The controversy over the Internal Revenue Service's handling of applications for tax exemption from conservative groups has put the tax agency in the hot seat.
The Chronicle invited nonprofit and legal experts to suggest remedies.
Improve the Application Process
The process should be clearly time delimited and include one round of questions and then a follow-up round limited to questions raised by the answers.
For some straightforward 501(c)(3) charities, the process for obtaining recognition of federal tax exemption is simple and fairly efficient. In many other cases, however, the process breaks down and leads to many rounds of questions. These questions are often intrusive, of questionable relevance, and very time consuming. In some cases, it seems like the Internal Revenue Service is trying to win a war of attrition and avoid making hard decisions rather than getting the information it needs to make a timely decision.
There are instances when even the mere potential for an issue to arise may give rise to the denial of an application—for example, the possibility that someone might improperly benefit financially from the charity, based, for instance, on its organizational structure or certain relationships that are described on the application.
The IRS could take several concrete steps to help fix these problems. First, it should adopt internal rules that include clear timelines for action. The IRS could give itself the ability to extend the time in certain circumstances, but the normal process should be clearly time delimited. This timeline should include one round of questions and then a follow-up round limited to questions raised by the answers. All told, this process should be about 10 months from start to finish. For simple, straightforward applications, the timelines should be much shorter.
Second, the IRS should develop standardized questions to deal with certain situations. This would help to avoid the irrelevant and intrusive questions that often seem to come from the agency.
Third, it should establish clear, objective standards where possible for granting or denying exempt status.
Fourth, the IRS needs a better internal decision-making process. For example, if there are certain concerns, then the application should be forwarded to a knowledgeable person for a prompt review and decision, not simply sit in an inbox.
Finally, the only realistic way to make this happen is to increase the number of people reviewing the applications and to give them better training.
Originally published in The Chronicle of Philanthropy
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