IRS Commissioner John Koskinen said last week that critics of a new form intended to speed small charities through the application process for tax-exempt status are “wrong for several reasons” and that the form will weed out illegitimate exempt organizations.
The new Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, which was introduced by the IRS last month, is three pages long, while the standard Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, is a robust 26 pages.
Form 1023-EZ will enable the tax agency to shorten the approval process for smaller groups, which the IRS said will free up resources to review applications from larger, more complex organizations while reducing the application backlog. The IRS currently has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. There are more than 1 million 501(c)(3) organizations recognized by the IRS.
According to the IRS, most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most groups with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.
However, critics have said the new form oversimplifies the charitable exemption process and could lead to an increase in charity fraud and abuse.
In an interview with Tax Analysts on July 29, Koskinen said the new three-page expedited form will allow the IRS to collect the information it needs to qualify small groups for tax-exempt status. Because the form will be digital, the information can be more easily screened and analyzed to ensure the credential goes only to those qualified, he added.
“It will be for the first time digital, online, so we can actually screen the applications and the answers, to pick up ones that we want to take a look at before we give approval to because we'll know which answers are inconsistent, which ones raise questions, even though they answer them or are supposed to answer them in a way that allows you to get through without more review,” Koskinen said during the hourlong interview. “So that we will have, for the first time, these applications as opposed to the old forms, we'll be electronic and we'll be able to screen them and analyze, as I say, of the 60,000, probably 45,000 are small. We'll have a lot more control over the 45,000 by simply being able to screen them.”
The IRS will also take a statistical sample of applications and subject them to a more rigorous process to ensure that the form's questions have been answered correctly, the commissioner said. After a year, the IRS will audit some to ensure that the organizations are doing what they said they would do to qualify for tax exemption under the law, he added.
"We'll be much more efficient at the front end with the 80 percent of applications that are small, and be able to screen them out more effectively than we have, and we're actually going to look at them at the front and look at them a year later, and adjust accordingly," Koskinen said.
“But the net result is that there will be less risk to the public, that people are getting the benefit of tax exemption and contributions for what they're doing because we will have more resources available,” he continued. “We'll be better at the front end, but we'll have more resources available to check on people at the back end and see are you doing what you said you were going to do. Are you still doing the right thing? Now we'll know.”