NPOs Approach 1.8 Million As IRS Rejects Few Applications

May 24, 2018       Mark Hrywna      

More than 93 percent of applications for tax-exempt status were approved last year by the Internal Revenue Service (IRS) for the third consecutive year, with tax-exempt organizations approaching 1.8 million nationwide. The IRS disapproved 68 applications for tax-exempt status last year, on par with recent years. Fewer than 100 applications have been disapproved in each of the past five years. The figures are in the new IRS data book for the Fiscal Year Ending September 2017.

Marcus Owens, a partner at Loeb & Loeb in Washington, D.C., and a former director of the Exempt Organizations Division of the IRS from 1990 to 2000, told the New York City Bar’s sixth annual Institute on Not-for-Profit Law recently that it seems like an unusually small amount of disapprovals. There were 6,236 applications otherwise closed, meaning they did not complete the process. That could mean anything from there were too many questions by the IRS or the organization did not collect enough money to stay open, he said.

Of the 91,975 applications for tax-exempt status last year, the IRS approved 85,669, an approval rate of about 93.1 percent. The number of applications declined slightly from 92,129 in 2016 and almost 10 percent from spike of 101,962 in 2015 and 20 percent off the 117,538 in 2014.

The overwhelming majority of applications — 79,699 or about 93 percent — are for 501(c)(3) charitable organizations. The only other classes of nonprofit that even surpass 1,000 approvals are 501(c)(4) social welfare, 501(c)(6) business leagues, and 501(c)(7) social/recreation clubs.

“Changes last fiscal year will make our jobs actually more difficult, believe it or not,” Owens said during the New York Bar event. The IRS has been under some budget stress for several years and the recent collapse of its electronic filing system is an example of what’s going to be happening increasingly during the next year or two — “at least until Congress and the executive branch decide to fund the agency,” he said.

The IRS has taken number of dramatic steps to expedite the process of tax-exempt status approvals in recent years, with a shortened Form 1023. Even with this rate of approvals, Owens said the IRS is falling behind in application approvals. “We’re seeing six-months wait until the case actually falls on someone’s desk,” he said.

Resource constraints on the Exempt Organizations function have ratcheted down the ability to audit tax forms. The 3,678 returns audited is likely inflated if one takes into consideration that number is not organizations but the number of Form 990s that moved through the audit process and closed in that process year, he said. The audit could have started a couple years ago or included multiple tax forms from an organization in that review. Owens estimated that the IRS probably has taken a look at about 1,500 tax-exempt entities among those fewer than 4,000 returns.

The stage is set for a scandal and resulting overreaction, which is typical, Owens said. “It makes these times pretty dangerous for us.”

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