Can Donors Trust 1023-EZ?

August 1, 2014 Posted by Jessica Shofler in Donations, IRS, News, Nonprofits

1023-EZDonors rely on 501(c)(3) to indicate that an organization is carrying out charitable activities. But since the IRS released the streamlined exemption application (Form 1023-EZ), should they still do so?

The National Taxpayer Advocate (TAS) is an independent organization within the IRS that helps taxpayers who are having trouble resolving problems with the IRS. On July 16, TAS released its mid-year report to Congress. Among other topics discussed, the report includes TAS’s concerns about IRS treatment of taxpayers applying for exempt status.

Although TAS previously recommended that the IRS develop a Form 1023-EZ for use by small organizations, TAS is not happy with the Form that has been released for public use. The report explains that TAS is “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.” The report also argues that “[b]y adopting this approach, the IRS will undo, in the space of less than six months, decades of practice in this area.”

Our firm’s managing attorney, Arthur Rieman, has also criticized the Form. During an interview with Tax Analysts, he explained that streamlining the application “in this manner has the potential to open the floodgates to people who will use the relaxed requirements for exemption to game and abuse the system to reap profit and private gain at the expense of the trusting public.”

The IRS has told TAS that it intends to conduct audits of a representative sample of exempt organizations that have used the streamlined application in about 6 months and a year from now. At that time, the IRS intends to adjust its procedures to address any noncompliance it identifies. TAS believes this will have only a limited effect on compliance.

Our colleagues have argued that private foundations should not rely on a determination letter for an organization that has filed 1023-EZ. Should you?

Is it time for Congress to intervene and roll back 1023-EZ?

NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Casey Summar, Partner, The Law Firm for Non-Profits, 4705 Laurel Canyon Blvd, #306, Studio City, CA 91607

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