On June 6, the IRS Advisory Committee on Tax Exempt and Government Entities (“ACT”) held a public meeting at which the panel submitted its latest round of recommendations to senior IRS executives. At the meeting, the ACT’s Exempt Organizations project team presented a report containing several recommendations intended to improve the application process for organizations seeking recognition of exempt status as a Section 501(c)(3) charitable organization, including significant revisions to the content of, and filing process for, Form 1023 (the application for recognition of exemption under Section 501(c)(3)). In the report, the ACT recommends that the IRS take the following actions to improve the efficiency, effectiveness and educational benefits of the application process:
The ACT had previously recommended the development of a fully e-fileable version of Form 1023 in a 2003 report, and it strongly reiterates this recommendation in this year’s report, noting that the successful implementation of mandatory electronic filing of Forms 990 and 990-PF for many (but not all) filers has resulted in more accurate and complete Forms 990, significant improvement in the quality of information available to the IRS and increased transparency by making Forms 990 more readily accessible for public inspection. The ACT observes that if an electronic Form 1023 were created (and mandatory electronic filing were to be implemented for a large majority of filers) the IRS would be able to create one electronic database through which potential donors could review an exempt organization’s filing history from inception up through its most current Form 990.
Interestingly, while the ACT gave serious consideration to the creation of a shortened version of Form 1023 for small organizations, similar to the Form 990-EZ, it ultimately rejected this approach in light of the fact that Form 1023 serves an important educational role for many applicants, which are often small organizations in the start-up phrase and are still contemplating how they will operate and be governed. The various questions contained in Form 1023 educate an applicant organization about the requirements that must be met to initially qualify for and maintain exempt status and signal to the organization that a comprehensive regulatory regime will apply to it if the application is approved. Accordingly, the ACT report instead focuses on ways in which Form 1023 can be redesigned to be more user-friendly and educational for all applicants, while still ensuring that the IRS receives the information that is necessary to effectively evaluate an applicant’s qualification for exemption under Section 501(c)(3).
Specific revisions to Form 1023 that the ACT recommends in the report include:
The ACT report also includes recommendations for monitoring ongoing compliance once an organization’s application has been approved. In 2005, the IRS established its ROO unit to monitor previously non-compliant exempt charitable organizations and newly approved exempt charitable organizations that may be at risk for non-compliance. The ROO unit monitors ongoing compliance through a review of the publicly available information about such organizations, typically without the organization’s knowledge, and conducts follow-up inquiries as needed. The ACT reports that the state charity regulators it spoke with expressed a desire for the ROO process to be expanded to include organizations that state charity regulators have identified as being more likely to be non-compliant with the requirements for exemption in the future. The ACT recommends that the IRS coordinate with the state charity regulators to identify such newly approved but high-risk organizations, which should result in a more effective use of IRS resources. The proposed regulations for IRS information sharing with state charity regulators would facilitate such sharing. Such ongoing monitoring of high-risk organizations would also ease some of the pressure placed on the IRS to correctly identify non-compliant applicants during the Form 1023 review process, which typically occurs at a time when the applicant organization has little, if any, operating history and thus forces the IRS to make a determination that is largely based on the applicant’s speculative representations of how it will operate in the future, rather than on its past track record.
Elizabeth M. Mills is a Senior Counsel in the Health Care Department and a member of the Not-For-Profit / Exempt Organizations Group in Proskauer’s Chicago office. Kathleen E. Gerber is an Associate in Proskauer’s Tax Department, resident in the Los Angeles office. This article originally appeared in the firm’s Not-For-Profit/Exempt Organizations Blog at http://nonprofitlaw.proskauer.com/.