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Regulation and Compliance > Federal Regulation > IRS

Has It Become Too EZ to Gain Tax-Exempt Status?

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More and more organizations that apply to the IRS for tax-exempt status are being granted 501(c)(3) designations following introduction of the simplified Form 1023-EZ application, according to The Chronicle of Philanthropy.

In fiscal 2016, ended Sept. 30, 79,545 charitable and religious groups received the designation out of 84,588 that applied, about a 94% approval rate, compared with an 82% rate in 2010 before the EZ form was introduced.

The number of approvals has doubled each since July 2014 when the three-page EZ form was rolled out, The Chronicle said.

The IRS created Form 1023-EZ to help clear a backlog of applications that had resulted in groups waiting 18 months for their requests to be processed.

Organizations seeking to use the form must attest that they have less than $250,000 in assets and do not expect their gross annual receipts to exceed $50,000 within the next three years. Larger applicants continue to fill out the 23-page Form 1023.

It does not always works out this way, however.

When The Chronicle examined the latest informational Form 990 filings last year, it found that of some 100,000 organizations that had filed the EZ form, 1,888 reported revenue exceeding $50,000 within three years, and 765 of those reported revenue of more than $100,000.

In addition, 193 organizations claimed assets of more than $250,000, including 30 with assets in excess of $1 million.

The longer Form 1023 requires nonprofits to provide details about such things as their mission, organizational structure, employee compensation and fundraising activities.

The Chronicle noted that once a charity is established using Form 1023-EZ, no federal requirement says that it later must provide all of the additional documentation required by the long form, no matter how large it grows.

Some of the data, like financial information, will come through in the Form 990. Other parts, like the articles of incorporation and bylaws, will not.

Critics Weigh In

According to The Chronicle, critics of the EZ form warned that charities that would not normally qualify for a 501(c)(3) designation would improperly obtain tax-exempt status. They also worried that its use would make it more hard for the IRS to screen out tax cheats

It said another concern, raised by Terri Helge of Texas A&M School of Law, was that the IRS appeared to have approved many EZ filings from churches, which are not supposed to use the new form. In fact, churches do not have to ask for a written approval of charity status, but if they do they must use the longer Form 1023.

In its 2015 report to Congress, the Taxpayer Advocate Service excoriated the IRS, asserting among other things that 37% of the organizations in its sample of groups that had received exempt status using the EZ form did not satisfy the legal requirements for the designation.

“Rather than auditing its way out of the noncompliance it helped create, the IRS should reconsider its decision to use Form 1023-EZ in its present form,” the TAS said.

The report credited the IRS’ Tax Exempt and Government Entities division for “implementing a broader compliance risk framework, expected to unfold over several years, that entails defining and measuring compliance for the exempt organization population.”

How far this goes remains to be seen.

The Trump administration has proposed cutting IRS funding by $239 million in its 2018 budget proposal, the Center on Budget and Policy Priorities said last month. This would bring the total decline in funding since 2010 (after adjusting for inflation) to 21%.

— Check out Vanguard Offers Guidance to Donors Wary of Tax Reform on ThinkAdvisor.


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