Commentary: The New 1023ez Nonprofit Filing Form

It just got a whole lot easier to start a nonprofit organization.

The 1023 is the IRS filing form needed for an organization to gain tax-exempt status. It’s 26 pages long, requires a slew of attachments, has an $850 filing fee, and created an entire industry of consultants and firms that charge thousands of dollars to help you muddle through it. The kicker is, once you send it in, you might have to wait a year or two to hear back from the IRS if you’ve been accepted.

That all changed about a month ago with the release of the 1023ez. The form is just three pages, costs $400, and gives the same tax-exempt status. There are some caveats: you have to answer a 26-question worksheet, generate less than $50,000 in revenue and hold less than $250,000 in assets. Even with these guidelines, the IRS states that about 70 percent of their applicants would qualify under the 1023ez.

This is one the biggest changes to hit the sector in ages. There has also been a flood of criticism about it, mainly around increased competition and a fear that bad actors will take advantage of this change and scam people out of money.

But there are many limits to what this class of organization can do to limit the potential damage. By default, these groups are small and have limited resources and abilities. Lean operations that are effective should be encouraged.

Perfect for Pilots

In my experience in the sector, reviewing nonprofit business plans and helping start organizations from scratch, I’ve seen dozens of budgets that are much higher than $50,000, but these budgets focused on expenses, with little to no recognized plan for getting revenue to pay for what they want to do.

They are expecting the Foundation Fairy to bestow $250,000 or more on them, without any experience, evidence, or outcomes.

What the 1023ez is excellent for is testing an idea out. It’s a great tool for a lean startup. If you can’t run a successful pilot of your program for under $50,000, no one is going to give you 10 times that for a city-wide initiative. Many fiscal sponsors won’t even take organizations that generate under $100,000 of revenue, making the 1023ez the best and most practical vehicle for testing new ideas. The 1023ez gives you enough room to really test out your ideas without committing to something you can’t manage or getting stuck in an obligation that you can’t fulfill. If you are lucky enough to grow past your $50,000 ceiling, you will have the time to properly file the full 1023 and wait for recognition, or reach out to a fiscal sponsor or even another nonprofit for a merger.

Even if you are an existing organization, using a 1023ez could be a useful way to spin off small projects or experiment in faster ways and even fail in a safe space that won’t harm your main brand.

How this will affect everyone else

There are likely two issues you will have to worry about: one is the cost to insure your program, and the other is increased audits and oversight.

Insurers have the ability to rely on the IRS vetting new organizations’ competency via the full 1023, but now that anyone with a few hundred dollars and the time to fill out a three-page online form can have a nonprofit, I predict that the cost to insure 1023ez programs may go up and in fact may increase the overall cost of directors and officers liability insurance across the board, so that insurance companies can spread out their risk and stay profitable. The increased risk of penalties, fraud and general incompetence will only drive up the cost of insurance for the sector.

There has been a lot of political pressure on the the IRS to speed up the review process, and insinuations that IRS “gatekeepers” are slowing down certain applications. Now that the IRS has made it easier to get your tax-exempt status, essentially trusting you to be a good and responsible, I predict that they will increase the enforcement and audit side of their work, meaning more audits. This is long-game theory. People were complaining that their nonprofit was being held up for political reasons, even if there was a legitimate reason that the group should not have nonprofit status. But now the IRS will let you in, let you sign the documents, then charge you higher penalties when they catch fraud. This could mean an increase in audits and IRS oversight over the next few years.

Small and Smart

Keeping a group under $50,000 a year could be an effective strategy. You get to file the 1023ez, file a postcard 990N, and stay under the audit window. Mostly it means staying an all-volunteer organization or maybe hiring a part-timer. Crossing the $50,000 mark means refiling, needing a proper 990, and more, which leads to more overhead costs like bookkeeping and accounting.

If it looks like you are going to graduate out of the 1023ez, you might want to consider merging with an existing like-missioned organization that can take your organization to scale without you having to jump through more regulatory hurdles.

Tivoni Devor writes a monthly column on the ins and outs of nonprofit sector for Generocity.org.

Tivoni Devor, MBA, has spent his entire career in the nonprofit sector. While working for diverse institutions in many roles, Tivoni has often found himself developing earned revenue models and designing strategic partnerships. Tivoni currently works as the Manager of Partnerships and Outreach at the Urban Affairs Coalition, where he helps social entrepreneurs leverage fiscal sponsorship to jumpstart their nonprofit endeavors. Tivoni Devor lives in Point Breeze with his wife Jennifer and daughter Ava. The thoughts and content of his columns are his and his alone. You can follow him on Twitter: @tivonidevor.