The Taxpayer Advocate Service (TAS) recently released its Annual Report to Congress, calling out concern over the new form allowing small tax-exempt organizations to obtain tax-exempt status. The report claims Form 1023-EZ makes recognition of tax-exempt status virtually automatic for most applicants and identifies the form as the third most serious problem, out of a total of 24 most serious problems. Problems snagging first and second place was the way the IRS interacts with taxpayers and the use of user fees to fill funding gaps.
The short form was introduced to help the IRS address the serious backlog of exemption applications. Certain organizations may qualify to submit the Form 1023-EZ if the organization expects gross receipts of less than $50,000 each year for the first three years and total assets of less than $250,000.
The three-page form requires organizations to “attest” versus “demonstrate” that they meet the requirements for tax-exempt status. TAS analyzed a sample of applications approved by the IRS and found 37% of organizations did not meet requirements for tax-exempt status.
TAS is recommending the IRS revise the form to require submission of organizing documents (articles, bylaws, trust agreements, etc.) and a description of activities, including related revenues and expenses. TAS estimates adding these steps to the process would require an additional one-hour of time to the IRS review process.
The IRS identified evaluation of the Form 1023-EZ in its Priorities for FY 2016. In addition, the IRS stated it will continue to review organizations that were granted tax-exempt status through the short-form and will begin post-determination compliance enforcement. The TAS says this approach invites noncompliance, diverts tax dollars and taxpayer donations, and harms taxpayers that could have adjusted their organizing documents or activities they pursued from the beginning. The TAS calls the IRS audit strategy of these small organizations a misallocation of IRS resources and an unnecessary burden on compliant organizations.