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Research Study #4: Study of the Extent to Which the IRS Continues to Erroneously Approve Form 1023-EZ Applications

 

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #4-1

Require Form 1023-EZ applicants to submit their organization documents as part of the application and make a determination only after reviewing the organizing documents.

IRS RESPONSE TO RECOMMENDATION: None given.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The 2019 study shows that failing to review organizing documents caused the IRS to erroneously approve applications for exempt status 46 percent of the time (i.e., of 347 organizations in the 20-state sample,  159 did not meet the organizational test). For example, the IRS approved the Form 1023-EZ submitted by an organization whose entire purpose, according to its articles of incorporation, was “to provide financial assistance to family members with mental health illness.” This organization’s articles of incorporation do not identify any exempt purpose. Moreover, the articles may actually prevent the organization from operating to further public rather than private interests – they effectively prevent it from meeting the operational test. This organization, like other organizations whose Form 1023-EZ is erroneously approved, may not report and pay tax on income that should be subject to tax, and donors may claim deductions for contributions to it that should not be deductible. In comparison to the potential negative impact on tax administration caused by erroneous approvals, requiring Form 1023-EZ applicants to provide their organizing documents does not present an unreasonable burden.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

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2.

TAS RECOMMENDATION #4-2

Review Form 1023-EZ applicants’ websites, if any, before making a determination.

IRS RESPONSE TO RECOMMENDATION: None given.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS routinely reviews the websites of applicants that are selected for predetermination review (see IRM 7.20.9.2.6), so we continue to recommend that the IRS require review of all applicants’ websites as part of the determination process.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

3
3.

TAS RECOMMENDATION #4-3

Ascertain the frequency with which applicants’ descriptions of their mission and activities on Form 1023-EZ result in referrals of the application for further review, and if such further review is infrequent, conduct additional training on procedures for evaluating Form 1023-EZ applications.

IRS RESPONSE TO RECOMMENDATION: None given.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s narrative does not address the recommendation set forth in RS 4-3. TAS has never recommended that Form 1023-EZ applicants be required to submit Form 1023, so the outside research firm’s recommendation (or lack of recommendation) on that point seems irrelevant.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

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4.

TAS RECOMMENDATION #4-4

Revise IRS procedures to require reviewers to determine whether applicants’ descriptions of their mission and activities on Form 1023-EZ clearly identify an exempt purpose, rather than requiring a determination of whether the mission or activity is “within the scope” of IRC § 501(c)(3).

IRS RESPONSE TO RECOMMENDATION: None given.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Form 1023-EZ now requires applicants to provide a short description of their mission or most significant activity. This requirement has been in place since 2018. TAS expected that the short descriptions may have lowered the erroneous approval rate, but TAS’s 2019 study did not show lower erroneous approval rates compared to previous TAS studies of representative samples from the same 20 states — the erroneous approval rate was actually higher in the most recent study (46 percent in the 2019 study, compared to 37 percent in the 2015 study, 26 percent in the 2016 study, and 42 percent in the 2017 study).   We believe further research would be helpful to determine the effect of the short descriptions     on the rate of erroneous approvals. We noted some of the short descriptions the applicants provided,  such as “Promoting cultural relationships thru food and activities” or “Build new homes to be sold to low income families,” warranted further review, such as reading the applicant’s articles of incorporation.   TAS   is not recommending that a determination as to exempt status be made solely on the basis of the short description, or that the IRS make determinations that are inconsistent with judicial precedent, but rather that the IRS review the descriptions more rigorously to determine whether additional information is needed before making a determination.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

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