Dozens of charities that obtained tax-exempt status using a bare-bones form intended only for very small nonprofits quickly ballooned into million-dollar-plus organizations, according to a Chronicle analysis of new data released by the Internal Revenue Service.
The data raises questions about whether many organizations are improperly using the three-page electronic Form 1023-EZ rather than the 26-page Form 1023, which nonprofits had to use to get tax-exempt status until the EZ form became available in 2014.
To be eligible to use the EZ form, groups must attest that they have less than $250,000 in assets and that they don’t expect their gross annual receipts to exceed $50,000 within the next three years. Otherwise, they must use the long form.
However, a Chronicle analysis of the informational Form 990 filings found that of the more than 100,000 groups that have filed the 1023-EZ form, 1,888 groups have reported revenue of over $50,000 within three years, with 765 of those reporting revenue of more than $100,000 in their latest available 990 filing. For example, Giving Hope International, in Riverside, Calif., received more than $3.8 million in contributions in its 2015 fiscal year, while the Wild Animal Preservation Fund in Peoria, Ariz., pulled in nearly $1.5 million that same year thanks to unexpected gifts of medical supplies.
The filings also showed that 193 organizations claimed assets in excess of $250,000, including 30 with assets of more than $1 million. That includes the Warrior to Citizen Foundation in McDonough, Ga., which reported assets of more than $30 million in 2015 due to a series of land donations.
Explosive Growth Is Rare
The findings point to “abnormalities,” because it typically takes a long time for new nonprofits to establish themselves and grow, said Tim Delaney, president of the National Council of Nonprofits.
“As a whole, it’s very abnormal to see hundreds of groups that were expecting to be small to suddenly explode in size,” said Mr. Delaney, who made it clear he wasn’t referring to any specific charities.
The long form requires nonprofits to provide details about their mission, organizational structure, employee compensation, and fundraising activities, among other information.
Once a charity is established using the EZ form, there is no federal requirement that it later provide all of the additional documentation required by the long form, no matter how large it grows. Some of the data, like financial information, will come through in the Form 990. Other parts, like the articles of incorporation and bylaws, won’t.
And it is unlikely that charities that scale up operations soon after filing the 1023-EZ will suffer any repercussions, according to Chip Watkins, a lawyer at Webster, Chamberlain and Bean.
Even if the IRS were to audit a charity and find it had misrepresented its plans for growth, he said, it’s unlikely that it would result in penalties. “If this is really being filed by amateurs, people who are trying to start up a small organization and probably don’t have any substantial knowledge of exempt organizations’ tax law, you probably couldn’t get a conviction for perjury because these people don’t know what they’re doing.”
Controversial Beginnings
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.
Advocates said the new form would make it much easier for small nonprofits to get their start, but critics warned it would throw open a door for charities that wouldn’t normally qualify for 501(c)(3) status to improperly obtain tax-exempt status. For example, they could attest to having a dissolution policy without actually drafting one.
In 2012, the IRS’s Advisory Committee on Taxation recommended against creating 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.”
More Problems
Terri Helge of Texas A&M School of Law raised another concern: The IRS appears to have approved hundreds of EZ filings from churches, which are not supposed to use the new form. (Churches don’t have to request a written approval of charity status, but if they do they’re supposed to use the 1023.)
Additionally, The Chronicle’s review of IRS data showed that 8,508 groups reported they don’t receive at least one third of their financial support from public sources, suggesting some should have been formed as operating foundations — which run their own charitable programs — rather than charities.
“For better or worse, the form’s introduction is now water under the regulatory bridge,” said Cindy Lott, director of nonprofit management programs at Columbia University.
The next step is for researchers and regulators to track these charities and determine if regulatory improvements are needed at the federal or state level.
