Most Serious Problem: 1023-EZ
Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, was adopted in large part to reduce inventory backlogs for processing Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Today, Form 1023-EZ applications exceed Form 1023 applications, and the IRS approves virtually all Form 1023-EZ applications it receives.
Taxpayer Advocate Service (TAS) studies carried out in 2015 and 2016 showed, respectively, that 37 percent and 26 percent of approved entities in one of 20 states that post articles of incorporation online did not meet the organizational test for qualification as an Internal Revenue Code (IRC) § 501(c)(3) organization. This year’s TAS study of a representative sample of approved Form 1023-EZ applicants from those same 20 states found an erroneous approval rate of 42 percent. Meanwhile, the more detailed Form 1023 processing time, 96 days in Fiscal Year (FY) 2016, rose to 113 days for FY 2017. Thus, Form 1023-EZ as implemented created a new risk – erroneous grants of tax exemption – yet may not have solved the initial problem of long processing times for Form 1023.
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