New nonprofit formations under scrutiny

The nonprofit formation process is under scrutiny. This week’s Kiplinger Tax Letter devoted attention to the topic. It referred to an unnamed 2019 IRS study that concluded that 46% of 1023 EZ filings were erroneously approved. Some lawmakers are calling for an end to the 1023EZ filing.

Recent conversations with IRS employees the exempt organization division confirm a change in procedures. One new nonprofit application that I expected quick approval has required months of additional back-and-forth communication. I was surprised when the agent asked to see a business plan for the new organization. Typically, in my experience, a new nonprofit does not tackle that task of strategic planning until after formation and first round of funding.

My accounting practice handles about a dozen nonprofit formations each year ranging from charities to Political Action Committees. In the past this formation service was priced at about $1,500 and could be accomplished in about a day. Going forward, it will need to be higher to accommodate the additional IRS scrutiny and documentation requirements.