IRS Releases Short-Form 1023-EZ, Questions Remain

IRS Releases Short-Form 1023-EZ, Questions Remain

Article posted in General on 2 July 2014| comments
audience: National Publication, Dennis Walsh, CPA | last updated: 7 July 2014
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Summary

After many months, the IRS has now released a simplified version of the form 1023, known as the 1023-EZ. This form is meant to streamline the process by which smaller non-profits seek exempt status.

From IRS Newswire - The Internal Revenue Service today introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

"This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well," said IRS Commissioner John Koskinen.  The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work."

The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023.  Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form.  Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.  "Previously, all of these groups went through the same lengthy application process -- regardless of size," Koskinen said.

"It didn't matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.”

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months.

Following feedback this spring from the tax community and those working with charitable groups, the IRS refined the 1023-EZ proposal for today's announcement, including revising the $50,000 gross receipts threshold down from an earlier figure of $200,000.

"We believe that many small organizations will be able to complete this form without creating major compliance risks," Koskinen said.  "Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do."

The new EZ form must be filed online.  The instructions include an eligibility checklist that organizations must complete before filing the form.  The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted.  Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted today on IRS.gov.

There are more than a million 501(c)(3) organizations recognized by the IRS.

Editorial comment - This is ostensibly good news for those contemplating a new organization, but it’s important to consider some of the implications to the charitable sector, government agencies, and to the public.

The last sentence of the announcement is telling -– currently more than 1,000,000 recognized charitable organizations.  And this does not include the roughly one-half of all churches that choose not to seek recognition of exempt status. This translates into approximately 1 charitable nonprofit for every 300 citizens.

Where is the accompanying appropriation for resources needed to monitor a likely surge in new organizations, not to mention all of the existing charities?  At last count, in North Carolina we have 7 IRS EO revenue agents to monitor more than 40,000 exempt organizations.  The IRS announcement seems to suggest that this can be accomplished from time saved by the Covington, Kentucky agents processing fewer of the longer Forms 1023.  Really?

And what impact will this have on state agencies charged with monitoring nonprofit organizations, such as attorney general offices and charitable solicitation agencies?  Do they have the resources to oversee the activities of all of these new organizations?  Who’s going to be looking out for donors and consumers at the state level?

Turning to the charitable sector itself, do we really need so many organizations?  It may sound harsh, but the long Form 1023 is the best deterrent we have to duplicative and unnecessary startups.  It’s going to be more difficult to convince founders to take their program to an existing organization with compatible exempt purposes when forming a separate organization is relatively easy and inexpensive.

The new Form 1023-EZ will no doubt be prepared in the majority of cases without professional assistance, and will likely feed a stampede to the perceived pot of gold waiting for every new 501(c)(3) startup, increase competition for the dwindling supply of engaged board members, and invite fraud and abuse as a result of reduced public transparency.

For a significant percentage of new organizations, in my experience, the narrative statement of activities and 3-year budget required with Form 1023 is the first and last expression of strategic and budget objectives the organization will ever document.  This information is not required with Form 1023-EZ.

To be eligible to file the new Form 1023-EZ, an organization will also satisfy the criteria to file the annual Form 990-N “e-Postcard,” which unlike Form 990-EZ and Form 990 provides no information about finances or activities.  As a result, the majority of new organizations will never be required to tell the public about their activities, either planned or actual, unless they grow to a size where a Form 990-EZ or Form 990 is required.  One-time information about what the organization intends to do, submitted under penalties of perjury, is better than no information available to the public at all.

In my opinion, implementing the Form 1023-EZ is not the solution to clearing out the Form 1023 application backlog and erasing the memory of IRS abuses in recent years.  It’s a classic case of the pendulum swinging too far in the other direction and there will be consequences.

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