At Cray Kaiser, we’re always looking for ways to stay up-to-date on the ever-changing nonprofit policies. It’s especially important now since many organizations are beginning a new fiscal year on July 1. This month, we attended the 36th Annual Conference for Not-For-Profit Organizations hosted by Chicago-Kent College of Law. The conference provided several takeaways that will directly impact our nonprofit clients. If any of these issues raise questions for your organization, please do not hesitate to contact us today.
IRS Budget Cuts: How They’ll Impact You
Lately, there have been massive cuts to government spending, and the IRS is no exception. In particular, the Exempt Organization (EO) Unit of the IRS has been especially hard hit. Despite the reduction in resources, the IRS is still processing and auditing a high volume of nonprofit applications and filings. In 2016 alone, the IRS audited over 6,000 exempt organizations. Half of those audits were due to operational and organizational issues, like verifying exempt activities. The other half were mainly related to employment taxes and Unrelated Business Income Taxes (UBIT). Due to the resource reductions at the IRS, you can expect delays with processing returns and completing audits.
Tax Exempt Applications: Tips for Success
Applying for tax exempt status is a complicated endeavor. The form 1023 is one of the more complicated IRS forms, so it’s easy to have an application flagged due to simple human error. As a best practice, we recommend having a professional prepare or review your application before submission, which will save you time and hassle in the long run.
Despite the budget cuts, there have been improvements to the amount of time the IRS takes to process tax exempt applications. The average processing time in 2016 was only 70 days, a huge decrease from a few years ago when the same process would have taken about 180 days. The reduction in processing time is almost entirely due to the implementation of Form 1023-EZ. The 1023-EZ is a streamlined version of the original 1023 and is meant for smaller organizations. In addition to being less complex in general, the 1023-EZ has fewer requirements for supporting documentation as well as a lower application fee.
You can use the 1023-EZ form if your organization doesn’t expect to generate $50,000 in revenue annually in its first three years. However, if your estimates were low and you do exceed the $50,000 annual threshold, the IRS has yet to revoke or audit any prior 1023-EZ application for organizations going over the limit in a later budgeted year.
Filing For & Maintaining Your Nonprofit Status
In addition to filing with the IRS, you’ll also need to register your nonprofit with the state. In fact, most of the legwork surrounding your documentation and structuring begins at the state level, specifically with the Attorney General. The good news? The Charitable Organization Registration Form (CO-1) is much less involved than the federal forms. The bad news? Due to budget cuts at the state level, resources are extremely low and those offices are overwhelmed. Also, the state’s filing system lacks any electronic option and is completely paper-based. As a result, the process can take up to six months so it’s crucial to start the state filing process early.
Once you’ve achieved nonprofit status, it’s extremely important to file your yearly reporting well in advance of the deadline. Due to outdated legislation, the state can revoke your charitable status within 60 days of missing the filing or extension deadline.
Applying for and maintaining your nonprofit status can be a challenge if you’re not familiar with the process. It’s important to work with a firm that has considerable expertise in the nonprofit sector. If you’re considering starting a nonprofit, or have questions on how to maintain your status and keep up with the ever-changing guidelines, contact us and we’ll be happy to help you through the process.