Nonprofits are complaining that a new, shorter application form for tax-exempt status will open the floodgates for “cheats” to establish themselves as charities, undermining the credibility of the entire sector.
Relatively small charities will be able to use the two-page form, while larger groups will still have to fill out the existing 26-page form.
The Internal Revenue Service created the short form to help clear a backlog of about 60,000 applications for tax exemptions. In late 2013, groups had to wait 18 months for their applications to be processed.
The IRS says the short form also will allow it to focus more on tracking abuses of nonprofit status and spend less time on paperwork. The new form is “less burdensome for us, and it’s less burdensome for the taxpayer,” says Sunita Lough, who oversees tax-exempt groups at the IRS.
The Office of Management and Budget is reviewing public comments on the proposed rule. Ms. Lough says she expects the OMB to approve the form, and to release it this summer.
Critics of the short form, including the National Council of Nonprofits and the National Association of State Charity Officers, say the current long version of the application serves important purposes: It educates applicants about the requirements for tax exemption and helps the IRS screen out unscrupulous organizations.
The short form would “undercut the credibility of the entire nonprofit sector,” by allowing “cheats” an easy method of getting an exemption, says Tim Delaney, president of the National Council of Nonprofits.
Mr. Delaney likens the short form to doing away with testing for a driver’s license and relying exclusively on the police to keep roads safe through enforcement.
The proposed short form “will increase the opportunity for fraud and heighten the burden on state regulators to compensate for the reduced standards that will be required of the organization to meet federal tax exemption requirements,” wrote Alissa Gardenswartz, first assistant attorney general of Colorado and president of the association of state charity officials, in comments submitted to the OMB.
Donors and foundations that make gifts to smaller nonprofits will face a surge of new charities if the short form is used, says Jonathan Spack, executive director of Third Sector New England, a nonprofit consulting group in Massachusetts.
“If they think there are too many now, imagine how many there will be,” he says. “It will potentially be chaotic. Nonprofits are going to be competing in a much more crowded marketplace.”
In 2012, the IRS’s Advisory Committee on Taxation recommended against the creation of a short form, largely because the longer form educates applicants and “forces the applying organization to think somewhat deeply about its activities, finances, and management.” This process, the committee said, helps prepare applicants for complying with the law in future years.
Not everyone in the nonprofit world objects to the creation of a short form.
Jan Masaoka, leader of the California Association of Nonprofits, called opponents of the short form, known as 1023 EZ, “patronizing” and “elitist.”
“The current 1023 doesn’t weed out bad actors,” she says. “It weeds out people with lower educational levels and less fluency in English” who may have a harder time filling out the form.
She says long-established nonprofits may forget that for someone without the right experience, the current form can take days to complete. Paying for a lawyer to help often costs hundreds or thousands of dollars.
“Filling out the 1023 is like childbirth,” she says. “You forget how hard an experience it was because you’re focusing on your new kid.”
Educating Charities
Groups that would be eligible to file the EZ form are those that project an annual revenue of less than $200,000 and whose total assets are no greater than $500,000.
Not all nonprofits would be eligible: hospitals, colleges and universities, and groups that maintain assets in donor-advised funds and hedge funds would still have to use the current application form.
The IRS estimates that 17 percent of the approximately 80,000 groups that apply for tax-exempt status each year could use the shortened form.
A former member of the Advisory Committee on Taxation, Victoria Bjorklund, says the current application form and an IRS review are effective in weeding out applicants who want to run a nonprofit as a business, such as a case she knows of in which the applicants were surprised to find out, after having their long form scrutinized, that they could not use their organization’s assets to purchase a car for personal use.
She said documentation that is required with the current form, including a budget and a narrative description of a proposed nonprofit’s activities, helps regulators.
“If everyone were honest and wonderful, this would be a great development,” says Ms. Bjorklund, who is now a lecturer at Harvard Law School. “But not everyone is honest.”
Materials accompanying the short form will guide applicants through the process, says Ms. Lough, the IRS commissioner. The IRS, she says, doesn’t have the resources to educate organizations “one taxpayer at a time” by scrutinizing applications that spell out a new group’s aspirations.
A tight budget, she says, forces the agency to focus on the actual activities of tax-exempt groups, which they must report every year on their informational returns.
“In compliance, you always have to deal with the hard facts,” she says.
Bruce Hopkins, a nonprofit attorney in Kansas City agrees. “I love it,” he says, referring to the proposed short form.
“Rather than spending time looking at what organizations say they are going to do, why don’t we instead devote time looking at what they are actually doing?”
