New Streamlined Application Process for 501(c)(3) Recognition

July 1, 2014 by Leave a Comment
New 1023-EZ Issued

New 1023-EZ Issued

Most charitable organizations must seek recognition of their exemption under Section 501(c)(3) (exceptions include churches, associations of churches, integrated auxiliaries of churches, and very small charities with gross receipts normally $5000 or less per year). Application has historically been made on Form 1023 and over the past few years the processing time has become more and more lengthy.  I discussed that in this post.

Earlier this year the IRS issued a draft 1023-EZ proposing to streamline the process. Today the IRS has issued new guidance (in the form of final and temporary regulations under Section 501(c)(3)) as well as a working Form 1023-EZ.  Not all organizations will qualify.  Notably for my practice, churches that choose to file a 1023 must use the full form, schools, supporting organizations and private operating foundations must also use the full form. Finally, organizations with more than $250,000 of assets or that anticipate more than $50,000 per year over the first three years must use the full form.  The 1023-EZ Instructions contain a worksheet that identifies organizations that qualify/fail to qualify for the streamlined treatment.  Here’s to hoping this speeds the process up for everyone.

The IRS Press Release is set out below:

Issue Number: IR-2014-77

Inside This Issue

________________________________________

New 1023-EZ Form Makes Applying for 501(c)(3) Tax-Exempt Status Easier; Most Charities Qualify

WASHINGTON — The Internal Revenue Service today introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

“This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,” said IRS Commissioner John Koskinen. “The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”

The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

“Previously, all of these groups went through the same lengthy application process — regardless of size,” Koskinen said. “It didn’t matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.”

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months.

Following feedback this spring from the tax community and those working with charitable groups, the IRS refined the 1023-EZ proposal for today’s announcement, including revising the $50,000 gross receipts threshold down from an earlier figure of $200,000.

“We believe that many small organizations will be able to complete this form without creating major compliance risks,” Koskinen said. “Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do.”

The new EZ form must be filed online. The instructions include an eligibility checklist that organizations must complete before filing the form.

The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted today on IRS.gov.

There are more than a million 501(c)(3) organizations recognized by the IRS.

 

Filed Under: Blog, Charitable Organizations, Tax Exempttion, Uncategorized Tagged With: , , ,

Proposed Guidance for 501(c)(4)’s Coming Soon

November 26, 2013 by Leave a Comment

The IRS issued a news release today announcing that proposed guidance regarding qualification for exemption from federal income tax under as a social welfare organization under Section 501(c)(4) of the Internal Revenue Code would be posted on the Federal Register as soon as later today.  This guidance, which will be open for public comment, will define the type of political activity that will be acceptable to qualify under Section 501(c)(4) and that which will result in denial or revocation of exemption.

Here is the text of IR-2013-92:

New 501(c)(4) guidance coming soon

New 501(c)(4) guidance coming soon

Issue Number:    IR-2013-92

Inside This Issue

Treasury, IRS Will Issue Proposed Guidance for Tax-Exempt Social Welfare Organizations

Initial Proposed Guidance Clarifies Qualification Requirements and Seeks Public Input

WASHINGTON — The U.S. Department of the Treasury and the Internal Revenue Service today will issue initial guidance regarding qualification requirements for tax-exemption as a social welfare organization under section 501(c)(4) of the Internal Revenue Code. This proposed guidance defines the term “candidate-related political activity,” and would amend current regulations by indicating that the promotion of social welfare does not include this type of activity. The proposed guidance also seeks initial comments on other aspects of the qualification requirements, including what proportion of a 501(c)(4) organization’s activities must promote social welfare.

The proposed guidance is expected to be posted on the Federal Register later today.

There are a number of steps in the regulatory process that must be taken before any final guidance can be issued. Given the significant public interest in these and related issues, Treasury and the IRS expect to receive a large number of comments. Treasury and the IRS are committed to carefully and comprehensively considering all of the comments received before issuing additional proposed guidance or final rules.

“This is part of ongoing efforts within the IRS that are improving our work in the tax-exempt area,” said IRS Acting Commissioner Danny Werfel. “Once final, this proposed guidance will continue moving us forward and provide clarity for this important segment of exempt organizations.”

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Treasury Assistant Secretary for Tax Policy Mark J. Mazur. “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations. It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”

Organizations may apply for tax-exempt status under section 501(c)(4) of the tax code if they operate to promote social welfare. The IRS currently applies a “facts and circumstances” test to determine whether an organization is engaged in political campaign activities that do not promote social welfare. Today’s proposed guidance would reduce the need to conduct fact-intensive inquiries by replacing this test with more definitive rules.

In defining the new term, “candidate-related political activity,” Treasury and the IRS drew upon existing definitions of political activity under federal and state campaign finance laws, other IRS provisions, as well as suggestions made in unsolicited public comments.

Under the proposed guidelines, candidate-related political activity includes:

1. Communications

  • Communications that expressly advocate for a clearly identified political candidate or candidates of a political party.
  • Communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party.
  • Communications expenditures that must be reported to the Federal Election Commission.

2. Grants and Contributions

  • Any contribution that is recognized under campaign finance law as a reportable contribution.
  • Grants to section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities (note that a grantor can rely on a written certification from a grantee stating that it does not engage in, and will not use grant funds for, candidate-related political activity).

3. Activities Closely Related to Elections or Candidates

  • Voter registration drives and “get-out-the-vote” drives.
  • Distribution of any material prepared by or on behalf of a candidate or by a section 527 political organization.
  • Preparation or distribution of voter guides that refer to candidates (or, in a general election, to political parties).
  • Holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of the program.

These proposed rules reduce the need to conduct fact-intensive inquiries, including inquiries into whether activities or communications are neutral and unbiased.

Treasury and the IRS are planning to issue additional guidance that will address other issues relating to the standards for tax exemption under section 501(c)(4). In particular, there has been considerable public focus regarding the proportion of a section 501(c)(4) organization’s activities that must promote social welfare. Due to the importance of this aspect of the regulation, the proposed guidance requests initial comments on this issue.

The proposed guidance also seeks comments regarding whether standards similar to those proposed today should be adopted to define the political activities that do not further the tax-exempt purposes of other tax-exempt organizations and to promote consistent definitions across the tax-exempt sector.

Filed Under: 501(c)(4), Blog Tagged With: , , ,

The IRS, Tax Exemption and Patience

September 13, 2013 by Leave a Comment
Sign in front of IRS

Backlog at the IRS

Where is my exemption application and when will the IRS rule on it? I get those questions a lot from clients. This post will examine the current backlog problems at the IRS and offer a few planning options.

With very limited exceptions for churches, church-related organizations, and very small organizations (those with gross receipts normally not more than $5,000 per year), to be entitled to tax-exempt status under Section 501(c)(3) of the Internal Revenue Code an organization must obtain recognition of that status by filing Form 1023 (Application for Recognition of Exemption) with the IRS and receiving a determination letter. I receive many calls from individuals wishing to create a new 501(c)(3) organization and expecting that the process will be relatively quick. In fact, that is typically not the case.

Form 1023 is filed with the Determinations Office of the IRS. According to the IRS website, upon receipt applications that are accompanied by the required user fee are initially separated into four categories including those that can be approved immediately, those that may need minor additional information to be resolved, those that are incomplete, and those that require further development. Again, according to the IRS website, the first three categories result in the organization receiving a determination letter or a request for additional information within approximately 90 days of the date the application was submitted. The fourth category—those requiring further developments—must be assigned to an Exempt Organizations agent. While the IRS reports that approximately 30% of the applications submitted fall into this fourth category, my experience shows a much higher percentage. Given, this may be because the applications that I handle are typically not very basic or plain vanilla applications. Likewise, it may be because an inordinate percentage falls into the third category (incomplete applications) and once that issue has been resolved, the application falls into the fourth category. The IRS does not provide what percentage of applications are resolved within the initial 90 to 120 days. What is clear though is that the backlog is growing.

According to a Bloomberg BNA Daily Tax Report, National Taxpayer Advocate Nina Olson has said that the inventory of open applications increased from 15,570 in fiscal year 2010 to 33,505 in fiscal year 2012. If the IRS receives (as is reported) approximately 60,000 new applications a year and at least 30% of those require further development, the problem of the backlog is clear.

The issue with the backlog is that the applications are essentially in limbo during this wait. The applications have not been assigned to an Exempt Organizations agent and thus the organization has no contact person at the IRS. According to its website, the IRS is currently assigning the applications received in April 2012—17 months prior to this post being authored. The backlog increases month by month.

In light of this concern I am often asked what options exist. First, it should be noted that so long as the organization has filed its Form 1023 within 27 months from the time it was created (for nonprofit corporations, the time period when it filed its governing document with the Secretary of State), once exemption is granted (whenever that may be) it is retroactive back to the date of filing its initial governing document. While the organization cannot hold itself out as a Section 501(c)(3) tax-exempt organization during this interim time period, it can raise funds (though it cannot tell donors that those funds will be deductible) and it can operate. Oftentimes, this is not feasible as donors want the determination letter as evidence of the exemption. While the IRS does have procedures in place for expediting an exemption application, those procedures are narrowly drawn and require exceptional circumstances. If an organization believes they qualify for expedited handling, it is advisable to seek professional assistance in making that request.

The second option for organizations during this interim period is the use of a fiscal sponsor. A fiscal sponsorship arrangement is created between the organization with the pending application and an organization that has already been determined by the IRS to be a 501(c)(3) organization. The sponsor receives the funds with full discretion and control over the funds and uses the funds to support the pending organization’s project(s) in a way that furthers the sponsor’s tax-exempt purposes. There are various models of fiscal sponsorship and an organization considering entering into such a relationship needs to seek professional guidance to protect its assets, as well as its tax status and that of the sponsor organization. More information about fiscal sponsorship can be found from the National Network of Fiscal Sponsors.

Finally, an organization that has had its application pending for more than 270 days is authorized by Section 7428 of the Internal Revenue Code to seek a declaratory judgment that it is qualified under Section 501(c)(3). This requires a petition for declaratory relief to be filed in the United States Tax Court, the United States District Court for the District of Columbia, or the United States Court of Federal Claims (all of concurrent jurisdiction in such cases). This action requires a determination on the part of the board of directors that the expenditure of additional funds for the handling of this litigation is justified, in order to push through an exemption application.

It is well-known that the IRS is currently under fire and that the focus is specifically on Exempt Organizations. There has been significant turnover in management as a result of the inquiries and investigation concerning the handling of conservative groups’ 501(c)(4) applications. This has only served to exacerbate the backlog. That backlog is likely to continue to grow and thus an organization should understand its options for handling this interim period.

 

 

 

Filed Under: Blog, Charitable Organizations, Tax Exempttion Tagged With: , , , , , , , , ,