Friday, July 4, 2014

BP Holdings Tax Management, Balley Price Holdings: IRS makes it easier to get tax-deductible donations

It's hard to argue against tax simplification, but the Internal Revenue Service might have made it too easy for people and groups to set up tax-exempt charities.

On Tuesday, the IRS announced a streamlined form that small charities can begin using immediately to apply for 501(c)(3) status, which exempts them from paying taxes and lets them accept tax-deductible contributions.

The new Form 1023-EZ is three pages long, compared with 12 pages (plus individualized schedules) for the existing Form 1023. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less can use the short form. Certain types of organizations, including schools and hospitals, cannot use it. The IRS estimates that up to 70 percent of applicants will qualify to use the new form.

The long form requires charities to provide three or four years worth of detailed financial data and attach numerous documents, such as their articles of incorporation and a narrative describing their activities.

The short form requires no financial details and merely asks applicants to check boxes saying they have certain documents rather than providing them.

"It's almost like you are filling out a library card" application, said Tim Delaney, president and chief executive of the National Council of Nonprofits.

The council has been urging the IRS to review and streamline the long form. But the short form goes "too far too fast, representing radical departures from proven protocols," it said in a letter to the Office of Management and Budget.

Public trust

The group worries the short form will reduce public trust in charities by letting unqualified groups slip through the cracks.

"People who are working as telemarketers can file easy paperwork, go waltzing through this loophole, and the IRS will never know because the IRS is not requiring anyone to submit any backup paperwork," Delaney said.

Many state charity regulators also opposed the short form.

In a previous survey, state regulators "uniformly believed that collecting less information in the initial application for tax exemption on an assumption that an organization that begins small will remain small invites abuse and results in overall regulatory inefficiency," the National Association of State Charity Officials said in a letter to the budget office.

While the form "clearly needs to be redesigned and streamlined," it also serves an "important educational purpose," the letter said. It forces an organization to think deeply about its "activities, finances and management" and better understand the "comprehensive regulatory regime" it is about to enter. The association said the educational benefits "are especially important for small organizations. And we do not belive that a significantly shorter Form 1023 could provide a comparable level of these benefits."

States are also concerned that they will face an increased regulatory burden. "If the IRS is doing less screening, it will fall to the states," says Eric Gorovitz, a principal with San Francisco law firm Adler Colvin, which specializes in nonprofits.

State charity regulators, most of whom are attorneys general, are supposed to make sure that donations are used as intended.

State tax authorities also rely on the IRS. If it issues a determination letter that exempts a charity from federal taxes, the California Franchise Tax Board will exempt it from state taxes as well.

The federal exemption "used to be backed by all this review," Gorovitz said. "One concern is that (states) might lose confidence in the meaning of the federal determination letter."

Regulators and charity groups say the IRS created the new form without seeking their input. When an attorney discovered the form in a filing with the budget office and circulated it, the IRS listened to comments and agreed to make some changes. It lowered the gross receipts threshold to $50,000 from $200,000 in its original form, which reduced the number of charities eligible to use the short form.

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