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April 9, 2015

I.R.S. Shortcut to Tax-Exempt Status Is Under Fire

New York Times Business Day
By  APRIL 8, 2015 

Battered by a scandal over delays in approving groups for tax-exempt status and plagued by a backlog tens of thousands of cases long, theInternal Revenue Service unveiled a strikingly stripped-down online application last year to speed the process.

But to critics, the I.R.S.’s version of “don’t ask, don’t tell” is fraught with problems. An unlikely coalition of tax lawyers, state enforcement agents and even many nonprofits that favor simpler rules say that the agency — by not asking any questions about governance, conflicts of interest or function, and saying applicants don’t have to reveal any such issues — is making it too easy to commit fraud.

The form, 1023-EZ, was introduced over the summer and is available to small charities with an annual income of $50,000 or less and assets under $250,000. Instead of wrestling with a painstaking 26-page application that demands extensive documentation, these groups can now fill out a two-and-a-half page checklist that requires no additional paperwork or even a statement of purpose.

“In many communities, it takes more to get a library card than it takes to get this new exempt status,” said Tim Delaney, president and chief executive of the National Council of Nonprofits, a network of charitable groups. His group opposed the new form, arguing that the I.R.S. is abdicating its responsibility to screen groups, and that, in the long run, potential abuse will undermine public trust in charities.

The National Association of State Charity Officials has also taken a stand against the EZ route, complaining that it will further strain already overburdened regulators.

Tamera Ripperda, director of the I.R.S.’s Exempt Organizations division, said the criticisms were misplaced. “We underwent a thorough risk assessment of this form,” Ms. Ripperda said.

Looking through its records, the I.R.S. found that about two-thirds of applicants were small, fledgling groups that had not started operating, so that the detailed vetting was premature. Once approved, groups are required to file yearly tax returns.

“We think that this is a better use of our resources,” Ms. Ripperda said. “Rather than examining groups upfront on what they plan to do, we’re going to examine them on what they’re actually doing.”

Since the EZ form’s introduction last July, 28,000 groups have used it, Ms. Ripperda said. To check for abuse, the agency selected about 1,000 for more in-depth review and questioning.

“So far we’ve not found any indications that the EZ has been intentionally misused,” she said. Processing time for the new EZ application is averaging 16 days, compared with an average of 110 days for the long form.

She added that the backlog of existing applications had also been eliminated.

Advocates and tax professionals have long complained that applying for exempt status was a punishing ordeal, particularly for charities with small budgets. The original Form 1023 requires a narrative statement and extensive documentation, including bylaws, articles of incorporation, copies of contracts with officers, directors and service providers, and financial data.

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