Starting a Nonprofit?

The IRS Form 1023 EZ makes it extremely easy and less expensive for applicants to apply to the IRS for recognition as a 501(c)(3) tax exempt nonprofit.

While serving on the IRS Advisory Committee on Tax Exempt and Government Entities (ACT),  we reviewed the prospective IRS Form 1023 EZ and its online application process.  Some of our responses included:

1. Given the Congressional attitude toward the IRS, increasing funding cuts, and the movement to use the Internet and its website, this online form was an appropriate response and consistent with our recommendations on the IRS use of web based technology.
2. People will game the system.  Nonprofits, which would not be recognized as tax-exempt using the IRS Form 1023, will be erroneously recognized as tax exempt.   What will be the impact to the public, donors, and others?  When that happens, will the IRS have the resources and the will to address the problem? The IRS Taxpayer Advocate subsequently has confirmed this is a substantive problem in its reports to the IRS.
3. Applicants will be less likely to seek appropriate legal advice before starting a nonprofit.  Yet this is precisely the time during which prospective applicants will benefit the most from having an experienced and knowledgeable legal counsel advise them.  The IRS Form 1023 helps them to learn about IRS legal requirements and, if done properly, to create a business plan and initial case statement as an integral part of the application.

But the ease of the IRS Form 1023 EZ application process begs the question of a more fundamental issue:

Should an applicant start a nonprofit?

It is among the first questions I will ask a new client during a consultation about starting a nonprofit.   Answering it engenders a substantive and revealing discussion and enables clients to learn more about what it means to run a nonprofit organization and whether there are better ways to meet their goals.

My experience is clients always benefit from our discussion.

For another take on this issue, read the blog post “Don’t Do It: Don’t Start a Nonprofit”.

References:

IRS Form 1023 EZ

IRS Form 1023

IRS Advisory Committee on Tax Exempt and Government Entities (ACT)

IRS Taxpayer Advocate memo on IRS Form 1023 EZ

“Don’t Do It: Don’t Start a Nonprofit”

 

 

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25 Quotes (and counting) for the Nonprofit Sector

On this gorgeous autumn day filled with yellow leaves one is reminded that working in the nonprofit sector requires maintaining a sense of humor and perspective.

Vu Le in his recent Nonprofit with Balls’ blog “25 quotes by famous people if they had worked in nonprofit” helped to keep that balance.

His readers added even more in their comments.  Robert Frost’s poem “The Road Not Taken” is a favorite and on this autumn day reader Chris Galvin’s adaptation of Frost’s lines are particularly amusing:

“Two paths diverged in a yellow…I chose nonprofit work.  Seemed like a good idea at the time.  Too late now to get on the profitable path.”

Can you find a favorite quote among them?

Enjoy.

“25 quotes by famous people if they had worked in nonprofit” – Vu Le, Nonprofit with Balls

The Road Not Taken – Robert Frost

 

 

Shifting the Burden of Taxes to a Simpler Form and Tax Rate

When corporations and individuals do not pay taxes because of deductions, depreciation and credits, the relevant question is to whom does the burden of taxation shift?

Do you want a simpler federal tax code that is easier to understand, pay, and administer?

If you answered yes, then are you prepared to forego your deductions, depreciation, and credits to simplify the tax code?

Theses are the questions raised in my recent Nonprofit Quarterly article “Shifting the Burdens of the Unrelated Business Income Tax: A Proposal to Nonprofits” and my earlier IRS ACT “What if?” inquiry contained in my “Concurring, Dissenting, and Sixth Recommendation…” comments which I hand-delivered to IRS Commissioner Koskinen during our public hearing in June 2014.

The issue of complexity and unfairness of the federal tax code crystallized for me while reviewing unrelated business income (“UBI”) and the corresponding unrelated business income tax (“UBIT”) for the tax year 2010 as a member of the 2014 IRS ACT committee.  In that year there were approximately 43,000 corporations which generated UBI.  This discrete number of corporations made the issue easier to understand and to quantify.

Nonprofit tax exempt corporations which engage in business/economic activity that is unrelated to their exempt purposes will pay corporate income tax at a rate  between 15-35 per cent.  Like an individual’s income tax, a corporation’s taxes are determined after reducing its taxable income because of tax deductions, depreciation, and credits.

Yet nearly two-thirds (66 per cent) of these corporations paid no corporate income tax in 2010.  This finding was consistent with the trend beginning in 1992 outlined in the 2008 Chronicle of Philanthropy article “A Taxing Matter” by authors Peter Panepento and Grant Williams.

But, what if all 43,000 corporations were required to pay taxes, but only on their gross income?  What is the revenue neutral rate, i.e. raising no more taxes than collectively paid in 2010?  The rate is slightly more than 3%!

The corporate tax form goes from its current convoluted form to a simple formula or three line tax form:

Gross income x (Y) tax rate percent = Taxes owed

Deductions, depreciation, and credits are like a carnival shell game which disguise to whom the burden of taxation shifts while extracting money.  The problem is we lose sight of this simple fact.

Can taxes used to fund public goods and services be raised in a way that is easy, effective, and efficient?  Can the burden of taxation be lowered and shared more equitably? Can the tax code be simplified?

Yes, but only if we are willing to forego the deductions, depreciation, and credits!

To read more:

• Nonprofit Quarterly:  Shifting the Burdens of the Unrelated Business Income Tax: A Proposal to Nonprofits, October 14, 2016.
• IRS ACT:  “Concurring, Dissenting, and A Sixth Recommendation for an Economic, Financial, and Statistical Study of IRS Statistics of Income (“SOI”) and Related Data to Inform and Guide IRS Policy and Practices for Nonprofit’s Unrelated Business Income Practices and Unrelated Business Income Tax to Include Considerations of Alternative Tax Regimes.” June 2014.

• Chronicle of Philanthropy:  “A Taxing Matter”, Peter Panepento and Grant Williams, January 30, 2008.
• Tax Foundation:  Federal Corporate Income Tax Rates, Income Years 1909-2012.

Websites last accessed October 24, 2016.

 

 

 

 

Goldman Sachs – 10,000 Women and 10,000 Small Business Programs

Dina Powell, president of the Goldman Sachs Foundation, recently spoke at Duke’s Sanford School.  She discussed several Goldman Sachs’ programs which are built on the concepts of social enterprise and entrepreneurship operating through women owned and small businesses as a means of improving lives and communities.

The 10,000 Women’s goal is to stimulate economic growth by providing 10,000 women around the world with management and business education, mentoring, and access to capital. With a focus on helping women outside the United States, the program seeks to positively impact the lives of these women, their families, and their communities.

The 10,000 Small Business Program is a public-private partnership designed to create growth and job creation among small businesses throughout the United States.  Currently they are focused on 12 urban areas and provide education and access to capital to small businesses in these communities.  Currently the program does not operate in the harder to reach and smaller markets and communities in rural areas of the United States.

By focusing on women overseas and small businesses which create the majority of the jobs in the U.S., these program integrate the concepts of social enterprise and social entrepreneurship as a transformative power for the communities and individuals.

A significant challenge  is how to scale these programs.  What suggestions do you have?

To read more about these program:

10,000 Women 

10,000 Small Businesses

Thank You, IRS.

Thank you, IRS.

Government officials and their organizations are often criticized publicly.  It seems everyone, including this author on occasion, has an opinion on what they should or should not do and how well or how poorly they did or did not do it.  Yet,  government agencies exist to provide services on behalf of us – the public.

In recent year the IRS likely has been among one of the most publicly criticized agencies.  Yet despite the criticism and severe cuts in funding and personnel, IRS staff continue to serve the public. Seldom do they receive a word of public thanks for what they do.

Sometime on Wednesday night August 24, 2016, the IRS returned a direct link to the Exempt Organization’s home page on the IRS main landing page irs.gov.   They listened and responded positively to aid the nonprofit sector in a small way.

The NP Quarterly posted my article  “Thank You, IRS, for Returning EO’s Missing Link on IRS.gov.  in response to what they quietly did overnight.

Thank you again.

 

 

 

 

A Web Link on IRS.gov

Nonprofit Quarterly published my article “The Case of the Disappearing Exempt Organizations Link on IRS.gov”  on Wednesday, August 24, 2016.

It is a short article -well not quite as short as this blog.  My article was prompted by a 2016 IRS ACT Exempt Organization subcommittee’s recommendation – a report which is definitely much longer than either my article or this blog. (Skip to page 89 if you want to read all of the 2016 EO subcommittee’s recommendations.)  For those who may recall, I served on the ACT committee from 2011-14.

By Thursday morning, August 25, 2016, the IRS had posted an “Exempt Orgs” tab on IRS.gov.

This direct link  will make it easier, especially for small and mid-sized, nonprofits to access directly the IRS Exempt Organizations home page and the many resources which the EO division creates to provide them with much needed and used information.

Thank you to IRS Commissioner Koskinen and the IRS TEGE, EO, and IT personnel who listened and responded positively.

 

 

 

Alzheimer’s Association – Statement of Relationship

As the Alzheimer’s Association experiences simultaneous disaffiliation and consolidation of its chapter network, I recall the months long process which created the association’s State of Relationship.  This agreement guided the relationship between the chapters and the national Alzheimer’s Association for more than 15 years.

Through a process which included communication, transparency, feedback, discussion, and compromise, our task force created a consensus agreement which was adopted without modification and approved after a majority vote by the national board and a majority of the more than 220 chapters in existence at the time.  The majority vote approving the Statement of Relationship is in sharp contrast to the evenly split vote when the issue of consolidation was considered by the chapters last fall.  As a result many chapters are withdrawing from the national association and long term impact of this split yet to be determined.

Here is a link to my recent Nonprofit Quarterly article  “Alzheimer’s Association – Cooperation, Competition, or Consolidation?”  reflecting on our task force’s efforts.

IRS ACT

For the past three years I served on the IRS Advisory Committee on Tax Exempt and Government Entities, known also as “the ACT”, and its related Exempt Organization (“EO”) subcommittee.   Our subcommittee worked directly with the IRS leadership which oversees the nation’s nonprofit and tax-exempt organizations.   Yes, this is the IRS division and leadership about which you’ve read so much in recent times.  

During my tenure, I served as co-project leader for one report and co-author for portions of three reports.  The reports are the result of a year’s work, analysis, and discussions with IRS officials and others. These reports are formally presented as recommendations directly to the IRS Commissioner and senior IRS and Treasury leadership in a public hearing in Washington, D.C. Often, they are adopted in some form and implemented by the IRS. 

For example, in 2013 I gave the oral presentation for our report “Exempt Organizations: Leveraging Limited IRS Resources in the Tax Administration of Small Tax-Exempt Organizations.”  During my comments I specifically asked that exempt organizations have prominent link on the IRS’ main webpage to make it easier to find IRS information on nonprofits.  The Acting commissioner agreed and immediately ordered that a prominent tab for “Tax Exempt Organizations” be added to the main IRS main webpage.  

The tab appeared on the website before 5 pm.  You’ll find it in the middle of the page.  Wow, that’s responsive government leadership which made a positive difference!

We made other recommendations which will require more information for Form 990 EZ filers, enhance customer education and outreach, and increase sharing information with state charity regulators.   In time, hopefully, some of these other recommendations will be adopted.

In 2014 I authored the ACT’s first “Concurring, Dissenting, and a Sixth Recommendation” .   My comments were a first for the IRS and the ACT because they were not included as part of the overall report.  In preceding years ACT reports integrated differing and dissenting opinions. For example, see footnote 44 in the 2013 report.  Indeed, I was told these differences often helped the IRS to better understand and shape its policies.  

I drafted my comments in response to our EO committee’s report “Exempt Organizations: Analysis and Recommendation Regarding Unrelated Business Income Tax Compliance of Colleges and Universities.”   The committee based its report and recommendations  in part on the statistically flawed two IRS Interim and Final Colleges and University Study reports. 

Nevertheless,  I hand-delivered my “Concurring, Dissenting, and a Sixth Recommendation” to IRS Commissioner Koskinen before having a direct discussion with him about them during our June 2014 public hearing.   It remains to be seen whether the IRS, the Department of Treasury’s Office of Tax Policy, or others will undertake the study I recommended or, more interestingly, address the provocative and interesting “What if?” questions which I raised.    

My service on the ACT was a wonderful and challenging opportunity as a volunteer, as a lawyer, and as a citizen to influence and help nonprofit organizations.  

What are you doing to affect policy and law in your areas of interest?  Your thoughts and voice are needed and often you will make a difference!

IRS 1023 EZ

On July 1, 2014, the IRS announced its new IRS Form 1023 EZ. This form is designed to ease and expedite the application process for small organizations which project $50,000 or less in income and assets of less than $250,000 during their first three years of operations.

To file an applicant must pre-qualify by answering 17 questions. If qualified an applicant will submit the application online and pay an electronic application fee of $400.00 after establishing an account on pay.gov.

For the past three years (2011-2014) I served as a member of the IRS Advisory Committee on Tax Exempt and Government Entities (ACT).  During 2011-12 we reviewed the IRS 1023 application process and issued recommendations in our June 2012 annual report.   While the committee recommended the IRS continue to use the Form 1023 application, four of the report’s core recommendations were:

1. the IRS should expedite the internal processes and commit the necessary resources (human, financial, and technical) to transform Form 1023 to an interactive Web-based Form e-1023 that can be filed electronically and stored, transmitted, and disseminated in an electronic database format; and

2. the IRS should redesign the Form 1023 with four primary objectives: to make the form (i) effective at identifying whether organizations meet the requirements for recognition of exemption; (ii) consistent with the structures and definitions of Form 990; (iii) simple by using a short core form with supplemental schedules that will ease the filing burden on small and/or less complex organizations; and (iv) educational by organizing questions based on substantive exemption requirements and including explanatory information. ***

5.  the IRS should carefully examine recurrent complaints about the Form 1023 filing and review process and take appropriate and expeditious steps to improve the effectiveness, efficiency, and timeliness of that process; and

6. the IRS should expand its use of the Review of Operations (ROO) program (to follow up on Section 501 (c)(3) organizations whose 1023 forms indicate potential future compliance issues), and should consult with state charity regulators regarding indicia that may warrant such follow-up.

The Form 1023 EZ is the second form which the IRS released following this report.  The first was last year’s introduction of the Interactive Form 1023.

Finally, the IRS continues to review and revise its application process in the Cincinnati office.  The IRS will rely upon the ROO as the primary means to follow-up and check on the nonprofits which avail themselves of the Form 1023 EZ application process.

IRS Interactive Form 1023 – Public Testing

On September 4, 2013, the IRS posted a beta version of their forthcoming Interactive Form 1023 on their StayExempt website. This electronic form permits an applicant to complete a 1023 Application for Recognition of Exemption Under Section 501 (c)(3) on-line. The form has accompanying interactive web links. These links provide context sensitive information about the form’s questions and related issues which will guide the applicant through the form.

The beta version is available for public review and public feedback only until September 20, 2013. There are email links through the form to provide feedback. After September 20th, the form will be removed from the website while the IRS reviews the comments it receives. The IRS then will release a final version for public use later this fall.

Reviewers cannot use this beta version to download and print or submit as a current application. However, when released in its final form, an applicant will download and print a completed application which will be mailed to the IRS for processing. Hopefully, this form represents an interim step towards an online electronic 1023 application process.

In addition, the IRS also updated two of their related StayExempt courses: “Applying for 501(c)(3) Status” and “Maintaining Tax-Exempt Status.”

Will you:

• review this form and provide feedback to the IRS, and
• forward information about it to others and encourage them to review it before 9/20?

Both the Interactive Form 1023 and updated courses can be accessed on the StayExempt website.