Form 1023-EZ Problems - How Will the IRS Respond?

Last month the IRS made publicly available information from approved Forms 1023-EZ (Streamlined Application for Recognition of Exemption). As Terri Helge noted in this space, one question those data raised was whether hundreds of churches had used the form to obtain IRS recognition of their tax-exempt status under Internal Revenue Code section 501(c)(3), as a review of the names of successful applicants suggested. Such use would be problematic because churches are ineligible to use the streamlined application.

Yesterday the Chronicle of Philanthropy reported (subscription required) that "Some Charities Misuse IRS Short Registration Form, Chronicle Data Suggests." The article focuses in particular on the fact that some applicants quickly grew into million-dollar-plus organizations even though the streamlined application is only supposed to be used by charities that expect to have relatively modest financial resources.

Both these observations raise serious concerns about whether the attempt by the IRS to limit the use of the form to relatively small charities that do not raise any complicated legal issues is failing, with hundreds if not thousands of ineligible organizations obtaining a favorable IRS determination letter by using the streamlined form. These observations also further bolster earlier concerns raised by the National Taxpayer Advocate, who drew on the IRS' own determination that the approval rate for Form 1023-EZ users drops from 95 percent to 77 percent when the IRS reviewed documents or basic information of applicants. The question we are left with is how will the cash-strapped and politically battered IRS respond to these apparent shortcomings. No word from the IRS on the answer to this question yet.

Lloyd Mayer