IRS to Ease Process of Approving Tax-Exempt Organizations

IRS to Ease Process of Approving Tax-Exempt Organizations

Still reeling from the controversy over its scrutiny of nonprofits, the Internal Revenue Service has decided it will no longer screen approximately 80 percent of the organizations seeking tax-exempt status, TIME reports. While the move will make it easier for small charities to secure tax-exempt status, it will eliminate a review designed to counter fraud and prevent political and other non-charitable groups from abusing the tax code.

Any group that pays a $400 fee and declares on the three-page Form 1023-EZ that it has annual income of less than $50,000, total assets of less than $250,000, and is in compliance with the tax-code requirements for a charity will automatically be allowed to accept donations that are tax-deductible for the donors who make them. The new form includes twenty pages of instructions detailing the requirements and limitations of a tax-exempt charitable organization that applicants must certify they have reviewed, under penalty of perjury. The previous form was twenty-six pages long and required supporting documents as well as a narrative description of the applying organization's mission and objectives.

IRS commissioner John Koskinen told TIME the change would result in "efficiencies [that] will translate into a faster and better review" of larger nonprofits and would help clear the 66,000 applications that have built up in the approval pipeline over the past year. Some observers are concerned, however, that the agency is opening the door to widespread abuse of Section 501(c)(3) of the tax code, making it easier for organizations to defraud the public, harder to ensure that charitable assets will be used for the purposes represented to the public, and more likely that (c)(3)s will act like 501(c)(4)s. "What we'll see is the so-called dark political money that flowed into the (c)(4) world is going to begin to flow into the (c)(3) world," said Marcus Owens, an attorney at Caplin & Drysdale and a former director of the exempt organizations division at the IRS. Moreover, Owens said, because of outdated software, the IRS will be unable to track active charities from its master file back to their originating documents.

In 2010, the U.S. Supreme Court's Citizens United ruling opened the door to the virtually unlimited funding of political campaign ads by (c)(4) organizations. Indeed, during the 2012 election cycle, (c)(4)s funneled approximately $300 million into political campaigns, the Center for Responsive Politics reports.

While some nonprofit leaders agree the old process for securing tax-exempt status was cumbersome, they worry that the agency has gone too far in the opposite direction. "It's easier to get tax-exempt status under 1023-EZ than it is to get a library card," said Tim Delaney, president and CEO of the National Council of Nonprofits. "[Bad actors] will be able to operate in the name of the charity, and the IRS will never be the wiser because they're not looking at the underlying documentation."