Tax Exempt In 14 Days

Bob Angelone had witnessed people with autism suffer indignities, lose cases they should have won, and forfeit their basic rights because of a legal system that was not set up to meet their needs. He envisioned a nonprofit that would give them a fighting chance in court—but first, he needed to overcome an obstacle of his own.

The Vision

Navigating the legal system can be challenging for anyone, but for people with autism, those challenges can be insurmountable. Because the courts are ill-equipped to accommodate their unique needs, people on the autism spectrum are less likely than other citizens to receive the full protection of the law.

Frustrated by the inadequacy of the system, Bob got together with a group of like-minded people to devise a solution. They envisioned a nonprofit organization dedicated to advocating for people with autism and connecting them with attorneys who were specially trained to serve their needs. In 2014, the group established a board of directors and named their nonprofit Reform It Now, a name that reflected the urgency of their mission.

Excited that their vision was about to become a reality, Bob hired a competitor’s service to incorporate, set up records, and apply for tax exemption. But that’s where his vision ran into an obstacle of its own.

The Problem

When a month passed with no action, Bob tried calling to check on his project’s status and speed up the process. Yet he was unable to speak to a real person, let alone an account representative. Bob had heard that it could take anywhere from two to twelve months for the Internal Revenue Service (IRS) to process 501(c)(3) tax exemption paperwork, and he hadn’t even begun the application process. If it took several months just to get the paperwork started, Reform it Now’s mission could be put on hold for more than a year. Meanwhile, the people he wanted to help would continue to suffer the life-changing consequences of a legal system that wasn’t serving their needs. To Bob, that was unacceptable.

When he couldn’t get a response on his case, Bob turned to Harbor Compliance for help. “We couldn’t afford to wait for a company that provided very little on time and absolutely nothing as promised,” he said.

An "EZ" Solution

Bob called Harbor Compliance and told his story to an account manager. Within two days, Bob was reviewing Reform It Now’s mission, activities, and financial projections with a nonprofit compliance specialist. The specialist believed that Reform It Now was a great candidate for a streamlined tax exemption filing option, Form 1023-EZ, that had recently been released by the IRS. Form 1023-EZ was expected to reduce the backlog of tax exemption applications and dramatically speed processing times, but it was still so new that there was a lot of uncertainty and confusion in the nonprofit sector regarding its use. In fact, the IRS later determined that roughly two out of five applications submitted at the time were ineligible as submitted.¹

Yet Harbor Compliance had immediately seen the value of the 1023-EZ option for non-profit startups, and was a successful early adopter. “When a new filing procedure is released, we immediately review it to understand its complexities and determine if it is a viable option for our clients,” said Harbor Compliance Chief Executive Officer Mike Montali. “We believe our clients should have access to the most effective, expedient filing methods.”

The compliance specialist determined that Reform It Now was a good candidate for fast-track filing, and submitted a 1023-EZ application to the IRS the next day. Within a week, it was approved.

“We had our 501(c)(3) determination letter in our hands eight days before our original provider had scheduled our initial consultation,” Bob said. “Only Harbor Compliance could have achieved that.”

While streamlined tax exemption filing is an attractive option, it is not necessarily a simple one. “In addition to having basic eligibility requirements, Form 1023-EZ isn’t always a clear choice,” Mike noted. “There are reasons why an organization might still choose to file the original Form 1023. But our clients that have ultimately used 1023-EZ have been more than satisfied with the results, having received their determination letters in a matter of weeks.”

Getting To Work

With their 501(c)(3) established, Bob and his board could move on to the heart of their mission: providing training and support, making referrals, and helping people with autism assert their rights in and out of the courtroom. As an established nonprofit, the organization was able to spread the word, raise funds, and begin offering critical legal services to the autism community in a matter of months, not years.

In addition to fast results, Bob now has ready access to a dedicated account manager and compliance specialist whenever he has questions or needs assistance. “Reform It Now will be doing business with Harbor Compliance for a very long time,” he said. “They’re up-front, honest, forthright, and an absolute pleasure to work with at every step.”

The Takeaway

With an IRS tax exemption determination letter in hand, an organization:

• Is exempt from paying federal income tax.
• Can apply for state tax exemption.
• Can more easily raise funds.
• Can obtain government and private benefits reserved exclusively for 501(c)(3) nonprofits.

Filing for 501(c)(3) tax exemption can be a complex and lengthy process. Whether you’re contemplating applying through the traditional IRS Form 1023 or the streamlined 1023-EZ, you should have a thorough understanding of state and federal requirements as well as established organizational protocols and financial records. Our compliance specialists can help you navigate the process and determine whether your organization qualifies for streamlined filing.

1023 vs. 1023-Ez: Which Is Right for You?

Nonprofits have two options for filing for federal tax exempt status. Form 1023 is the traditional longform option, which has an IRS-projected processing time of roughly 6 months.

Introduced in July 2014, Form 1023-EZ is an attractive option for many nonprofits that meet its eligibility requirements, with processing times reduced from months to weeks. There are 29 specific requirements, but some of the most basic qualifications include:

• Having income of less than $50,000 for the past 3 years, and expecting income of less than $50,000 for the next 3 years.
• Having assets of less than $250,000.
• Being founded and headquartered in the U.S.

In addition, the following organizations are ineligible to apply with 1023-EZ:

• LLCs, for-profit entities, and successors to for-profit entities.
• Churches, schools, and hospitals.

Unfortunately, despite being much shorter than the full IRS Form 1023, the 1023-EZ option has proven far from easy. In fact, the IRS found that in 2014, the year that it introduced the 1023-EZ, early 40 percent of 1023-EZ applications submitted to the IRS were erroneously approved.² Those organizations were subject to auditing for possible recall of their tax exempt status. In fact, IRS audits of tax exempt organizations increased by nine times in the wake of the introduction of Form 1023-EZ due to mistakes by underinformed filers.³

Our compliance specialists will ensure that your tax exempt application is correct and that your tax exempt status will not be endangered later.

^{1, 2, 3} IRS Office of the Taxpayer Advocate, 2015 Annual Report to Congress - Most Serious Problem #3, January 6, 2016, https://taxpayeradvocate.irs.gov/Media/Default/Documents/2015ARC/ARC15_Volume1_MSP_03_Form-1023-EZ.pdf