IRS FY 2017 updates and a possible single portal for state registration

NONPROFIT NEWS

Although a busy time for individual tax filers, it's been a relatively quiet month in the exempt organizations legal space. The IRS did issue its report on its accomplishments with respect to the tax-exempt division in fiscal year 2017, which included some interesting statistics. A press release with an update about the promising planned single online portal for state charity registration and reporting was also issued.

IRS FY 2017 Accomplishments

In March, the Tax Exempt and Government Entities (TE/GE) FY 2017 Accomplishments report was released by the IRS. The report, which highlights the work done by the TE/GE division during the fiscal year, includes several points worth noting.

According to the report, the IRS received 95,177 applications for recognition of tax-exempt status during the 2017 fiscal year. Of those, it processed 92,043 -- granting exemption to 91,975 applicants (or 99.9 percent) and denying exemption to only 68 applicants. Of the exemption applications received, 65 percent were submitted using the short Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, which was higher than was expected. As I've previously written, the IRS made some revisions to the Form 1023-EZ and the related instructions in Jan. earlier this year. The IRS also clarified, in Revenue Procedure 2017-5 issued last year, that organizations that are currently or were previously exempt under a different subsection, and organizations with any pending application on file with the IRS, are ineligible to use the Form 1023-EZ.

Despite the high rate of exemptions granted on new applications, the report painted a different story with respect to the division's post-determination compliance reviews. In fiscal year 2017, the IRS examined a statistically random sample of 1,182 organizations that were granted tax-exempt status based upon a filed Form 1023-EZ. As of the end of the fiscal year, 565 of those organizations had been examined. Forty-nine percent of those were closed without any changes being required. However, the other 51 percent were required to make amendments to their organizing documents or were issued other written advisories. The IRS revoked or terminated the exemption of 5 of examined entities.

Similarly, of the 1,400 examinations completed in fiscal year 2017 of exempt organizations that filed the Form 1023 or Form 1024, roughly 57 percent of the examinations were closed without any required changes. The remaining 43 percent of the examined entities were required to make changes ranging from filing returns that had not been filed to making amendments to organizational documents. 14 of these examined organizations were revoked or terminated.

Finally, as previously reported, on July 8, 2016, the IRS issued final and temporary regulations relating to the requirement that organizations intending to operate as exempt under IRC 501(c)(4) notify the IRS of such intent by filing Form 8976, Notice of Intent to Operate Under Section 501(c)(4). This new requirement was added by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). According to the report, in fiscal year 2017, the IRS received 2,182 notifications of entities intending to operate as exempt under Section 501(c)(4). It approved 82 percent of the notifications received, rejected 17 percent, and had the remaining left to process as of the end of the fiscal year. The most common reasons for rejection of the notification were failure to pay the associated user fee and unnecessary notifications filed by entities that were not required to file (for example, because they are already recognized as exempt by the IRS).

Single Online Portal for State Registration

In early April, the National Association of State Charity Officials (NASCO), the Multistate Registration and Filing Portal, Inc. (MRFP), GuideStar and CityBase issued a press release regarding their joint efforts to create a single portal for state charity registration and reporting. Approximately 39 states currently require some form of registration by entities that plan to solicit charitable funds in the respective state, as well as by professional charitable fundraisers. However, the registration requirements and processes of each state are distinct and there is not currently an effective means of easily registering in multiple jurisdictions simultaneously. Many states also require annual or other periodic filings on an ongoing basis, in addition to an initial registration requirement. Accordingly, for nonprofits soliciting funds in multiple states, multistate registration compliance is often time-consuming, costly, and complicated. The fact that nearly all nonprofits now fundraise online and therefore may receive contributions from donors in many states further complicates state registration compliance issues.

MRFP is a 501(c)(3) public charity that was formed in 2013 by members of NASCO for the purpose of administering the development of the single multistate portal. According to the press release, the portal will capture information in one place for compliance with the registration and reporting requirements of multiple states and will also auto-fill many fields using data that has been gathered by GuideStar from the IRS or from nonprofits directly. It is also expected that data entered on the portal (other than personal data) will be made publicly available to serve as a resource for regulators, researchers, and the general public.

CityBase and GuideStar are planning to launch an initial prototype of the portal for registering with a few states this summer. They will then plan to work with NASCO to add additional states to the portal before a full launch later in 2018. The goal is for all states that require charitable solicitation registration of nonprofit entities or professional fundraisers to eventually be included in the portal, making it a one-stop solution for individuals and entities subject to registration. Given current widespread noncompliance with the registration requirement with the attorney general's Registry of Charitable Trusts in California, I would expect that a single online portal for multistate registration and reporting would greatly help in increasing compliance.