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MSP #19: Form 1023-EZ

The IRS’s Reliance on Form 1023-EZ Causes It To Erroneously Grant Internal Revenue Code § 501(c)(3) Status to Unqualified Organizations

TAS Recommendations and IRS Responses



In addition to revising Form 1023-EZ to require applicants to provide a brief narrative statement of their actual or planned activities, as directed by the National Taxpayer Advocate’s sustained TAD, revise Form 1023-EZ to:a. Require applicants, other than corporations in states that make articles of incorporation publicly available online at no cost, to submit their organizing documents; andb. Require applicants to submit summary financial information such as past and projected revenues and expenses.

IRS RESPONSE TO RECOMMENDATION: The recommended additional information (organizing documents and summary financial information) does not reflect how the organization will operate, and how the organization operates is a determinative factor regarding exempt status.  In addition, TAS recommends that some – but not all – Form 1023-EZ applicants submit copies of their organizing documents. Under the recommendation, corporations organized in states that have documents viewable online would not need to submit them. This recommendation would result in disparate treatment of applicants, potentially causing confusion and decreasing customer satisfaction.  A requirement for organizing documents would also preclude electronic filing


TAS RESPONSE: The National Taxpayer Advocate is baffled by the IRS’s refusal to obtain and review formation documents of Form 1023-EZ applicants. Organizing documents may not necessarily reflect how the organization will operate, but the law requires that organizing documents contain specific provisions, and these provisions supply important protections to taxpayers and consumers. As the IRS notes, an applicant for IRC § 501(c)(3) status must meet an operational test, but the manner in which it is organized is also a determinative factor. Requiring applicants to provide their articles of incorporation that are not already available online does not constitute impermissibly disparate treatment. All applicants would have their documents reviewed by the IRS. The only difference is the manner in which the IRS receives the documents. Moreover, the requirement is a simple one the National Taxpayer Advocate does not agree with the IRS that confusion would necessarily ensue. The IRS could simply post a list of the states that maintain a database with the necessary documents viewable by the public at no charge. In any event, the National Taxpayer Advocate questions whether organizations that cannot comply with such a basic request understand the requirements for exempt status, either in terms of organization or operationally. The IRS is correct that electronic filing does not currently allow applicants for IRC § 501(c)(3) status to submit attachments. Rather than accepting this limitation, Tax Exempt and Governmental Entities Division (TE/GE) should explore how it can adjust its systems to allow applicants to submit documents electronically. Taxpayers seeking certification as a Certified Professional Employer Organization can already upload documents to IRS systems, and there may be other IRS pilots on improving taxpayer digital communications in which TE/GE could participate. The Taxpayer Digital Communication project would be a solution. Even more routine solutions, such as allowing for e-fax transmissions (which allow documents to be transmitted via phone number and received in an email box within the IRS), would help address the limitation.


OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A



Make a determination about qualification as an IRC § 501(c)(3) organization only after reviewing an applicant’s narrative statement of actual or planned activities, organizing documents, and summary financial information.

IRS RESPONSE TO RECOMMENDATION: Once Form 1023-EZ is revised to require a narrative statement of actual or planned activities, the IRS will make a determination about qualification as an IRC section 501(c)(3) organization after reviewing the submitted narrative of activities. The IRS does not plan to require organizing documents or summary financial information as indicated in our response to recommendation #19-1.

Update: The described revisions to Form 1023-EZ were implemented on January 2, 2018. The tax examiners, who will review the narratives prior to making a determination, received the relevant tax law training in December 2017.

CORRECTIVE ACTION: The IRS is identifying and planning for process changes based on narrative activity statements on Form 1023-EZ. The IRS expects to have these processes in place on the implementation of the revised Form 1023-EZ.

TAS RESPONSE: The National Taxpayer Advocate is pleased that the Deputy Commissioner for Services and Enforcement sustained the portion of her September 26, 2016 Taxpayer Advocate Directive that directs the IRS to revise Form 1023-EZ to include a narrative statement of actual or planned activities. She looks forward to new processes that will ensure the IRS considers the narrative statement in evaluating an applicant’s qualification as an IRC § 501(c)(3) organization.


OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A



Where there is a deficiency in an organizing document, require an applicant to submit a copy of an amendment to its organizing document that corrects the deficiency and has been approved by the state, even where the documents are available online at no cost, before conferring exempt status.

IRS RESPONSE TO RECOMMENDATION: Consistent with streamlined case processing used in processing all applications for recognition of tax-exempt status, the IRS does not plan to require that applicants submit copies of amendments where the IRS has identified a deficiency in the organizing document and requested an amendment. The IRS will continue to accept attestations, signed under penalties of perjury, that the organization has made the required amendments. If, upon examination, the IRS determines that an organization that attested to amending its document made no attempt to do so, the examining agent will propose revocation after discussion with the manager per Interim Guidance Memorandum TEGE-04-0117-0007, Review of Organizing Documents of Organizations that Attested to their Conformity in the Determination Process.


TAS RESPONSE: The National Taxpayer Advocate is perplexed by the IRS’s reluctance to verify that organizations follow its direction to amend their organizing documents. Affected organizations are those that submitted Form 1023-EZ attesting their organizing documents met the statutory requirements when they did not and were then directed by the IRS to amend their organizing documents. Rather than ascertaining that the required amendments were made, thus ensuring the organization complied with the requirements for exempt status, the IRS allows the organization to again simply attest that it has complied with the law. The organization’s noncompliance will come to light only if it is selected for audit, at which point the penalty for the noncompliance may be revocation of exempt status. These procedures represent a lack of service to organizations making good faith errors and a windfall to those that are intentionally noncompliant.


OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A