In 2003, the number of applications for exemption had gone up by over 40% with no corresponding increase in the number of IRS Exempt Organization employees. This motivated the IRS to consider how to streamline the application for exemption process to make processing easier for both the IRS and the applicant. The IRS invited a panel of experts from the nonprofit legal community to make recommendations to improve the application process. The panel’s key recommendation was that the IRS revive earlier plans to develop and fund an interactive online Form 1023 filing tool accessible through the IRS website known as the “Cyber Assistant.”
Cyber Assistant: The idea is that the Cyber Assistant will guide applicants through the Form 1023 application, displaying educational information and filing tips along the way and helping applicants identify and resolve inconsistencies in the information they submit.
Reduced Cost: To encourage use of the Cyber Assistant tool, the IRS is offering filers who use the system reduced user fees. Currently, organizations whose gross receipts have averaged or are expected to average less than $10,000 per year pay $400. All others pay $850. Cyber Assistant applications will still have to be printed out and mailed in, but applicants whose Form 1023s have the special bar-coding inserted by the Cyber Assistant will be eligible to pay a reduced $200 user fee.
Timing: The IRS has announced that the Cyber Assistant will become available sometime during 2010. However, informal comments by IRS officials have indicated that the IRS has discovered some glitches in the system and that the program will not be released until they are fixed, throwing the 2010 release date into doubt. Notably, the IRS website still states that the program will be available sometime in 2010.
Is it Worth the Wait?: This is exciting news, however, clients are starting to ask, is it worth the wait? The potential savings of $650 is tempting, but there are a number of disadvantages to waiting such as:
- Delayed Exemption. 501(c)(3) status is retroactive to the date of incorporation so long as the application is filed within 27 months of formation. So, donations to new organizations are tax deductible once the application is approved so long as it is filed within this deadline. Applications submitted after the deadline lose this benefit.
- Delayed Qualification for Grants. Most governmental entities, private foundations and other major donors require the determination of 501(c)(3) status letter as a condition of making the grant or contribution.
- Delayed Qualification for Other Benefits. 501(c)(3) organizations are eligible for reduced cost postage and tax-exempt bond financing. Also, many jurisdictions condition property and sales tax exemptions on 501(c)(3) status.
Final Analysis: Cyber Assistant is a great idea whose time has come, but it won’t ensure the success of an application. It should make filing less confusing, reduce the opportunity for errors, and save filers a little money in the process. Still, the benefits of securing the exemption combined with the uncertainty regarding the release date lead me to conclude that those who can afford to file now should go ahead and file. Those who can’t afford the higher user fee should be mindful of their 27 month deadline if they choose to wait.