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Monday September 8, 2014

posted by Thomas J. Banaszynski
Tags: In the news 

Time, Inc. recently reported on changes at the Internal Revenue Service (“IRS”)  related to the tax-exempt status of charities.  Beginning July 1, 2014, the IRS has embarked on a plan which will make it easier for charities seeking tax-exempt status to achieve that status.  As of July 1, any charitable group that pays a Four Hundred Dollar ($400.00) filing fee, and declares on a three-page form that it has, and will have, less than $50,000 in annual income, and has total assets of less than $250,000, is a charity.  According to the IRS, the organized will automatically be authorized to accept tax deductible donations. 

This is a huge change from the earlier procedures for a charity to attain tax-exempt status.  The IRS tax-exempt status application, Form 1023, required the charity to demonstrate how it has been a substantial charitable organization, and would continue to be so in the future.  It was not a form which could readily be completed by a small charity.  It was onerous.  The form itself was twenty-six (26) pages in length.  It also required many supporting documents and a narrative description of past and intended activities.  That has now all been changed.  Two (2) years ago, in 2012, the IRS rejected the idea of a new Form 1023-EZ.  But now, it has adopted a new short form procedure, despite objections.  The change should result in forty to fifty thousand fewer detailed, lengthy applications for organizations to attain IRS “501(c)(3)” status. 

Why did the IRS move in this direction now?  Two theories have generally been advanced.   One is that the change is in response to the IRS scandal over the alleged wrongful treatment and political scrutiny of presumed right-wing 501(c)(4) lobbying groups, often thought to be Tea Party groups, under the then head of the IRS, Lois Lerner.  Another theory being advanced is that the IRS has seen its overall budget reduced by some $950,000,000, or approximately 7.8% from 2010 to 2013.  Realistically, it is probably a function of both factors that the tax-exempt application changes have come into effect at this point in time.

One concern frequently raised is that organizations might claim that they have an annual income of less than $50,000, even though they plan to grow that income, and thereby qualify to use the shortened form.  Most charitable organizations, seeking tax-exempt status start out small.  Many will grow to have an annual income of more than $50,000, but they do not start out that way.  Organizations do not typically start out with a million dollar endowment.  While the application process might be shortened and streamlined, charitable organizations must still file an annual charitable tax return, Form 990.  Whether the organization gets to file the Form 990-EZ, or the regular Form 990, or the online Form 990-N, will depend on its annual income. 

It has been argued that filling out the long Form 1023 helped organizations to better understand the requirement of being a charity.  Maybe the person who filled out the form, an attorney or accountant who filled out the form, had a better understanding of what it is to be a charity—not so the staff and volunteers serving the charity.  The annual report to the IRS Form 990 can equally assist the charity in keeping its charitable focus.  Reducing onerous paperwork is a good thing, even though there may be pitfalls along the way.