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Recent IRS Changes Help Non-Profits

In the last couple of years, the IRS has made some substantial changes that have simplified a variety of procedures applicable to non-profit organizations. Here is a brief summary of some of those changes.

New Simplified Application Process for Small Non-profits

On July 1, 2014, the IRS implemented a new, much shorter form – Form 1023-EZ – for small non-profit and religious organizations applying for federal 501(c)(3) tax exemption. The new Form 1023-EZ drastically simplifies the application process for qualifying organizations, reducing the new application to 3 electronic pages from the previous 26-page long form application. Form 1023-EZ is available to most charitable organizations with gross receipts of $50,000 or less and assets of $250,000 or less. The IRS’s purpose in introducing Form 1023-EZ was two-fold: to cut down on the paperwork for charitable organizations applying for tax-exempt status, and to drastically reduce the nearly 75,000 application backlog it was facing.

It appears that Form 1023-EZ's simplified and streamlined application process has been successful. Since July 1, 2014, approximately 55-56% of the tax exemption applications submitted to the IRS have been submitted on the new Form 1023-EZ. The number of backlogged applications and the time it takes the IRS to review the applications has also been greatly reduced. In December 2013, the average age of pending applications was more than one year. As of November 2014, that timeframe was reduced to around 150 days. The IRS was also able to reduce the inventory of applications pending more than 270 days by 91 percent. Applicants who submit Form 1023-EZ applications also generally receive determination letters within 60 days of their submission.  Reports indicate that in the first six months Form 1023-EZ was used, the IRS approved 18,169 of the 20,123 applications it received. More detailed information directly from the IRS regarding Form 1023-EZ can be found here

New Procedure Simplifies Tax-Exempt Status Reinstatement for Small Nonprofits

The IRS also issued a new regulation, Revenue Procedure 2014-11, in early 2014 that really helps certain small nonprofits that had their tax-exempt status revoked for failing to file tax returns for three consecutive years.

In 2006, a change in the law required nearly all tax-exempt organizations to file annual returns no matter how small their annual receipts were. If an organization failed to file tax returns for three consecutive years, the IRS automatically revoked its tax-exempt status. Unfortunately, many smaller organizations that were not previously required to file annual returns were unaware of the change. As a result, hundreds of thousands of entities did not file annual returns over the next three years and in turn had their tax-exempt statuses automatically revoked by the IRS.

This change in the law ended up being a major headache for the IRS, which did not have enough personnel to process all the re-applications it received from organizations that had their tax-exempt statuses revoked. Another major issue was whether the IRS should retroactively reinstate the revoked tax-exempt status once it approved the re-application. If the reinstated tax-exempt status was not applied retroactively, it would have created serious problems for the organizations like subjecting them to federal and state corporate income taxes for the period in which the tax-exempt status had lapsed.

In an effort to resolve these issues and streamline the reinstatement process, on January 2, 2014 the IRS issued Revenue Procedure 2014-11. Revenue Procedure 2014-11 allows organizations whose tax-exempt status was revoked to have their status retroactively reinstated. The retroactive reinstatement allows the organizations to avoid any gap in their tax-exempt status and the array of issues that would come with such a gap, such as having to pay taxes and file returns as a taxable organization for the period between revocation and reinstatement.

The most streamlined process in Revenue Procedure 2014-11 applies to “small” nonprofits, which are those eligible to file Form 990-EZ or Form 990-N. Organizations with annual gross receipts below $200,000 and total year-end asset value below $500,000 may file the Form 990-EZ, and organizations with annual receipts of $50,000 or less may file the Form 990-N. These small nonprofits can apply for retroactive reinstatement by filing a new Form 1023 in addition to Forms 990-EZ for the years it failed to file annual returns. If the nonprofit was eligible to file Form 990-N for any or all of the missed years, it does not have to file the Form(s) in arrears.

Significantly, unlike previous requirements, the organization does not need to provide a separate written submission demonstrating reasonable cause for failing to file. The IRS will also waive late filing penalties incurred for the Forms 990-EZ for the missed years. If an applicant wants to take advantage of not having to demonstrate reasonable cause, it must file for reinstatement within 15 months of its revocation. If it misses this 15-month deadline, it is required to prove that it had reasonable cause for failing to file returns in order to have its tax-exempt status retroactively restored. The full version of Revenue Procedure 2014-11 is available here.

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