Charities and nonprofits…did you know that you must electronically apply for tax-exempt status? The Internal Revenue Service (IRS) has released a newly revised form 1023 that will allow organizations to e-file applications for tax exempt status. Here’s what you need to know.

Tax exempt status

Obtaining federal tax-exemption status is a critical step for nonprofits. Your tax exempt status provides many benefits for your organization, depending on the type of nonprofit, including:

• Federal income tax exemption
• Tax deductible contributions (for 501(c)(3) organizations)
• Potential exemption from state income, sales and employment taxes
• Reduced postal rates
• Exemption from federal unemployment tax (for 501(c)(3) organizations)
• Tax exempt financing

How do you apply for tax exempt status?

Nonprofits must apply for tax exempt status through IRS form 1023. You may be eligible to file form 1023-EZ, which is a streamlined version of the application. To find out if you’re eligible to file this version, you must complete the form 1023-EZ eligibility worksheet. The Organization must register at www.pay.gov in order to submit the completed Form 1023 and supporting materials.

Historically, nonprofits have submitted the form 1023 via paper, whereas form 1023-EZ can be submitted electronically (due to a change in 2014).

Why the change?

After complaints that tax-exempt application process was taking too long, the IRS decided to change the submission process. Allowing organizations to e-file both form 1023 and 1023-EZ reduces errors and provides a smoother application process for achieving tax exempt status. “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.” said Tammy Ripperda, commissioner of the IRS Tax Exempt and Government Entities Division.

What is the effective date?

Starting January 31, 2020, applications for recognition of exemption on Form 1023 must be submitted electronically at www.pay.gov. The IRS will continue to accept paper versions of 1023 provided that the Form 1023 is postmarked within the 90 day transition relief period from the effective date.

What is the fee?

When submitting form 1023 or 1023-EZ, organizations must pay the required user fee ranging from $275 to $2,500 (which can be paid through www.pay.gov)

Need assistance with your filing? We can help- reach out to our team.