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Firm Poses Questions About Electronic EO Application System

DEC. 13, 2019

Firm Poses Questions About Electronic EO Application System

DATED DEC. 13, 2019
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December 13, 2019

Margaret Von Lienen
Director, Exempt Organizations and Government Entities
Internal Revenue Service
Tax Exempt and Government Entities Division
1111 Constitution Avenue NW
Washington, DC 20224

Re: Questions About Obtaining Copy of Electronically Submitted Form 1023

Dear Ms. Von Lienen:

Thank you for your recent remarks at several public conferences where you have shared the news that the Internal Revenue Service will make available an electronic Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, beginning in January of 2020. Your remarks, and those of other IRS officials who have also spoken about this development, indicate that there will be a three month transition period during which Form 1023 may be submitted electronically or on paper after which electronic submission will be required. It is helpful to practitioners and the clients they serve to have advance notice of this pending change and to have the opportunity to ask questions so that we may prepare for the change. We write to you with two questions about the new electronic Form 1023 in our individual capacity as tax practitioners and not on behalf of our firm or any client.

As you know, under section 6104(d)(1), an organization that has submitted a Form 1023 and received a determination from the IRS recognizing the organization as described in section 501(c)(3) is obligated to provide a copy of the Form 1023, including all attachments, to any member of the public who requests it. The copy provided must be identical to the application that was submitted to the IRS. The organization can be subject to penalties if it fails to provide a copy of its Form 1023 when requested. Will the new system for electronic submission of the Form 1023 allow the organization to download a file that can be printed or print a copy of the entire application exactly as it was submitted and in a form that allows a member of the public to read and understand what was submitted and be confident that the copy is identical to what was submitted to the IRS? A taxpayer that submits a Form 1023-EZ is able to download a copy of the form it has submitted as a PDF file. It would be helpful to confirm the same function will also be available for the full Form 1023.

A Form 1023 must be signed under penalties of perjury by an officer of the organization. Officers currently confirm the content of the application they are signing by reviewing the complete document on paper. That confirmation process will remain critical even as the process moves to electronic submission. Officers will want to rely on practitioners to input the information into the electronic system and have a mechanism where they can provide an electronic signature without having to be present while the balance of the information and attachments are put into the system. To require the officer to input the information or to be present to provide a signature at the time and place where the electronic submission is made would be burdensome and make for a worse customer experience than taxpayers have today with a paper form. Having a complete copy of what has been submitted in readable form will allow the organization and the officer to confirm that the information submitted is the information to which the officer has attested.

It is critical for organizations to have an identical copy of what they have filed not only to meet their obligations under section 6104, but also for other aspects of tax compliance. If an organization makes significant changes to its governing documents, it is obligated to describe the changes in the annual return (Form 990 series) it submits for the year in which the changes are made. See Instructions to Form 990, Part VI, Section A, Line 4. An organization may rely on the IRS determination unless and until there is a substantial change in its character, purposes or method of operation. See Treas. Reg. § 1.501(a)-1(a)(2). Whether there has been such a change is determined by reference to the character, purposes and methods of operation the organization described in its Form 1023. Having access to the identical document that the IRS received is critical for making these judgments. During an examination of a Form 990 or Form 990-T, it is common for a section 501(c)(3) organization to produce its Form 1023 to substantiate its response to one or more information document requests.

For all these reasons, it is important to know whether the new electronic submission system will allow a user to produce a downloadable file that can be printed in a form that is easy to read and understand. Furthermore, given that the application remains critical for as long as the organization is in existence, the organization may want to print a hard copy of the file and retain it on paper to ensure they have access even if software changes make it difficult to access the file years later. It would be beneficial if organizations were given a message after the submission process is complete reminding them of the obligation they will have to make the application available in the event they receive a determination and providing a link to where they can download the file.

Another key question is what accommodation is available if an organization wishes to submit more information in support of the application than can fit within the parameters of the system. Public remarks have suggested that organizations will be able to submit up to 250 pages of material as attachments to the electronic Form 1023. Presumably some of that allocation will be used to attach the governing documents and the conflict of interest policy (if the organization has adopted one) as well as any leases or contracts that must be attached as is required under the existing application. While many, if not most, organizations will be able to provide complete responses to the questions with the remaining space available for attachments, an organization with a lengthy lease or an organization that is a successor to another organization and has significant existing material that illustrates the nature of its work or a complex organization with foreign activities that have to be explained and that may also have an associated single-member LLC and wants to include documents for the LLC as well may not have sufficient space with a 250-page limit. There is no limit to the number of pages that may be included on the existing paper application. As noted above, the organization will be able to rely on the determination as long as it does not have a material change in character, purpose or methods of operation. For this reason, an organization is well advised to describe not only its initial activities but also additional activities in which it may engage in the future so that it may rely with confidence on its determination letter. To limit the number of pages that may be attached with no path available for requesting and receiving an exception will cause the customer experience to deteriorate and frustrate the ability of an organization to give the IRS a complete and detailed description that will provide a basis for reliance on the determination for years to come.

Practitioners appreciate that an electronic submission system will reduce errors and omissions and allow for a more efficient system in processing applications. We submit these questions as practitioners who want to prepare for the change while also ensuring a section 501(c)(3) organization will have what it needs for ongoing compliance purposes. To that end, we ask (a) whether a section 501(c)(3) organization using the electronic submission system will be able to produce a complete identical copy of the Form 1023 that the organization can retain in a format that is easy to read and understand, and (b) what mechanism will be offered to an organization that wishes to request an exception and submit more pages of attachments than the electronic system otherwise allows.

Thank you again for keeping the public informed about the new electronic Form 1023 and for your willingness to entertain questions. We are hopeful that the IRS will have answers by the time the electronic submission system becomes active.

Very truly yours,

Catherine E. Livingston

Gerald M. Griffith

Jones Day
Washington, DC

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