IRS revises streamlined application form for tax-exempt groups

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The Internal Revenue Service has revised the streamlined application form for groups that are applying for tax-exempt status.

The IRS is revising both Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, along with its instructions, to help small charities apply for 501(c)(3) tax-exempt status.

The changes include request for more information from the organizations. The IRS began offering the streamlined form in 2014 in response to complaints from conservative and Tea Party groups that it was taking too long for the IRS to process their applications for tax-exempt status and they complained they were being unfairly targeted for extra scrutiny by the IRS. However, the National Taxpayer Advocate Nina Olson and the Taxpayer Advocate Service they lead said in a recent report to Congress last week that the IRS is now subjecting such applications to very little scrutiny now. “Form 1023-EZ was adopted in large part to reduce inventory backlogs for processing Form 1023,” said the report. “Today, Form 1023-EZ applications exceed Form 1023 applications, and the IRS approves virtually all Form 1023-EZ applications it receives. Taxpayer Advocate Service studies carried out in 2015 and 2016 showed, respectively, that 37 percent and 26 percent of approved entities in one of 20 states that post articles of incorporation online did not meet the organizational test for qualification as an IRC § 501(c)(3) organization. This year’s TAS study of a representative sample of approved Form 1023-EZ applicants from those same 20 states found an erroneous approval rate of 42 percent.”

The IRS provided a summary of the revisions made to Form 1023-EZ.

• A text box was added to Part III asking for a brief description of the organization’s mission or most significant activities. The change was recommended by the IRS National Taxpayer Advocate and is designed to provide a better understanding of the most significant activities that an organization engages in to further its exempt purposes.

• Questions about annual gross receipts, total assets and public charity classification were also added to the Form 1023-EZ. The questions are also on the Form 1023-EZ Eligibility Worksheet in the Instructions for Form 1023-EZ that organizations must certify they have completed.

• Question 29 on the Form 1023-EZ Eligibility Worksheet now requires an automatically revoked organization that applies for reinstatement to seek the same foundation classification it had at the time of the revocation in order to be eligible to use the Form 1023-EZ. Organizations that are not seeking that same foundation classification will now have to file a full Form 1023. The IRS automatically revoked tax-exempt status from organizations that don’t file a Form 990-series return for three years in a row.

The revisions are aimed at making it easier for organizations to select the correct form when applying for tax-exempt status and help the IRS make the correct determinations on tax-exempt status. The revisions won’t change the Form 1023-EZ user fees, though, the IRS noted.

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