Dateline: March 17, 2008, Chicago
Yup, you read that headline correctly. The IRS released its 2007 Data Book last Friday. For the period from October 1, 2006 through September 30, 2007(fiscal year 2007), the IRS received...
The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives
Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour.
85,771 applications for recognition of Section 501(c)(3) status. We would bet the average cost of creating a charity is somewhere around $5,000. That would mean that people spent somewhere around $425 million just creating charities, assuming our estimate is correct.
Of course, there are many people who navigate the process without the benefit of professional advisors, but there are many who rely on paid advisors. Moreover, time is money, even pro bono time. Notably, the cost estimate does not take into account the cost of undoing botched formations by people who do not use professional advisors or the cost to the IRS of processing all those applications.
What is truly amazing is that over 68,000 of those organizations were recognized as Section 501(c)(3) organizations. Only 1,607 were denied recognition of exempt status. The other 15,886 organizations either withdrew their applications, failed to complete the application, or found that the IRS refused to rule.
As we noted, we are unable to quantify the cost to the IRS of processing all these applications, but there are other costs, as evidenced by some of the statistics found in the Fact Book. The IRS processed over 867,000 Forms 990 and 990-EZ returns for Fiscal Year 2007. During that period, only 3,450 Forms 990 and 990-EZ were examined. The examined returns include returns for earlier years. This number implies an audit rate of below 1%.
You know all those draconian excise taxes imposed on private foundations. As a practical matter, the foundation community doesn't have much to worry about, with just 386 Form 990-PFs being pulled for examination.
The IRS offered a surprisingly large amount of guidance. It issued 1,018 private letter rulings and 40 letters involving technical advice. It also issued 21 revenue rulings, revenue procedures, regulations, notices, announcements, and information releases. We think everyone agrees more formal guidance in the form of revenue rulings would be appreciated and valued. Finally, it issued 469 letters of correspondence, which includes congressional and general correspondence. That number seems low, causing us to wonder what the term "correspondence" means.
At the end of the day we draw two conclusions from these numbers. First, someone needs to find a way to stop people from creating charities, or at least so many. Do we need more social service agencies, disaster relief organizations, or charities that focus on various diseases? We suspect not. So what's the solution? Certainly, state charity officials, secretaries of state, and the IRS should be authorized to begin campaigns and provide information that discourages the formation of charities. Upping the user fees for processing the paper might also make sense. The current IRS user fee for processing the Form 1023 is $750, but smaller organizations only pay $300. Maybe it is time to raise the fee to $2,000 for all applicants, or to require a $5,000 fee, $3,000 of which would be refunded if the application is approved.
And in our continuing one-way dialogue with Senator Grassley: If you are so concerned about bad charities, why don't you work harder on increasing the appropriation of funding for the IRS's EO division. You keep telling us about the abuses. Why don't you provide the IRS with enough money to triple the size of its examination staff and expand its outreach?
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
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