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Will new IRS policy encourage tax fraud?

Starting on July 1 a new policy went into effect for organizations seeking tax-exempt status as a charity. Previously, groups pursuing this designation had to complete a detailed 26-page form, provide reams of supporting documentation and describe their intended activities in narrative form.

To obtain tax-exempt status as a nonprofit now, many groups will simply have to certify on a three page form that they are in tax code compliance with the requirements of a charity. After applicants pay a $400 fee, these forms will essentially be rubber stamped.

To get an automatic designation as a charity under the new process, a group has to declare that it has a yearly income below $50,000 and holds total assets valued at less than $250,000. Assuming an organization meets these eligibility criteria and files all paperwork properly, it will qualify as a charity to which donors may make tax-deductible contributions.

This change will affect around 80 percent of the groups that seek tax-exempt status as a charity. Annually, it will mean 40,000 to 50,000 fewer applications for tax-exempt status will need to be reviewed.

The IRS says the move is not only being made in the name of efficiency, but that it will actually help counter tax fraud. Some other commentators have not been so optimistic, however, and fear that the change will open the door to fraud.

The review process in applications for tax-exempt status is being eliminated for many organizations, but that does not mean the IRS intends to ease up whatsoever on enforcement actions that are deemed necessary. Any tax controversy investigated by the IRS is a serious matter, and if you are being audited or investigated for a tax issue, it is important to get the right legal help.

Source: Time, "IRS to Rubber-Stamp Tax-Exempt Status for Most Charities After Scandal," Massimo Calabresi, July 13, 2014

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