Not too long ago the IRS made available a streamlined version of Form 1023 (Application for Exemption) called Form 1023-EZ for qualifying nonprofit organizations. The goal was to shorten the process of exemption approval and reduce the backlog of applications sitting in their under-resourced offices. Some critics suggest that it is already too easy to fraudulently pass through the requirement door for what the Treasury describes as “charitable” or “educational”, and that Form 1023-EZ only makes it worse.
Form 1023-EZ does not require applicants to submit backup documentation to support its claim as a charitable organization. As a result the approval rate for a 501(c)3 application rose from 84 percent in 2013 to 94 percent in 2014, and the amount of applicants more than doubled from 45,289 to 100,032. Keep in mind that Form 1023-EZ was not even made available until July of 2014.
An organization that receives their tax exempt status through the submission of a Form 1023-EZ and produces a simple postcard as an annual return (Form 990-N) essentially provides no transparency for the public to determine how the organization actually conducts its activities.
The 2016 work plan for the Tax Exempt/Governmental Entities unit is calling for an evaluation of the 1023-EZ process, a collection of data on the trends and patterns of applicants, and a post-determination compliance enforcement on those organizations that were granted exempt status through the submission of the application.
Regulators at the 2015 meeting of the National Association of Attorneys General (NAAG) and the National Association of State Charity Officials (NASCO) noted the growth in the number of nonprofit organizations and believe it is in part due to the IRS Form 1023-EZ and the increase in online fundraising platforms.
With the IRS providing a blurry definition of what constitutes as “charitable” or “educational” and requiring no backup to the organizations’ claims, the state regulators are left to determine what each state themselves have to do to ensure nonprofit accountability.
(Compiled from “What Makes a Charity Tax-Exempt? Issues for Government Oversight and Due Diligence”, Rick Coehn, The NonProfit Quarterly)