Hello, IRS, is anyone listening?
Guest blog by Jennifer Chandler, Vice President, National Council of Nonprofits
A troubling development underscores that charitable nonprofits will have to work even harder to be heard by the IRS.
In January, the IRS announced that it will be changing both the focus and the membership of the Advisory Committee on Tax Exempt and Government Entities (“ACT”). The ACT is a volunteer (unpaid) advisory committee that the IRS Commissioner appoints so the IRS (specifically the Tax Exempt and Government Entities Division (TE/GE)) can receive informed feedback and recommendations from experts in the field regarding exempt organizations, employee benefit plans, tax-exempt bonds, and federal, state, and local and Indian tribal government issues. The ACT “enables the IRS to receive regular input on the development and implementation of IRS policy concerning these communities.”
The IRS announcement initially seemed innocuous, yet it turns out the changes will be very significant for charitable organizations. First, the ACT used to work through subcommittees focused on the five priorities of the IRS including exempt organizations (such as charitable nonprofits). But now, instead of serving as a forum for feedback and advice on issues pertinent to the communities identified above, the announcement tells us that the ACT will turn its attention to “tax administration issues in general,” including TE/GE’s internal “five key priorities: continuous improvement, knowledge management, risk management, data-driven decision-making and employee engagement.” The IRS also announced it will reduce the ACT from 21 members to 15 volunteers, giving no indication whether it intends to recruit individuals for their direct experience with exempt organizations (such as those affecting charitable nonprofits). We are concerned that these changes will further limit the flow of information that the IRS has access to about how its practices affect charitable nonprofits in the field.
In the past, the ACT has been in a position to submit recommendations to the IRS from a “real life” perspective on issues affecting all charitable nonprofits. (The ACT, for instance, played a valuable role providing feedback to the IRS in its report in 2006 about the redesign of the annual reporting form, the IRS Form 990.) But recently the IRS has ignored the ACT’s informed recommendations. The most vivid – and consequential – example occurred when the IRS issued the Form 1023-EZ (used for applications for tax-exemption) in July 2014, in spite of strong opposition expressed in the ACT’s June 2012 report (as well as equally strong opposition to the 1023-EZ expressed by the National Association of State Charity Officials and the National Council of Nonprofits, among others).
The IRS ignored the advice from its own advisory committee when it released the Form 1023-EZ, resulting in ongoing significant distrust of the application process, summarized in a scathing report issued by the National Taxpayer Advocate. We continue to hear about many situations where the rapid-fire 1023-EZ approval process produces negative results harmful to the general public, charitable nonprofits, private foundations, and state and local governments.
We wonder why the IRS is not taking advantage of the ACT members’ considerable expertise? For instance, before introducing significant policy changes, it would make sense to get feedback from its own advisory committee for their informed insights. But last fall the IRS issued proposed rules about the process
acknowledging contributions that led to a groundswell of opposition, causing the IRS to withdraw the proposal. Surely the ACT members, drawing on their insights and experiences in the field, would have spotted the serious flaws in the proposal. Had the IRS simply asked its own advisory committee for feedback, it could have saved the time, effort, and energy expended by the tens of thousands of individuals and organizations from across the country filing almost 38,000 formal comments.
We find it very troubling that the volunteer advisory subcommittee tasked with explaining real life nonprofit experiences to the IRS will become more muted, at a time when the ranks of the IRS exempt organization division are already depleted of experienced “EO” investigators. By further limiting one of the only vehicles the IRS has for learning how its practices affect nonprofits operating in the real world, the IRS is projecting the attitude that it is (i) either trying to silence its critics, or (ii) simply not interested in understanding how its policies and practices impact nonprofits, board members, foundations, and donors.
We just think the optics are bad: The IRS is ignoring advice and counsel from the very group it convenes to give it
and counsel, and it is shutting down one of the only avenues it has for feedback.
In two weeks the Acting Director of the IRS TE/GE Division will be speaking at our invitation to leaders of state associations of nonprofits. We will be respectful. Our goal is to provide a forum for a constructive dialogue. We want to understand why the IRS appears to be cutting itself off from informed perspectives. We also want to explore how to build a stronger relationship between the IRS and the charitable nonprofit community and have productive dialogue by listening and learning. Please share your questions with your state association of nonprofits or send us your questions directly. The National Council of Nonprofits and its state association network are committed to representing nonprofit voices and serving as a trusted resource and advocate for America’s charitable nonprofits.
A sampling of what concerns us about the Form 1023-EZ
- In a sample reviewed by the National Taxpayer Advocate, over a third of the applications for tax-exemption using the Form 1023-EZ were from organizations that did not meet the basic requirements, yet the IRS still approved them as tax-exempt public charities under Code Section 501(c)(3)!
- Applications for tax-exemption are approved without any requirement to prove that the organization actually exists or describe the organization’s planned activities, or financial data, or any other explanatory material.
- One year after the 1023-EZ was introduced, more than half (58%) of all applications for tax-exemption were using the EZ version of the form. Source: Study of Taxpayers that Obtained Recognition as IRS Section 501(c)(3) Organizations on the Basis of the Form 1023-EZ
- The new Form 1023-EZ is “effectively making a mockery of the IRS’ significant oversight function” for determining which nonprofits deserve tax-exempt status. (New York Times, quoting Nina Olson, the National Taxpayer Advocate)
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