The IRS Form 1023 EZ makes it extremely easy and less expensive for applicants to apply to the IRS for recognition as a 501(c)(3) tax exempt nonprofit.
While serving on the IRS Advisory Committee on Tax Exempt and Government Entities (ACT), we reviewed the prospective IRS Form 1023 EZ and its online application process. Some of our responses included:
- Given the Congressional attitude toward the IRS, increasing funding cuts, and the movement to use the Internet and its website, this online form was an appropriate response and consistent with our recommendations on the IRS use of web based technology.
- People will game the system. Nonprofits, which would not be recognized as tax-exempt using the IRS Form 1023, will be erroneously recognized as tax exempt. What will be the impact to the public, donors, and others? When that happens, will the IRS have the resources and the will to address the problem? The IRS Taxpayer Advocate subsequently has confirmed this is a substantive problem in its reports to the IRS.
- Applicants will be less likely to seek appropriate legal advice before starting a nonprofit. Yet this is precisely the time during which prospective applicants will benefit the most from having an experienced and knowledgeable legal counsel advise them. The IRS Form 1023 helps them to learn about IRS legal requirements and, if done properly, to create a business plan and initial case statement as an integral part of the application.
But the ease of the IRS Form 1023 EZ application process begs the question of a more fundamental issue:
Should an applicant start a nonprofit?
It is among the first questions I will ask a new client during a consultation about starting a nonprofit. Answering it engenders a substantive and revealing discussion and enables clients to learn more about what it means to run a nonprofit organization and whether there are better ways to meet their goals.
My experience is clients always benefit from our discussion.
For another take on this issue, read the blog post “Don’t Do It: Don’t Start a Nonprofit”.