Tuesday, August 26, 2014

Are new “EZ” charities second class?

By now you’ve likely heard of the new IRS Form 1023-EZ, a streamlined Application for Recognition of Tax Exemption that greatly reduces entry barriers for new, small charities. There are some potential benefits. There are some serious potential drawbacks.
The benefits are fairly obvious.
·       The application fee is only $400, instead of $850. The total form is only 2½ pages, rather than 12 pages with eight schedules and scores of pages of attachments.
·       The time necessary to complete the new EZ application is less than 10 percent of the time necessary to complete the regular application. Less time is spent on administrative and managerial tasks.
·       The organization still gets an IRS “determination letter” and in about three weeks instead of 12 to18 months.
·       The organization may receive tax-deductible contributions.

This is the good news.
But what are the drawbacks? They are more serious than you might imagine.
Some drawbacks are obvious. With the new simple form, nonprofits now may fail to think through business planning, program development or board development. Most charities that complete the full Form 1023 receive substantial guidance from an accountant, lawyer or other professional. As part of the startup process, these professionals usually advise on the overall regulations and wise business practices.
The major issue lurking is that highly respected attorneys in the field are advising private foundations and, by extension, other major funders and grantmakers NOT to respect or honor the EZ “determination letter.”
Private foundations are responsible for how their money is used, even after it leaves their possession, which is why their grant application process can be so cumbersome. Without the built-in safeguards of the “long form,” private foundations would want to complete an extensive, expenditure-responsibility-like, in-depth review of all activities of a grant applicant. This would be cost-prohibitive and fraught with risk, risk that was once borne by the IRS. Most private foundations cannot afford this kind of responsibility.
This effectively creates a “second class” of charities, those who took the “EZ” route, and those who took the time and energy to complete a full Form 1023.
The kicker? Once a charity takes the “EZ” route, they cannot undo it. They cannot go back and reapply with the full Form 1023. They may forever be second class.
Charities and donors should seek competent counsel when determining whether a novel process is as good as it seems. Most often, if it seems too good to be true, it probably is. 
Attorney Zac Kester provides generalist and strategic nonprofit legal and consulting services. He holds a Master of Law, a post-law school advanced degree, in which he studied the unique needs of tax-exempt nonprofit organizations. His legal and consulting career has focused on nonprofit organizations.

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