TAS Report Slams "1023-EZ" Results

TAS Report Slams "1023-EZ" Results

Article posted in Forms and Instructions on 12 January 2016| 3 comments
audience: National Publication, Dennis Walsh, CPA | last updated: 13 January 2016
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Summary

Dennis Walsh analyzes a recent report and findings on the 1023 EZ, and it isn't good news.

OpEd By: Dennis Walsh, CPA

When the IRS released a short-form application for recognition of tax exemption in July 2014, like many others I opined that this was not the solution to clearing out the Form 1023 application backlog and erasing the memory of recent IRS abuses.  I felt then and now that it is an example of the pendulum swinging too far in the other direction and that there would be consequences.

But amid strong objections from the National Council of Nonprofits and other leading nonprofit advocates and stakeholders, the IRS decided to address its applications backlog by introducing a streamlined version of the application, Form 1023-EZ.

Unlike Form 1023, the 3-page online 1023-EZ does not require any narrative of the organization’s activities, any financial data, any substantiating documents, not even a copy of the approved organizing document, but instead relies on check-box applicant attestation to verify some very technical exemption requirements.

Well now, a year and a half later it seems the chickens are coming home to roost.

The recently released 2015 report to Congress by the Taxpayer Advocate Service (TAS), a taxpayer advocacy program independent from the IRS, describes problems with the 1023-EZ that it classifies as a “most serious problem.”

TAS states that by adopting Form 1023-EZ to address exemption backlogs, the IRS relinquished its power to effectively determine whether applicants qualify as IRC Section 501(c)(3) organizations.

The IRS’s own analysis shows a significant discrepancy between the rate at which Form 1023-EZ filers obtain exempt status and the rate of approval when the IRS subjects their applications to a slight amount of scrutiny.  The Exempt Organizations (EO) function approved Form 1023-EZ applications much less frequently — 77 percent of the time, compared to 95 percent of the time — when it requested documents or basic information from the applicants.

And an independent TAS study confirms there is a significant level of erroneous approvals.  From July through September 2015, TAS reviewed a representative sample of 408 organizations whose Form 1023-EZ applications were approved. The analysis showed that 149, or 37 percent, of the organizations in the sample did not satisfy the organizational test required for recognition of exemption.

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, said TAS.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

  • Revise Form 1023-EZ to require applicants, other than corporations in states that make articles of incorporation publicly available online at no cost, to submit their organizing documents
  • Revise Form 1023-EZ to require applicants to provide a description of their actual or planned activities and submit summary financial information such as past and projected revenues and expenses
  • Make a determination only after reviewing the Form 1023-EZ application, the applicant’s organizing documents, its description of actual or planned activities, and its financial information
  • Where there is a deficiency in an organizing document, require an applicant to submit a copy of an amendment that corrects the deficiency and has been approved by the state, even where the documents are available online at no cost, before conferring exempt status

It appears that reviewing an applicant’s case file and its articles of incorporation and then requesting necessary amendments takes EO about an hour.  This is a small price to pay to prevent waste, error, and abuse, added TAS.

Click here to read the full TAS report.

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