New “EZ” Charities are Second Class?

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By Zachary S. Kester, JD, LLM, CFRM, at Charitable Allies

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 wonderful potential benefits. There are some rather grave potential drawbacks.

The benefits are fairly obvious. The application fee is only $400, instead of $850. The Form itself is only 2½ pages total rather than 12 pages with 8 schedules and scores of pages of attachments. The time necessary to complete the new EZ Application is less than 10% 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 3 weeks instead of 12-18 months. The organization may receive tax-deductible contributions. Seems like nothing but good, right?

Not really. The drawbacks are more serious than you might imagine.

Some drawbacks are obvious. Charities now do not have to think through business planning, program development, or board development. Most charities who complete the full Form 1023 receive substantial guidance from an accountant, lawyer, or other professional. These professionals usually advise as part of the startup process regarding the care and feeding of the charity.

This care and feeding includes:

  • Annual IRS, Secretary of State, Department of Revenue filings;
  • HR, worker’s compensation and unemployment compliance;
  • Nonprofit and bulk postage applications;
  • Charitable solicitation compliance;
  • Charitable gaming compliance;
  • Donation receipts;
  • Fundraising disclaimers;
  • Board and Officer duties; and
  • Much more.

Receiving this kind of advice is par for the course for a startup charity. Most people do not realize that entering the charitable world is entering a highly regulated environment. It’s not “easy.”

The EZ Application is also ripe for abuse by the nefarious sort.

But the major issue lurking underneath 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 the grant application process can be so cumbersome. Because of the ease of the new EZ Application, private foundations would have 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, a 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 will 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.

With highly experienced legal, accounting and training personnel, Charitable Allies provides all manner of legal and educational services for boards, officers management and staff of myriad charities throughout the sector. From basic one-time questions about a single matter to training for boards and officers to complex reorganization or merger of activities, Charitable Allies is your go-to cost-effective provider of legal services to nonprofit organizations.