The IRS Advisory Committee on Tax Exempt and Government Entities (“ACT”) issued its eleventh “Report of Recommendations” at a public meeting recently held at the IRS headquarters in Washington, D.C. The ACT consists of legal practitioners, external stakeholders, and representatives who advise and work with employee retirement plans; tax-exempt organizations; tax-exempt bonds; federal, state, and local government; and Indian tribal governments. The IRS Tax Exempt and Government Entities Division (“TEGE”) oversees all of these areas. There are separate ACT subcommittees for each area. ACT members are appointed to serve on a subcommittee based upon their expertise. I serve on the Exempt Organization’s subcommittee (“EO”) which includes all nonprofit and tax exempt organizations.
The EO subcommittee reviewed the current IRS Form 1023 “Application for Recognition of Exemption Under Section 501 (c)(3)” form and application process. Titled “Form 1023-Updating It for the Future” the EO subcommittee’s report made six recommendations which are:
- The IRS should expedite the internal processes and commit the necessary resources (human, financial, and technological) to transform Form 1023 into an interactive Web-based Form e-1023 that can be filed electronically and stored, transmitted, and disseminated in an electronic database format. This information will serve as the electronic gateway for IRS knowledge about tax-exempt organizations.
- The IRS should redesign 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 to reduce 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.
- The IRS should develop more educational tools about Form 1023, including tips for filing Form 1023, and more information about the substantive requirements for recognition of exemption. The development of these tools, coupled with the redesign of Form 1023, should obviate the need for separate “Form 1023-EZ” for small organizations. The ACT does not recommend development of such a form.
- The IRS should coordinate with the Department of the Treasury and the Office of Chief Counsel on the issuance of precedential guidance about the use of tax-compliant alternatives to the creation of new Section 501(c)(3) organizations, such as fiscal sponsorships and donor-advised funds.
- The IRS should carefully examine recurrent complaints about the Form 1023 filing and review process, and take expeditious steps to improve the effectiveness, efficiency, and timeliness of that process.
- The IRS should expand its use of the ROO program to follow up on Section 501 (c)(3) organizations whose Forms 1023 indicated potential future compliance issues, and should consult with state charity regulators regarding indicia that may warrant such follow-up.
The EO subcommittee believes the IRS will undertake to address and implement each of these recommendations over time.