IRS to allow charities to e-file applications for tax-exempt status

The Internal Revenue Service announced that it is going to let charities and nonprofits electronically apply for tax-exempt status with a newly revised Form 1023, starting later this month.

The move comes after complaints that applications for tax-exempt status have been taking too long. In 2013, a scandal erupted over applications for Section 501(c)4 tax-exempt status from social welfare organizations, after a Treasury Inspector General for Tax Administration report found the IRS was holding up applications from conservative Tea Party groups.

The new e-filed form, however, is aimed at charities applying under a different section of the Tax Code, 501(c)3. To help charities apply for Section 501(c)(3) tax-exempt status, the IRS has revised Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and its instructions.

The IRS anticipates that allowing the Form 1023 to be filed electronically will yield benefits similar to when Form 1023-EZ went online in 2014. IRS statistics indicate the 1023-EZ improved application processing time for both the Form 1023 and 1023-EZ while maintaining similar approval and rejection rates between the two forms.

“Filing electronically reduces errors, and we believe this will help provide a smoother application process for those seeking tax exemption,” said Tammy Ripperda, commissioner of the IRS Tax Exempt and Government Entities division, in a statement Friday. “As we’ve seen with the 1023-EZ, we believe this change will help with application processing time and help with our wider efforts to improve our work with the tax-exempt community.”

Starting Jan. 31, 2020, applications for recognition of exemption on Form 1023 will need to be submitted electronically online at www.pay.gov. The IRS will provide a 90-day grace period during which it will continue to accept paper versions of Form 1023 (Rev. 12-2017).

The required user fee for Form 1023 will remain $600 this year. Applicants can pay the fee through www.pay.gov when submitting the form. Payment can be made directly from a bank account or by credit or debit card.

To receive updates about Form 1023, practitioners can subscribe to Exempt Organizations Update, a free e-Newsletter from the IRS Exempt Organizations’ office. More information about how to apply for IRS recognition of tax-exempt status is available via:

• Applying for Tax-Exempt Status on IRS.gov;
• Form 1023 Electronic Filing Overview presentation on StayExempt.irs.gov; and
• Applying for 501(c)(3) Status course on StayExempt.irs.gov.

The IRS also issued on Friday Revenue Procedure 2020-08, which makes specific modifications to Rev. Proc. 2020-5 to allow for the new electronic submission process of the Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. It also provides a 90-day transition relief period, during which paper Form 1023 applications will be accepted. The revenue procedure also modifies language related to the submission of written requests of Canadian charities to be listed on the Tax Exempt Organizations Search database or for a determination on private foundation status.

Natalia Bratslavsky/Adobe