Q&A #83 – What happens if my organization files Form 1023-EZ and then exceeds $50,000 in revenue?
Question: I serve on the Board of Directors of a new organization that will soon be applying for 501(c)(3) status. The Board expects the organization to be small and is interested in applying for 501(c)(3) status using the Form 1023-EZ. However, we are concerned about what would happen if the organization unexpectedly receives donations of more than $50,000 in a year within the first three years. Could our 501(c)(3) status be revoked if that happens? Is there an opportunity to file the full Form 1023 later?
Answer: The decision whether to use the Form 1023-EZ instead of the full Form 1023 is a one-time choice, so it is important to choose wisely. There is neither a requirement nor an opportunity to supplement the Form 1023-EZ later with a full Form 1023 if your organization exceeds $50,000 in revenue in one of the first three years. In the worst-case scenario, it is possible the IRS could audit the organization and retroactively revoke 501(c)(3) status if your initial financial projections are deemed to be a “misstatement of material information.” However, this result is unlikely if you can show that your financial projections were reasonable and made in good faith at the time the application was submitted.
One of the main eligibility requirements (in fact, the first question on the IRS Form 1023-EZ Eligibility Worksheet) is that an organization cannot file Form 1023-EZ if it projects that annual gross receipts will exceed $50,000 in any of the 3 years following submission of the application. The use of the verb “project” is key, as the IRS understands that the future cannot be predicted with certainty. Thus, there is no automatic penalty for exceeding the initial projections, although exceeding $50,000 in revenue will likely require you to file Form 990-EZ or Form 990 instead of the Form 990-N.
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However, the IRS has retained discretion to penalize organizations that abuse this system. As stated in Revenue Procedure 2014-40, the IRS can retroactively revoke or modify an organization’s 501(c)(3) status if there has been a “misstatement of material information” in the Form 1023-EZ, including “an incorrect attestation as to … the organization's eligibility to file Form 1023-EZ.” Note also that the Form 1023-EZ attestations are made under penalties of perjury, so criminal sanctions could also apply in extreme cases.
Planning Tip – Before deciding whether to use the Form 1023-EZ, read through the full Form 1023 and attempt to answer all the applicable questions. You might find that the full Form 1023 involves less extra effort than you expected. The full Form 1023 (along with the Form 990) serves as an excellent outline of the main issues that most concern the IRS. Regardless of the application form you use, it is essential to be aware of the rules, best practices, and disclosures that will apply to the organization before starting on the process of forming a new nonprofit organization.
Therefore, as mentioned in Q&A #46, it is recommended to prepare a 3-year projection of revenue and expenses. While this information is not specifically required as part of the Form 1023-EZ, in the event the IRS audits the organization these documents will serve as strong evidence that your organization met the Form 1023-EZ eligibility criteria at the time you applied.
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You might also be interested in:
Q&A #118 – What happens if an organization misses the 27-month deadline to submit the Form 1023?
Q&A #46 – What are the downsides of using the Form 1023-EZ instead of the Form 1023?
