IRS Proposes (Very) Short-Form Application for Charitable Tax Exemption

 

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The IRS has issued a preliminary draft of a dramatically shorter application for tax exemption of charitable organizations. If this draft is eventually approved by the IRS and made available for public use, it would greatly simplify the process for gaining IRS recognition of tax exempt status for many charitable organizations.

The Current System

Currently, any charitable organization seeking tax exemption under IRC § 501(c)(3), other than very small organizations with gross receipts of less than $5,000 per year and other than churches, synagogues, temples, and mosques, must file Form 1023 with the IRS. The paper version of that form runs to 26 pages, with several schedules required, and is accompanied by 36 pages of instructions. Because of the complexity of the current application, many charitable organizations require the assistance of a lawyer, accountant, or other advisor to complete and file the form. In September 2013, the IRS issued an interactive version of Form 1023 that allows the form to be completed on a computer and includes auto-calculated fields, help buttons, and links to relevant information. The interactive Form 1023 I, which is thirteen pages, still must be printed and mailed just like the paper version.

When filed, these applications are processed by an IRS unit in Cincinnati. That office separates applications into three groups—those that can be approved immediately, those that need minor additional information to be approved, and those that require further development. Those that fall into the first two groups typically receive a letter confirming tax-exempt status or a request for additional information within 90 days of the date the IRS acknowledges receipt of the application. There is a backlog of thousands of applications in the third group that delays the tax-exempt status of these applicants. According to the IRS website, as of April, 2014, the average filing date of applications pending in this third group is July 2013. It typically takes over six months for an application in the third group to even be assigned to an agent to begin the process of further developing the information necessary to process the application. For a relatively small number of applications that raise complex issues, it is not uncommon for the process to take more than three years from beginning to end.

The Proposed Short Form

The proposed Form 1023 EZ is a three-page form, mostly consisting of boxes to be checked. The short form is accompanied by 17 pages of instructions that contain eligibility requirements for the streamlined application. The organization may not have assets in excess of $500,000, nor may it have or expect to receive annual gross receipts in excess of $200,000. While there are several categories of charitable organizations that would not be able to use the proposed Form 1023 EZ, it would dramatically reduce the time required to prepare and process applications for tax exemption by those smaller organizations that would qualify. Analysts have determined that, under the current system, 70% of applications fall into the first two categories described above and that use of the proposed form could increase to 90% the portion of applications that could be quickly disposed of by the Cincinnati processing office. That would mean that no more than 8,000 applications (that is, 10% of the approximately 80,000 applications that are filed every year) would need to be assigned to an agent for review and possible further development. Commentators anticipate further revisions to the form before it would be available for public use. For example, the draft form does not specify the user’s fee (which is currently $850 for organizations with anticipated gross receipts in excess of $10,000 annually and $400 for smaller organizations). Some commentators anticipate that the form will be transformed into an online, purely electronic form, and others view the streamlined form as a first step toward a system where nonprofit charitable organizations merely “register” with the IRS, attesting to their own qualification without any review in advance by the IRS.

While it is not clear when the Form 1023 EZ will be available for public use, the advisory community anticipates that that could happen before the end of summer 2014.

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