October 19, 2015; LinkedIn, “Pulse”
It should be no abruptness that 15-year-old Hana co-authored a column with her uncle Gene titled, “Why Are Charities Tax-Exempt?” Uncle Gene is Gene Takagi, the managing advocate at the NEO Law Group and a nationally accepted able in nonprofit law. Gene’s Nonprofit Law Blog should be on everyone’s blog feed.
Assisted by Uncle Gene, Hana has composed a actual competent assay of the requirements for entities to accept 501(c)(3) designations and, as she puts it, “whether authoritative authorities are appropriately administration those requirements.”
After actual agreeably reviewing Treasury regulations what it agency to be “charitable” or “educational,” two of the accessible purposes for 501(c)(3) status, Hana and Gene perceptively agenda that some critics accept appropriate that “it’s too accessible to canyon the requirements for furthering a ‘charitable’ or ‘educational’ purpose” and that this “anything goes” access “has alone been fabricated worse by the new Anatomy 1023-EZ” that the IRS started appliance aftermost year for “streamlined” 501(c)(3) applications. The 1023-EZ form, a three-page appliance that simplifies accomplishment for 501(c)(3) cachet bottomward to answering 11 basal questions about proposed activities, makes the IRS assay action of the accomplished attending like an dogged obstacle advance in comparison.
With an under-resourced tax-exempt assemblage at the IRS, it is accessible that the 1023-EZ was apparent as a way of abbreviation a excess of applications. Perhaps the IRS was artlessly acceptance that the front-end assay of 501(c)(3) applications wasn’t that abundant added able-bodied than walking through the 1023-EZ checklist.
“With cryptic advice [from the IRS] about what it agency to be operating for ‘charitable’ and/or ‘educational’ purposes,” Hana and Gene write, “there are acceptable bags of accommodating organizations that are operating with purposes that abounding critics accept are not aces of tax-exemption.”
The Takagis’ affair zeroes in on a austere problem. The 1023-EZ process, alike if a well-intentioned acknowledgment to the accommodation limitations of the IRS, affronted by the troubles of the tax-exempt assemblage of the Service in the deathwatch of the Lois Lerner imbroglio, may able-bodied be counterproductive. In 2014, the admiral and CEO of the National Council of Nonprofits, Tim Delaney, wrote a analytical assay of the 1023-EZ process, highlighting abeyant problems that could ensue:
The new anatomy and action would all but annihilate the accepted due activity undertaken by the IRS. One accomplished nonprofit controlling forecasts anarchy for alone donors and foundations, “if the acreage is aback abounding with hundreds of thousands, if not millions, of anew minted (c)(3)s.” Accompaniment alms regulators… analogously argue the proposed process. The National Association of Accompaniment Alms Officials has actively warned the IRS that “that the Anatomy 1023-EZ will access befalling for artifice and heighten the accountability on accompaniment regulators.”
A year later, the National Taxpayer Advocate’s appointment has connected to accession concerns: “Because Anatomy 1023-EZ does not crave applicants to accommodate acknowledging affidavit or substantiation, but alone to adjure they authorize for absolved status, the IRS has in aftereffect alone its ability to brainwash and adapt taxpayers afore it confers absolved status.” As a aftereffect of the 1023-EZ process, the Advocate’s assay shows that the approval amount for 501(c)(3) applications rose from 84 percent in FY2013 to 94 percent in FY2014, and the cardinal of applicants added than angled from 45,289 to 100,032. The 2014 cardinal provides some affirmation for Delaney’s concern, in that the Anatomy 1023-EZ action started alone in July of that year. Early after-effects on the 1023-EZs themselves through the additional division of 2015 announce a 95 percent approval rate. An IRS accidental sample of a baby cardinal of 1023-EZ applications suggests that there ability be an absurdity amount in 1023-EZ approvals of about amid 21 and 29 percent compared to a added accelerated due activity process.
The Taxpayer Advocate’s address added, “The advice on the e-Postcard [Form 990-N] is bereft to acquiesce a abeyant donor or researcher to actuate whether the alignment absolutely conducts absolved activities. Thus, Anatomy 1023-EZ and Anatomy 990-N, alike taken together, accommodate about no transparency.”
The IRS appears to apperceive it has launched a activating that warrants a analytical reexamination. The 2016 workplan for the Tax Exempt/Governmental Entities assemblage calls for evaluating the 1023-EZ action to appear up with “potential improvements,” aggregate abstracts on the trends and patterns of 1023-EZ applicants, and admit “post-determination acquiescence administration on organizations that were accepted absolved cachet through the acquiescence of the Anatomy 1023-EZ application.”
Even if the affair were artlessly a amount of warding off problems of nonprofit artifice and abuse, the botheration extends above the role of the federal government. At the 2015 affair of the National Association of Attorneys General (NAAG) and the National Association of Accompaniment Alms Officials (NASCO), regulators acclaimed “the atomic advance of the cardinal of nonprofit organizations, due in allotment to the IRS Anatomy 1023-EZ and the availability of online fundraising platforms…[and] accompaniment alms regulators…working adamantine to ensure that organizations are acknowledging with their accompaniment acknowledged obligations.” With bare IRS definition, due diligence, and oversight, accompaniment regulators will atrociously access the affray to actuate what the states themselves charge do to ensure nonprofit probity.
Hana and Gene Takagi end their LinkedIn article with a alarm for bigger advice on the requirements and abilities for tax-exempt status. “What is important is for the IRS and accompaniment agencies to consistently and adequately accomplish laws to advice anticipate organizations from operating inconsistent with 501(c)(3),” they conclude. We charge added 15-year-olds like Hana Takagi reminding the nonprofit area to ask adamantine questions of itself and its regulators.—Rick Cohen
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