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Form 1023-EZ and Political Activity

Posted on by bentakis

Tax Analysts has a new piece on the Form 1023-EZ, focusing on the challenges the IRS will face in enforcing the restrictions on 501(c)(3) organizations engaging in political activity. The piece includes a few quotes from me.

State and federal regulators alike may have a hard time tracking down some politically active 501(c)(3) groups. An organization can be exempt under state law and not under federal law, Hill said, adding that some states permit various types of nonprofit organizations to engage in considerably more political campaign activity. Even if some organizations ultimately lose their federal exemptions, they might keep their state tax-exempt status, she said.

Owens said that if, as he fears, a swarm of ostensibly educational but truly political 501(c)(3)s develops close to an election, those groups will likely have a lifespan of less than a year. And if they never file a Form 990, all the IRS will have to use in tracking them down is the Form 1023-EZ.

Applicants will file the new Form 1023-EZ electronically, which will allow the agency to more easily screen applications with inconsistent answers or ones that raise questions before it issues approvals, Koskinen said. The agency will also test the accuracy of the short form by taking a statistical sampling of streamlined applications and subjecting them to the more rigorous, full exemption application, he said. The IRS will do still another sampling of Form 1023-EZ applicants a year after they’re approved and audit “how they’re doing and what they are doing,” Koskinen said.

“We’ll be better at the front end, but we’ll have more resources available to check on people at the back end and see are you doing what you said you were going to do,” Koskinen said. “Are you still doing the right thing? Now we’ll know.”

Takis interpreted the situation differently. “One challenge for the IRS will be that the Form 1023-EZ is likely to lead to many more organizations getting formed and applying for 501(c)(3) status, so it’s going to be that much harder for the IRS to keep track of all these organizations and find the bad actors,” he said.

You can read the full piece here.

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