How the IRS Revamped Tax-Exempt Applications
With a new leadership team in place, the Internal Revenue Service Exempt Organizations Division has swiftly come together to introduce a shorter and easier application form (Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code) for organizations seeking section 501(c)(3) tax-exempt status. The IRS estimates up to 70% of all applicants will qualify to use the new streamlined approach.
Prior to the form’s July release, Tamera Ripperda, IRS Exempt Organizations Division’s newly appointed director, shared insights with CPAs at the AICPA Not-For-Profit Industry Conference and explained the significant role the simplified form will play in the new IRS transition process her team has internally dubbed: “Moving Exempt Organizations Forward.”
“The new form will focus on the questions that are absolutely necessary for exempt determination,” Ripperda said. The Exempt Organizations Division receives more than 60,000 applications each year and a rise in applications in recent years, combined with a decrease in staffing, means the team receives more tax-exempt status applications than it is able to process.
This is where the new Form 1023-EZ process fits in. The new streamlined method is designed to reduce the application backlog and a minimized number of application questions should alleviate the IRS’s need to conduct extensive research and fact checking. The IRS now puts the burden of compliance on applicants by requiring them to check a box at the top of the form to attest that they have completed the eligibility worksheet, are eligible to apply for exemption, and have read the requirements for exemptions under section 501(c)(3).
Who is Eligible to Use the 1023-EZ?
Form 1023-EZ is geared towards smaller organizations, with a strong aim towards organizations that may be eventual 990-N filers, organizations with low receipts, and new startups that do not have a lot of activity or operations yet. Most small organizations should meet the following major eligibility requirements (see full Form 1023-EZ Eligibility Worksheet):
- Annual gross receipts of less than $50,000 during the first three years of operation and assets less than $250,000; and
- Outside the definitions of a church, school, or hospital.
What is the New Streamlined Application Process?
Ripperda explained how the IRS is implementing Lean Six Sigma Organization managerial concepts (widely used in corporate settings) to make the process more efficient and is using the FIFO (first in, first out) method to resolve old cases first. These new procedures are illustrated in an IRS memo, where we can see an initial pilot for the streamlined application process includes six basic review steps, along with a final confirmation of correct user fee submission.
Both the Form 1023-EZ and the user fee can only be submitted online at pay.gov. This online-only requirement hopefully will reduce the chance for applications to get stuck in a backlog due to insufficient payments.
(Source: TEGE-07-0214-02 memo, Feb. 28, 2014)
Will the New Streamlined Process “Move Exempt Organizations Forward?"
CPAs representing EOs are concerned that a shortened tax-exempt application process today may result in an increase in long and extended audit examinations on the back end.
National Taxpayer Advocate, Nina Olson, explained in a recent FY15 Objectives Report to Congress that the “Form 1023-EZ does not even provide a space for, much less require, a narrative description of the organizations’ proposed activities. Olson is therefore “deeply concerned about the IRS’s abdication of its responsibility to determine whether an organization is organized and operated for an exempt purpose and not merely accept an organization’s statement to that effect.”
Only time can tell how the implementation of a new Form 1023-EZ will affect the 501(c)(3) application process and the overall recovery of the IRS Exempt Organizations Division. The IRS’s willingness to innovate is an encouraging sign for both taxpayers and practitioners.
For more information on applying for tax-exempt status and how to keep up to date on IRS Exempt Organization news, please see the following resources:
- Applying for Tax-Exempt Status
- IRS Basic Tax Resources for 501(c)(3) Exempt Organizations
- IRS Webcasts and Tutorial Videos for Non-Profits
- Upcoming IRS Workshops for 501(c)(3) entities
- “Exempt Organizations Update” – IRS Newsletter for Tax-Exempt Organizations, Tax Practitioners/Attorneys, and others
Amy Wang, CPA, Technical Manager - Tax, American Institute of CPAs. Amy serves as the technical manager for the Individual & Self-Employed Tax Technical Resource Panel, as well as the Exempt Organizations Tax Technical Resource Panel and related task forces. She also sits on the planning committee for both the AICPA Not-for-Profit Industry Conference and the Conference on Tax Strategies for the High-Income Individual. She has public accounting experience in federal and state taxation and holds a BS in Accounting with a Minor in International Business from Penn State University.