IRS Plans to Significantly Decrease Backlog of Exemption Applications in 2014
IRS Plans to Significantly Decrease Backlog of Exemption Applications in 2014
It is well known for a variety of reasons, that there has been a tremendous backlog at the Internal Revenue Service (“IRS”) of Forms 1023, Application for Recognition of Exemption Under Section §501(c)(3) of the Internal Revenue Code, that have been filed and are currently pending determination.
This was addressed on February 28th by IRS Tax Exempt/Government Entities commissioner Sunita Lough. Ms. Lough said she expects to see a “significant” decrease in the IRS’ backlog of applications by organizations for tax-exemption by the end of 2014. She did not comment on or provide a number with respect to how many pending applications would be cleared in 2014 but continued by saying that the focus on processing applications and improving efficiencies will dominate work for the year and the IRS won’t be issuing a compliance plan for 2014. For 2015, Ms. Lough said the compliance plan that will be issued is “probably going to be vastly different from what you’re used to.”
BACKGROUND
A Form 1023 is the form filed by organizations requesting to be recognized by the IRS as tax-exempt under Internal Revenue Code (“IRC”) §501(c)(3). In addition to the form, filers are also required to include certain organizational documents with the application including, but not limited to, a Certificate of Incorporation, Bylaws, and a Conflict of Interest Policy.
As outlined previously in a WithumSmith+Brown tax tip, the Form 1023 has evolved considerably throughout the years. Form 1023, revised in March of 1951, was originally a four page document that requested similar information to that which is currently requested on the Form 1023 including, but not limited to, details of an organization’s charitable purpose and mission and copies of an organization’s governing documents. The Form 1023, as a result of the Pension Protection Act of 2006, was last revised by the IRS in June of 2006 and is now a core form comprised of 12 pages. In addition, there are 14 supplemental schedules that could potentially apply to certain types of organizations applying for tax-exempt status. The revised form added questions with respect to such items as an organization’s governance practices, compensation practices and conflicts of interest.
This revision pre-dated the 2008 IRS redesign of Federal Form 990, Return of Organization Exempt from Income Tax, which has led to some inconsistencies of definitions between the two forms.
TEA PARTY SCANDAL
With the advent of the Tea Party Scandal, the time it has taken for the review and approval of Forms 1023 has increased significantly. Subsequent to the release on May 14, 2013, of the Treasury Inspector General for Tax Administration’s (“TIGTA”) report entitled “Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review” on IRS treatment of the tea party and other conservative groups seeking tax-exempt status under IRC §501 (c)(4), there had been minimal communications from the IRS pertaining to this area. The report findings concluded that since 2010, the IRS used inappropriate criteria to identify which organizations’ applications would be reviewed for indications of significant political campaign intervention.
These reviews have resulted in considerable delays regarding tax-exempt applications; a majority of these applications were not worked on for 13 months. In addition, more than 20 months after being identified, TIGTA discovered that unnecessary IRS information requests were issued, including questions regarding past and future donors. This scandal has been ongoing since and has significantly contributed to the backlog of pending applications for tax-exemption on file with the IRS.
WHERE IS MY EXEMPTION APPLICATION?
The IRS has been very aware of this situation, in order to assist applicants in determining the status of a pending Form 1023, the IRS has established a section on its website aimed at providing this information. Please see the link below for the section devoted to this process entitled “Where’s My Exemption Application?”.
Additionally, in their efforts to expedite the application process and address the backlog of applications, applications for tax-exemption and miscellaneous determination requests are assigned to IRS Exempt Organizations specialists for review. If additional information is necessary to make a determination, a specialist will contact the organization for the information. Sample questions for many topics are available on the IRS’ website at the following link: https://www.irs.gov/charities-non-profits/charitable-organizations/exempt-organization-sample-questions
According to www.irs.gov, in general, applications are processed in the order received by the IRS. However, there are certain instances when the IRS will work a case outside the regular order. In order for a taxpayer to be granted expedited processing, there must be a “compelling reason” to process the case ahead of others.
Compelling reasons include the following:
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- A pending grant, where failure to secure the grant will have an adverse impact on the organization’s ability to continue operating.
- A newly created organization providing disaster relief to victims of emergencies.
- A pending grant, where failure to secure the grant will have an adverse impact on the organization’s ability to continue operating.
- IRS errors have caused undue delays in issuing a determination letter.
A request for expedited processing must be made in writing and must fully explain the “compelling reason”. The granting of expedited processing by the IRS will be determined on a case-by-case basis.
CONCLUSION
Developments with respect to this area are continuing on a daily basis. WithumSmith+Brown will continue to closely monitor the IRS’ progress.
Questions or comments?
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For more information on the topics discussed or services we can provide, please contact:
Scott Mariani, JD, Partner
Practice Leader
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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