Jan 11

Print this Post

IRS AUDITS of Tax Exempts Coming UP in 2016!

Drukowanie Audits of tax-exempts that filed Form 1023-EZ are on tap for 2016.

Charities with annual gross receipts of $50,000 or less and total assets of $250,000 or less can submit the two-page 1023-EZ to apply for tax exemption. The IRS rubber-stamps 95% of the applications and does per-determination random checks on a mere 3% of filings. It is now gearing up to conduct back-end examinations of some of the organizations that receive tax exemption after filing the form. [Source – The Kipling Tax Letter]

So What is a Form 1023-EZ

On July 1, 2014, amidst much criticism, the IRS radically changed the nonprofit world by launching the Form 1023-EZ, a new streamlined method of applying for 501(c)(3) status.

The Form 1023-EZ essentially makes it possible for certain new organizations to self-certify their own 501(c)(3) status. While other types of tax-exempt organizations, such as those exempt under Code sections 501(c)(4), 501(c)(5) or 501(c)(6), have long been allowed to “self-declare” their tax-exempt status without filing for IRS approval, 501(c)(3) organizations historically have been required to endure a rigorous application process comprising a detailed 26-page Form 1023, a written narrative, financial data, and specific governing documents such as the Articles of Incorporation, Bylaws, Conflict of Interest Policy, and copies of contracts with officers, directors, and service providers. In contrast, the Form 1023-EZ is only 2 and a half pages long, requires no documents, and basically requires only that the applicant check various boxes attesting that they will comply with the rules governing 501(c)(3) status.

There are other incentives to use the Form 1023-EZ besides its simplicity. Most applicants will pay a reduced filing fee for the Form 1023-EZ, which only costs $400, compared to the $850 for most applicants filing the standard Form 1023. And applicants filing the Form 1023-EZ will surely have their applications processed much faster (the turnaround on Form 1023-EZ applications is expected to be only a month or two, rather than the 1-2 year waiting periods many Form 1023 filers are experiencing).

The Form 1023-EZ has been very controversial. There are obvious concerns about fraud and abuse, since there will be so little oversight of the applications. While the IRS has promised to shift its attention to enforcement on the “back end,” through more audits once organizations are operational, most practitioners are skeptical that the IRS will be able to follow through on this promise, especially given the large increase in applications the Form 1023-EZ is likely to cause. More fundamentally, critics worry that the Form 1023-EZ abandons that the crucial educational role that the application process has traditionally served. The standard Form 1023 requires new organizations to give serious thought to difficult concepts like the exempt purpose test, the commerciality doctrine, and the private benefit and inurement rules. In the absence of this forced training period, many organizations will be tempted to commence operations without knowledge of the rules.

Jim Milucky CPA Forensic Accounting

Jim Milucky, CPA|Forensic Accounting Services, Inc.

Nonetheless, the Form 1023-EZ is here to stay for the foreseeable future. The immediate question for new organizations and practitioners is: Who should file the Form 1023-EZ and who should stick with the standard Form 1023? A few considerations are relevant to this question.

If you are unsure of which form to file call James J. Milucky, CPA|Forensic Accounting Services, Inc. at 321|722-0882

Permanent link to this article: http://www.fasaccounting.com/1023-ez-audits-in-2016/

Leave a Reply