For several years, applying for tax-exempt status has been a waiting game, one that hopefuls for exempt status have come to expect will take more than a year to complete.
This has been due to several converging factors, including the already-large volume of new applications requesting tax-exempt status, an influx of requests for reinstatement by organizations that lost their status due to autorevocations, the debacle concerning exemption applications with lobbying and political activities, and the reduction in staffing at the IRS. The result is what feels like a black hole for many exemption applicants. As of April 2014, the IRS reported a backlog of 75,000 applications pending, of which 55,000 were over 275 days old.
Here, we give an overview of what’s happening with tax-exempt status applications.
Clearing the Backlog
The IRS has instituted several measures to cope with its application backlog, including a streamlined Form 1023-EZ and optional expedited processing for certain section 501(c)(4) organizations.
Today, the IRS reports that 91 percent of the old inventory was cleared through September 2014, and new applications are being processed faster: 90 percent of the over 20,000 applications received in the last six months have been approved, and Forms 1023-EZ are now processed in approximately 14 days.
Form 1023-EZ Applications
Because Form 1023-EZ requires much less information than the full Form 1023, the IRS plans to follow up with 1,500 of the 2,000 organizations that have filed Form 1023-EZ through correspondence audits to confirm the organizations are functioning appropriately under Section 501(c)(3).
In the event your organization is contacted for a correspondence audit, contact your tax professional to discuss your approach to the response. Doing it right the first time can save money and headaches later.
Requirement for Some Organizations to File for Tax-Exempt Status
Under present law, organizations planning to operate as not-for-profits under Sections 501(c)(4), (5), or (6) aren’t required to request tax-exempt status, but they may file Form 1024 if they want assurances that their activities will qualify. This option may change in the future.
Originally referred to as the IRS Bureaucracy Reduction and Judicial Review Act, HR 1295 was passed by the House of Representatives on April 14 and the Senate on May 14; however, in the process of passing the bill, it was revised to address trade issues instead of this tax-exempt status issue. If passed as originally proposed, the bill would have required that Section 501(c)(4) social welfare organizations intending to operate as tax-exempt entities notify the IRS of their identity and purpose within 60 days of being established. It would also have allowed such an organization to seek a declaratory judgment concerning its initial or continuing classification as a tax-exempt organization.
More Updates to Come
The issue of requiring an application for exemption isn’t included in current legislation but could be reintroduced in the future. If your organization is considering forming a new Section 501(c)(4) organization, we can help navigate the pros and cons to requesting exemption.
Moss Adams routinely monitors the regulatory landscape for not-for-profit and other tax-exempt organizations. We’ll continue to follow this issue and other developments, so check back regularly for additional news and insight on changes that may impact your organization.
If you have questions or want more information on the exempt status application process or new legislation, reach out to your Moss Adams not-for-profit professional.