20 January 2017 Form 1023-EZ exemption applicants will likely be required to include a narrative description of their activities with their application The National Taxpayer Advocate has instructed the IRS Tax Exempt and Government Entities division (TE/GE) to require organizations applying for recognition of exemption using Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, to include a brief narrative statement of their planned or actual activities. The Taxpayer Advocate Directive (TAD) requesting the change was released as part of the National Taxpayer Advocate's 2016 Annual Report to Congress (the Annual Report). The Form 1023-EZ issue was included as the Annual Report's Most Serious Problem #19 (FORM 1023-EZ: The IRS's reliance on Form 1023-EZ causes it to erroneously grant Internal Revenue Code (IRC) Section 501(c)(3) status to unqualified organizations). The Annual Report, like the TAD before it, asserts that the IRS erroneously approves Form 1023-EZ applications at an unacceptably high rate. One analysis found 25% of Form 1023-EZ applicants failed to meet the organizational test to qualify as a Section 501(c)(3) organization, yet TE/GE approves Form 1023-EZ applicants 94% of the time. Form 1023-EZ currently only requires applicants to attest that they meet the requirements to qualify as Section 501(c)(3) organizations. In addition to calling for the new requirement of a narrative statement describing the organization's activities, the TAD also called for TE/GE to require 1023-EZ applicants to submit summary financial information and organizing documents, if not readily available online. An October 2016 IRS Deputy Commissioner review of the TAD sustained the request to require the narrative summary, but not the requirements for financial information or organizing documents. The National Taxpayer Advocate still recommends the IRS implement these additional requirements. Organizations that seek to obtain tax exemption by filing Form 1023-EZ likely will be required to include a narrative with their application describing the organization's actual or proposed future activities, assuming the IRS follows the TAD. This narrative should be consistent with the responses that the organization provides to the other questions appearing on Form 1023-EZ and information that it reports on its Form 990-series return(s). — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
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