The IRS Advisory Committee on Tax Exempt and Government Entities (“ACT”) presented its recommendations and released its Report of Recommendations at a public meeting attended by Steven Miller, Internal Revenue Service Deputy Commissioner for Service and Enforcement, Lois Lerner the Director and senior leadership for the IRS Tax Exempt & Government Entities Division (TEGE), and members of the public and media. Marty Martin, a Raleigh, NC lawyer serving on the ACT’s Exempt Organizations (EO) subcommittee, explained “Though not required to do so, the IRS TEGE often seek to implement the ACT’s recommendations by incorporating them into their ongoing work plans or by other means. Our EO subcommittee believes the IRS will undertake to address and implement each of these recommendations over time.”
If implemented, the recommendations will create a process for applying for recognition as a tax-exempt organization through the use of an interactive Web-based Form e-1023 and a redesigned the Form 1023 that is more effective, simple, educational, and consistent with the new IRS Form 990. In addition, the IRS would provide more guidance on alternatives to forming and operating a tax-exempt organization and expand how it addresses compliance issues as a complement to the application process.
Lois Lerner, the director of the IRS Tax-Exempt & Government Entities Division, supports the recommendations of the EO subcommittee. She commented “Because the Form 1023 is the gateway to obtaining the privilege of tax exemption, it needs to be easily understood by applicants, yet provide the IRS with the necessary information to ensure applicants meet the legal requirements. The ACT’s recommendations for revising the form and making it electronic strike a good balance between those needs.”
The recommendations of the EO subcommittee follow:
1. 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.
2. 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.
3. 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 a separate “Form 1023-EZ” for small organizations. The ACT does not recommend development of such a form.
4. 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.
5. 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.
6. 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.
In addition to the EO recommendations above, the ACT Report discusses recommendations submitted by its other subcommittees related to employee retirement plans examination process; federal, state, and local governments’ use tax-payer identification number matching to improve compliance; the General Welfare Doctrine as applied to Indian tribal governments; and IRS forms for information reporting related tax-exempt bonds.
The IRS Advisory Committee on Tax Exempt and Government Entities consists of external stakeholders, practitioners, and representatives with expertise in the areas for review for the year. ACT members are an external sounding board and provide direct input to the IRS Tax Exempt and Government Entities leadership.