The new IRS Commissioner admits that the backlog of applications from IRC 501(c)(3) charities has increased by 500 percent. over the past year. This revelation underscores how difficult it can be for a new nonprofit organization to deal with the IRS.
A new nonprofit organization or a charity files that seeks to be recognized as tax-exempt needs to file its application (Form 1023 or 1024) with the Exempt Organizations Division of the IRS, near Cincinnati. That office sorts applications into two boxes. An application that is standard, uncontroversial and complete, with all the necessary documents in proper form, goes into the “no-brainer” box. Otherwise, if any item is missing or if the nonprofit’s activities are out of the ordinary, the application goes into the second “brainer” box.
Applications in the no-brainer box are usually approved in a few weeks. On the other hand, the applications in the brainer box pile up, so it can take up to a year before the first round of IRS questions arrives. At that point, it can take several more months to provide the requested items, which could involve amending its Articles of Incorporation. After that, the IRS may send another round of IRS questions to answer.
This process has gotten a lot slower since May 2013, when the IRS office in Cincinnati drew scrutiny for its handling of applications from politically-involved IRC 501(c)(4) nonprofits. Some of those applications were delayed for more than 2 years. The head of the IRS Exempt Organizations Division, Lois Lerner, promptly took the Fifth before Congress, and then retired.
Even though IRC 501(c)(3) charities are inherently limited in their political activities to a greater degree than the controversial IRC 501(c)(4)s, the commotion in the Cincinnati office has obviously enlarged the brainer box, and shrunk the no-brainer box.
At this point, no one can guarantee a swift and smooth passage through the IRS Cincinnati office. An experienced attorney can, however, help a new nonprofit organization to surmount the technical legal requirements and escape the over-stuffed brainer box.