The US largest organization representing non-profits, which has over 25,000 non-profit members, has called for the IRS to eliminate their Form 1023-EZ charity application.  They call for “the need to eliminate Form 1023-
EZ and restore integrity to the process for determining tax-exempt status under Internal Revenue Code Section 501(c)(3).”

 

In a letter to the IRS they note:

 

In 2014, the IRS radically streamlined its application and approval process for certain organizations seeking tax-exempt status under Section 501(c)(3) of the Internal Revenue Code.  Generally, organizations with total assets up to $250,000 and those expecting annual gross receipts up to $50,000 are eligible to use Form 1023-EZ to apply for recognition of exempt status. However, the Taxpayer Advocate has consistently found that virtually every entity that applies using the Form 1023-EZ receives tax-exempt status regardless of eligibility. The Taxpayer Advocate performed extensive reviews and found erroneous approvals at rates of 37 percent, 26 percent, and 42 percent during 2015, 2016, and 2017, respectively. In its most recent report, the Taxpayer Advocate found: “The IRS approves Form 1023-EZ applications submitted by organizations that do not qualify for IRC § 501(c)(3) status at a rate that is unacceptable and is higher now than when the form was introduced.” The erroneous approval rate was found to be 46 percent.

The recommendations for improvements by the Taxpayer Advocate address specific problems with the IRS processing of the form but do not get to the root cause of the problem. Quite frankly the form fails to provide adequate information to ensure that only eligible organizations attain tax-exempt status and the privilege of receiving tax-deductible donations.

We recommend that the IRS withdraw the Form 1023-EZ and engage stakeholders – charitable regulators, nonprofit infrastructure organizations, funders, and tax-law practitioners – to develop a workable replacement that will respect the IRS’ primary obligation of preventing ineligible organizations and perhaps bad actors from receiving and exploiting tax-exempt status for personal gain. Learn more about the challenges of and the broad opposition to IRS Form 1023-EZ.

 

So while “streamlining” and simplifying may seem like good ideas, sometimes they are but they can have very negative unintended consequences.   So the IRS approves close to 100% of groups applying for charity status with this particular form and 46% would not actually be entitled to charity status.   While some may like the simplicity of a short form – because of the huge reputational and tax advantages of being a 501(c)(3) organization – allowing in a large number of groups that are not actually charities will ultimately hurt the whole sector in terms of reputation and the country in terms of tax incentives to groups that were never supposed to receive them.  Oh, it also lets in some Neo-Nazi groups if you are concerned about that.  Please note that with many bad ideas for simplifying or improving charity regulation, while there may be some people who can see immediately the disastrous consequences, it can take 7-10 or more years for it to be shown that the move was a disaster.

In the letter, it was also interesting to note that they had a comment on the Form 990, which is the US annual filing.  They wanted clarification on how government funding is treated on the form.    The US Form 990 asks for significantly more information than the Canadian T3010.  Much of the lobbying by special interest groups in Canada has been to reduce even further the amount of information collected on the T3010 rather than to have greater transparency.

 

Anyway, it is refreshing to see umbrella organizations not just taking the knee-jerk approach of simpler is better (or whatever my biggest sponsor thinks is a good idea is a good idea) and actually thinking about what is in the long-term best interest of the charity sector.