What Does It All Mean? IRS Changes Application Process for Small Start-up Nonprofits

Diana Take 22

By: Diana Kern, NEW’s Vice President of Programs

The new streamlined application process for becoming a 501(c)(3) might help nonprofit startups — at least small ones — get off the ground more quickly.  As a nonprofit employee of a capacity building organization that gets at least one call a day, 365 days a year,  from someone who wants to start a nonprofit, I am left scratching my head. What are the implications?

As it is now, there are over 1.6 million nonprofits in this country and more continue to register for nonprofit status on a daily basis. Those of us who work with small nonprofits can tell you that a great number of nonprofits are run by passionate people who lack the knowledge for running a sustainable and successful nonprofit business and working with a nonprofit board.  So many applicants send in their IRS applications with the name of three friends or family members and a mission they wrote around someone’s dinner table last week. Do you want to give your money to charities that do not know how to fulfill the mission they state on their applications?  Is making it easier to start a nonprofit going to result in a boon of a lot more  smaller nonprofits with no resources, no real boards, and high expectations?

Some groups, such as the National Council of Nonprofits and the National Association of State Charity Officers, say the new streamlined process is an invitation for groups to abuse tax-exempt status.  I personally think there should be higher thresholds for starting a nonprofit and more review of applications instead of less for this very reason.

However, the IRS says that they have been under criticism for a complicated and lengthy application process and for long waiting periods.  This might be true, but what is the role of the IRS?  Seems to me they just made it easier  for tax payers to donate to scam artists that see a much easier application process, lower fees and less oversight as a new way to get rich fast. Start it up, raise $50,000…close it and start up another one under a new name, rinse, repeat…it only costs $400. No one is watching.  {These are the new guidelines}

By inviting more nonprofits aren’t they collecting fewer taxes? Also, what agency is going to oversee all of these start-up nonprofits to make sure they are fulfilling their missions and making changes within the community? Isn’t this the purpose of granting tax-exemption status in the first place? Are they doing things to benefit society and those in need so all of us eventually can hope to pay fewer taxes? When was the last time a nonprofit fulfilled its mission and went out of business?

So donors will give out more tax deductible donations to small, tax exempt charities that are not fulfilling their missions and the government increases our taxes to pay for all of the services needed to support the things the nonprofits were supposed to help eliminate. Are you scratching your head with me now?

Granted, we have all heard the stories about people that applied for nonprofit status and waited over a year for their determination letter.  I just spoke to someone in Detroit who shared that it took about 14 months. We also know many people who have had difficulty navigating the tax-exemption process at the IRS and complained of being in a storm of silence and nail biting.  Some people were so anxious to get their tax-exemption status that they just paid an attorney to expedite the process for them. But, it’s a 3-page application, and only $400.   No oversight is the solution?

I was shocked when I read about the IRS’s introduction of the new application. It makes getting tax-exempt status not much more complicated than ordering online merchandise. What was once a 26-page form has become three, and groups will now only have to pay a $400 fee rather than $850 to apply.

Not all potential nonprofits will be eligible for the streamlined process: The new form is only open to groups with an annual income of less than $50,000 and assets of less than $250,000. While that might seem like a low threshold, the IRS estimates around 70 percent of the organizations applying for 501(c)(3) status will qualify.  Certainly we at NEW can attest to that.  Most people that approach us have little to no money, or have been putting their own money in and hoping to get paid back and have no assets. They think that by getting their tax-exemption status the money will just start rolling in because everyone will want to give to their cause!  They are certain they will get every grant they apply for because their work is “so important.”

The IRS, says it has a backlog of 60,000 applications, with most pending for at least nine months. The idea behind the new application is to help small nonprofits avoid that tax-exempt purgatory and to help an IRS that has less resources. According to IRS Commissioner John Koshinen in an interview with Time, the change will mean the division that reviews tax-exemption requests will see 40,000 to 50,000 fewer applications annually.

Let the small nonprofit rain storm begin.  Donors beware.  Perhaps not all of these small nonprofits will be scammers, but there is no guarantee they have the requisite capability to run a business and use your donation responsibly and effectively. My recommendation… perform due diligence before you donate to any nonprofits in the future.