The IRS released its streamlined Form 1023-EZ process about a year ago, in an effort to reduce the cost and processing time for most small charities seeking 501(c)(3) status. Most charity professionals lauded the move initially, but it’s worth revisiting a couple aspects of the streamlined process after a full year in effect.

Is the streamlined process good policy?

Many people in the philanthropic world question whether the streamlined application properly balances ease of process with effective administration. As an administrative agency, the IRS is charged with policing tax-exempt organizations and ensuring that tax-exempt dollars are put to proper use. As some have pointed out, the streamlined application requires a few attestations, and then asks about 8 yes-or-no questions designed to identify ineligible organizations (the instructions make clear that a “yes” response requires the applicant to submit the full Form 1023). Many applicants will lie on the form to receive 501(c)(3) status, but the important questions are: “How many?” and “Will the IRS effectively identify and remedy instances of abuse?”

The first question is open; we’ll have to wait for more data to determine whether the streamlined application facilitates an unacceptable level of abuse. Regarding the second question, the IRS has stated that they intend to “check-in” on streamlined applicants 3 years after filing. Presumably we’ll know more about IRS enforcement efforts in 2017 (when the first streamline applicants reach their 3-year mark).

Are there any disadvantages to using the streamlined application?

Aside from a possible IRS check-in at year 3, we know very little about any increased scrutiny that streamline applicants will receive. It is very possible that donors will direct their dollars toward 501(c)(3) organizations that have disclosed much more information about their activities on the full Form 1023. However, one reporting complexity has resulted from the streamlined process:

Traditionally, exempt organizations rely heavily on their Form 1023 in order to complete their annual reporting on Form 990 (or Form 990-EZ). Now, the streamlined application is limited to organizations that should, in most cases, be eligible for the Form 990-N (“e-Postcard”), which requires very little information. However, some organizations have filed under the streamlined process, but have been required to report on Form 990 or Form 990-EZ as a result of changed circumstances (typically, from receiving donations in excess of their projected amounts). Furthermore, a successful 501(c)(3) will eventually need to file a Form 990 or Form 99-EZ, and will be required to develop the additional information at that time. In either case, the streamline organization will at some time be required to generate the Form 990 information without having developed that information on a traditional Form 1023 submission. This may seem a minor issue, but in practice many tax return preparers are not yet accustom to developing the Form 990 information from scratch, and may need to work closely with an attorney (often under the timing pressure of a filing deadline).