National Taxpayer Advocate Report Criticizes Form 1023-EZ Review by IRS

National Taxpayer Advocate Nina Olson has submitted her 2015 Annual Report to Congress, required by section 7803(c)(2)(B)(ii) of the Internal Revenue Code.  One section of the report (see pages 36-44) scathingly criticizes the review of Forms 1023-EZ  (or lack thereof) by the Internal Revenue Service.  The following paragraph from the Executive Summary of the report details key findings:

TE/GE’s Exempt Organization (EO) function approves 95 percent of applications submitted on Form 1023-EZ. EO’s own pre-determination review program shows that EO approves applications much less frequently — 77 percent of the time — when it reviews documents or basic information from the applicants, rather than relying only on the attestations contained in the form. EO rejects some applications simply because the applicant was not eligible to use Form 1023-EZ, but the pre-determination review also showed that almost 20 percent of Form 1023-EZ applicants, despite their attestations to the contrary, did not qualify for exempt status as a matter of law. These results are consistent with TAS’s analysis of a representative sample of Form 1023-EZ applicants that obtained exempt status, which showed that 37 percent of the organizations in the sample did not satisfy the legal requirements for exempt status. Often, a deficiency in the applicant’s organizing documents that prevented qualification as an Internal Revenue Code § 501(c)(3) organization could have easily been corrected had the applicant been advised of it.

The report recommends revising Form 1023-EZ generally to require applicants to submit to the IRS their organizing documents, a description of their actual or contemplated activities, and relevant financial information.  The report further urges the IRS to determine exempt status only after reviewing the application and the recommended supporting materials.

Additional Coverage: Tax Notes Today (Electronic Cite: 2016 TNT 4-6)

JRB