoked because of terrorism activity or connections.

A successor to a for-profit entity. An organization that had c 3 status revoked for any reason other than failure to file Form for 3 consecutive years. An organization that had c 3 status revoked FOR failure to file Form for 3 consecutive years that is seeking retroactive reinstatement.

Seeking status as a private operating foundation. Purpose and Activity. These purpose exclusions include:. Nonprofits exclusively purposed to test consumer products for public safety. Accountable Care Organizations. Health Maintenance Organizations. Credit counseling purposes including budgeting, personal finance, financial literacy, mortgage foreclosure assistance, etc. Supporting organizations under section a 3 formed to support another specific c 3.

Charitable risk pools.