The Internal Revenue Service (IRS) in the last year has reduced a backlog of tax-exempt applications but it did not come without risks.

Sometimes not changing far outweighs the risk of making significant changes, according to Tamera Ripperda. It’s important not to be afraid to take risks, but to take measured risks, she said. Ripperda, the director of Exempt Organizations Division within the IRS Tax Exempt and Governmental Entities (TE/GE) Division, provided an update on tax-exempt functions, particularly the new Form 1023 EZ applications, during the AICPA Not-for-Profit Industry Conference at the Gaylord National Resort & Convention Center in National Harbor, Md.

“We undertook an extreme streamlining of our application process, where we did assume some risks, and the amount of information we’d look at and request,” Ripperda said. In five months, the division essentially wiped out a backlog of 170,000 applications that closed last year, versus an average of 50,000 in prior years. “It’s a tremendous impact on employees and application inventory,” she said.

When Ripperda took over the EO Division in January 2014, the average process of an application was more than one year and almost all were more than nine months old. Now the current age of the application inventory is less than 120 days, including Form 1023-EZ applications. “It really did serve to get us current, get us on more solid ground going forward and looking ahead. We’ve been able to sustain that currency with the 1023-EZ action,” she said.

The new Form 1023 application process was implemented almost a year ago and the IRS has data for the first five months. There were more than 31,500 Form 1023 EZ applications, about 50 percent of all 501(c)(3) applications, according to Ripperda, and of those, the agency closed 30,600 of them.

There were just as many long-form applications during that period. Of those closed, 95 percent have been approved, and some have gone through the pre-determination process.

A little more than 2 percent of applications were rejected, Ripperda said. The majority of those used the Form 1023 EZ for reinstatement but did not qualify to use the EZ form. “That didn’t mean they could not be reinstated,” Ripperda said, but the IRS needed more information and the organizations would have to go back and complete the long-form. The next highest basis for rejection was an invalid Employee Identification Number (EIN), according to Ripperda. The name or the EIN did not match in the IRS system.

Concerns about the streamlined Form1023-EZ Form were raised by the National Council of Nonprofits and the National Association of State Charity Officials, fearing it could lead to increased malfeasance.

“We knew there were risks with that, issuing a form and allowing a set of organizations to give us minimal information on what they plan to do,” Ripperda. There was “rightful pushback” on that, she added, and the agency needed to hear concerns and risks. There were four primary concerns, which also were universal among IRS employees, about the streamlined Form 1023 EZ:

• It does not require a narrative explaining what an organization will do;
• There are no financial information request;
• There are no organizational documents; and,
• There is no explanation of transactions with related parties.

They were all valid concerns and to mitigate those risks, Ripperda said EO implemented a predetermination return process. On average, the division would select 3 percent of the EZ applications and request responses to those four key questions. “The predetermination process was meant to inform us, about whether not requiring on the front end, are we taking an acceptable risk, or is it something more serious,” she said.

“We really do feel this was the right decision. It lessens the burden on small organizations and on us. It’s much more efficient to get those organizations operating,” Ripperda said. On the back end, she said, the agency is currently instituting the post-determine process and plans to examine 1,400 of those organizations. Next year, the agency will take a sample of EZ filings on organizations that have been in existence for one year or more.

Ripperda also reported on a new permanent leadership team within the EO Division. “I think that will drive us forward for many more changes on the horizon,” she said. Jeffrey Cooper was appointed director of EO rulings and agreements, and like Ripperda, will be based in Cincinnati, Ohio. Margaret Von Lienen was appointed director of EO examinations, and will be based in Dallas, Texas.

A realignment of tax law specialists and tax attorneys to the Office of Chief Counsel will more align with the rest of the IRS operations, Ripperda said, in addition to establishing the Office of Division Counsel, which will provide technical guidance.