irs mulls new 1023-ez rules for 501(c)(3)’s.
by rick telberg
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it’s safe to say that cpa firms tend to love irs form 1023-ez, the simplified form for application for 501(c)(3) tax exempt status. introduced in 2014, the form was ez on the nascent, smallish not-for-profit and on the cpa trying to help them get started.
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this easier version of form 1023 was a good and necessary idea. the irs was way backed up on approvals of the original application. approval was taking an average of 315 days. to the delight of do-gooders, wanna-be do-gooders, and outright frauds, virtually all 1023-ezs are approved in short order. approvals were and still are passed down in just a couple of weeks.
trouble is, a lot of those expedited approvals were for organizations that didn’t qualify for 501(c)(3) status.
when the taxpayer advocacy service, which investigates and reports on irs flaws and inefficiencies, looked into the applications of 395 organizations in 24 states, it found that 182 of them—a staggering 46 percent—didn’t even meet the organizational test for qualification. a quick perusal of the applications could have readily determined that many of them were churches, schools, llcs, or other unqualified organizations.
one organization’s statement of purpose was simply “establishment and operation of a farmer’s market.” note that apostrophe—that’s a market for just one farmer. another approved organization had no purpose clause at all, and its dissolution clause included “the assets of this non-profit will be distributed evenly amongst the families of the team.”
the tas determined that the irs spends about half an hour examining a 1023-ez, which seems barely enough time to see that the right boxes are checked, the form signed, the fee paid. maybe, the tas suggests, the irs needs to request a little more information and spend a little more time assessing the application.
meanwhile, the 315 days needed to approve the full-length form has been whittled down to 113. for a while it was down to 96. if almost half of the ez forms are being erroneously approved, maybe the slightly longer cycle time is worth the wait.
trouble for the cpa
approval of a 1023-ez by the irs does not give an organization eternal tax-exempt status. rather, it’s tentative, pending review. at any given moment, the irs can rule that the organization does not qualify and never did. the organization is going to have a very complicated tax situation going back to its first tax return. the cpa that made the erroneous exemption possible isn’t going to look good. could the cpa be held responsible for the bad advice? ask your lawyer.
the tas is recommending that the irs require that 1023-ez applicants submit their organizing documents, financial information on past and projected revenues, and other supporting documents (such as articles of incorporation) along with the form. it also recommends that the irs not approve the application until it has really reviewed an applicant’s statement on planned activities and all supporting documentation.
if the irs acts on the tas’s recommendations, cpas may soon have to deal with a 1023-not-so-ez package—which should be good news to accountants who want to guide their non-profits in the right direction.