The IRS recently announced that it plans to roll out a new online tax-exempt recognition form later this year known as the Form 1023-EZ, allowing applicants to enjoy a quicker, streamlined process for IRS approval. But wait: a dark cloud is on the horizon for this front-end good news. Namely, the IRS reportedly will focus more resources on back-end scrutiny of nonprofits’ 990 annual returns and other unwanted investigations of tax-exempt organizations.
As many can attest, the number of tax-exemption applications currently pending with the IRS is staggering: nearly 80,000 Form 1023 applications (!), of which approximately 80% were filed by 501c3 public charities. A significant number of these applications are from nonprofits that were auto-revoked for failure to file Form 990s for three consecutive years. Thousands of organizations have now been waiting more than a year for IRS approval of their Form 1023 applications.
The IRS is hailing the new Form 1023-EZ as one solution to its embarrassing backlog. The Form 1023-EZ will be available online in a fillable format, with key governance, operational, and financial information to be provided. Like many IRS forms, however, Form 1023-EZ terminology is confusing, full of “legalese,” and difficult to follow. Accordingly, it may be quite a challenge to successfully complete without experienced legal counsel available.
In addition, notable eligibility restrictions exist. First, only organizations with expected (or actual) annual gross receipts of less than $200,000 (and assets of less than $500,000) may use the Form 1023-EZ. Second, churches that affirmatively seek tax-exempt recognition may not use Form 1023-EZ. Limited liability companies, successor organizations, hospitals, and schools also are excluded.
Back to the back-end: the IRS reportedly will engage in a “robust compliance process” for streamlined nonprofits. Consequently, to avoid later troubles, it will remain critically important to have well formulated, governed, and operated tax-exempt entities from their inception.
For example, nonprofits should have a corporate charter containing a clear and accurate purpose statement. In addition, they should have detailed bylaws that accurately reflect their organizational governance. Conflict of interest policies should be implemented and followed, to sufficiently address both financial and non-financial issues, along with annual conflict of interest disclosure statements completed by all board members and other insiders. Careful attention to financial matters is essential, to ensure that the organization is operated in compliance with applicable legal requirements. Creative fundraising strategies also may warrant thoughtful evaluation with due regard for many resulting legal implications.