The IRS recently revised Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, as an online fill-in form that must be filed electronically. You can find an overview of the mechanics of e-filing Form 1023 here. For lawyers and tax practitioners, you may also want to review Rev. Proc. 2020-8.
As of January 31, 2020, a Form 1023 must be submitted electronically online at Pay.gov. However, the IRS has provided a 90-day grace period during which it will continue to accept paper versions of Form 1023 (Rev. 12-2017). For nonprofits that have been working on the paper copy and prefer not to file the electronic version, they will have until around April 30 to complete the paper filing.
Changes from the most recent paper Form 1023
The revised electronic Form 1023 (preview available here) has some significant differences from its paper counterpart.
Online registraiton and payment. An applicant must register to complete the Form 1023 and pay the application/user fee (currently, $600) on Pay.gov.
NTEE Code. The Form 1023 now requires the applicant to enter a National Taxonomy of Exempt Entities (NTEE) code best describing the organization. The list of NTEE codes is provided in Appendix D to the newly revised Instructions for Form 1023.
OFAC compliance. The Form 1023 requests information related to the applicant’s compliance with the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury:
- When you make grants, loans, or other distributions to foreign organizations, will you check the OFAC List of Specially Designated Nationals and Blocked Persons for names of individuals and entities with whom you are dealing to determine if they are included on the list? Describe any other practices you will engage in to ensure that foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities.
- Will you comply with all United States statutes, executive orders, and regulations that restrict or prohibit U.S. persons from engaging in transactions and dealings with designated countries, entities, or individuals, or otherwise engaging in activities in violation of economic sanctions administered by OFAC?
- Will you acquire from OFAC the appropriate license and registration where necessary?
501(h) election. Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation, is no longer submitted with Form 1023. It must be separately mailed to the IRS. We have strongly recommended this filing for the vast majority of public charity applicants. See Starting a Nonprofit: The Value of Making the 501(h) Lobbying Election.
Some problems with the online Form 1023
The online Form 1023 will not permit the person completing the application to move to the next page of the Form until they have completed all of the questions on the current page, including entering required descriptions or explanations or completing required schedules. Admittedly, this may help in assuring completion of all required items on the Form. However, this may also make it much more burdensome for those who do not have all of the information required in the precise order in which the Form is structured. One strategy to address this problem is to first complete a draft of the filing on paper (see this preview Form 1023) then transfer such information to the online filing.
- For professional tax return preparers, there does not appear to be a way to label a saved Form 1023 so it may be difficult to identify which Form 1023 belongs to which applicant if the professional has several Forms 1023 saved.
The online Form 1023 requires the signature of an officer, director, or trustee. The Instructions provide that an “other official” may also sign the Form 1023, but not the authorized representative with power of attorney if they are not also an officer, director, trustee, or other official who is authorized to sign the application. The term other official is more clouded because the Instructions further provide that “[t]he person signing Form 1023 TIP must be listed as an officer, director, or trustee within the first five entries of Part I, line 9.”
- For professional tax return preparers, the signature requirement may be impractical to meet without allowing a client applicant to access the professional’s account to view and e-sign the document.
The Form 1023 includes questions in which a yes-or-no-type response may not require a supplemental response, but to which the applicant may want to provide additional pertinent information. Because a comment text box will not open up to allow such entries, the applicant must include such additional information in the supplemental attachment that must be attached as one pdf file.
Applying for Section 501(c)(3) Status (IRS – Stay Exempt)
Exempt Organization Sample Questions Compensation and Related Party Transactions (IRS) – Forms 1023 may be assigned to Exempt Organizations specialists for review. If additional information is necessary to make a determination, a specialist will contact the organization for the information. This webpage includes a list of questions that might be asked on this topic.