New Form 1023 Released
The newly revised Form 1023 (PDF), the exemption application form for section 501(c)(3) organizations, is now available on the IRS website. Also available are the instructions (PDF) for filling out the form and a list of frequently asked questions about changes in the new form. According to the IRS press release, the new form will “streamline the application process for the organizations and will help the IRS spot potentially abusive charities.”

The IRS plans to do extensive outreach to educate the sector about the new form and will accept both the old and the new Form 1023 during a six-month transition period. Applicants can use either the old or new form from November 2004 – April 30, 2005. Beginning on May 1, 2005 the new form must be used.

The new Form 1023 contains new and more specific questions that the IRS hopes will expedite the application process by reducing the need for follow-up correspondence. One goal of the revised form and instructions is to educate applicants about requirements and good practices for charities. Marvin Friedlander of the IRS Exempt Organizations office said that the new areas of focus, including executive compensation and related party transactions, will also be reflected in the Form 990 revision that will come out in the next year or two. The new Form 1023 will help ensure that an organization is set up correctly, and the annual Form 990 will provide a check to see whether the organization followed its plan.

Several separate forms have been incorporated into the new Form 1023, including
Form 8718, which is used for filing the user fee for an exempt organization determination letter. Form 5768, for making the 501(h) election to make expenditures to influence legislation, will also now be part of the Form 1023 package. The revised form also contains a checklist that must be filed with the application, and the instructions now include a glossary of terms used and a sample conflict of interest policy.

Some of the more significant changes from the existing Form 1023 track the good governance and accountability proposals that have been discussed in the sector recently. Below is a summary of the more important changes and additions.

Compensation
Expanded questions in Part V about the compensation of officers, directors, trustees, now include the five highest compensated employees and independent contractors as well. This expanded scope tracks more closely the information requested in the Form 990 and should help new organizations to plan ahead for this type of disclosure. New questions about conflicts of interest policies, discretionary bonuses and whether transactions with officers, employees and contractors are negotiated at arm’s length for no more than fair market value will also heighten awareness of these key governance responsibilities for new organizations. Independent Sector comments to the IRS in November 2002 recommended asking for this type of information about key employees as defined in Form 990.

This section recommends certain good compensation practices, but does not require their adoption in order to obtain exemption. Other questions include whether the applicant organization has adopted a conflict of interest policy consistent with a sample policy that is provided in the instructions; whether compensation will include discretionary bonuses; and if the organization will enter into any purchases, leases, contracts, loans or other transactions with any officers, directors, highest compensated employees, or highest compensated independent contractors, how the organization will ensure that the terms will be negotiated at arm’s length and for no more than fair market value.

Specific Activities
Part VIII, Information About Specific Activities, asks the applicant organization to check all the fundraising programs it will conduct, including: mail solicitation, email solicitation, phone solicitations, accept donations on a website, and vehicle, boat, plane, or similar donations. This level of detail is new.

Bingo and fundraising questions are also expanded, more specific, and now ask about what states and local jurisdictions in which these activities are conducted There is also a new question about whether the organization offers contributors a donor advised fund.

New questions in Part VIII also asks if the organization owns intellectual property, and whether the organization will accept contributions of real property, conservation easements, closely held securities, intellectual property, works of music or art; royalties; boats, planes, or other vehicles, or collectibles of any type. It asks for a description of each type of contribution, any conditions imposed by the donor on the contribution, and any agreements with the donor regarding the contribution.

Questions about specific activities also request more detailed information on whether the organization will operate in a foreign country, and if the organization will make grants, loans or other distributions to foreign organizations, the names of the foreign organizations, the countries in which they operate, and whether the applicant organization will make pre-grant inquires or use any additional procedures to ensure that the distributions are used in furtherance of the organization’s exempt purpose.

There are also more detailed questions about whether and how the organization will make grants, loans or other distributions to other organizations.

Last Updated: November 5, 2004