Electronic Filing for Applications and Returns Moves Forward, Even as More Form 1023-EZ Issues Emerge

The IRS Exempt Organizations division is rapidly moving into the digital age when it comes to required filings. First, in mid-December the IRS provided details on how it will implement the new congressional requirement that annual information returns and related forms be filed electronically for tax years beginning after July 1, 2019. However and as allowed by Congress, the IRS decided to postpone this requirement for Form 990-EZ filers until tax years ending July 31, 2021 or later. It also will delay until 2021 electronic filing for certain other forms that are not yet available in electronic format, including Form 990-T (for reporting unrelated business taxable income) and Form 4720 (for reporting certain excise taxes).

Second, the IRS has issued guidance on its new requirement that the Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) also be filed electronically. In Revenue Procedure 2020-8 it made clear that electronic submission is the exclusive means of submitting this form after January 31, 2020, except for submissions eligible for a 90-day transition relief period, as well as modifying other aspects of the application process to reflect the electronic filing requirement. The IRS also issued a news release summarizing the changes made by the Revenue Procedure.

But at the same time as the IRS was moving forward with electronic filing, the Acting National Taxpayer Advocate included in her Annual Report to Congress a highly critical Study of the Extent to Which the IRS Continues to Erroneously Approve Form 1023-EZ Applications. Here are the Study’s key findings:

In 2015, 2016, and 2017, TAS studied representative samples of articles of incorporation for corporations from 20 states that make articles of incorporation viewable online at no cost and whose Form 1023-EZ had been approved by the IRS during the preceding year. The studies found that between 26 percent and 42 percent of the time, the approved organizations did not meet the organizational test and thus did not qualify for the exempt status the IRS had conferred. In 2019, TAS repeated the study and found that 46 percent of the approved organizations did not qualify for IRC § 501(c)(3) status.

The 2019 study also found that some states provide form, or template, articles of incorporation. Depending on the template, corporations that use the template are virtually guaranteed to meet, or fail to meet, the organizational test. A review of other information that applicants provide on Form 1023-EZ, such as their websites, may provide useful insight about whether the organization qualifies for exempt status.

Form 1023-EZ was revised in 2018 to require applicants to provide a description (in 255 characters or less) of their mission or most significant activities. However, according to IRS procedures, the described mission or activities need only be “within the scope of IRC § 501(c)(3)” to be deemed sufficient. According to the 2019 study results, the IRS made erroneous determinations more frequently after it added the description field.

Lloyd Mayer