For many years, the number of exemption applications has been on the increase while IRS staffing levels have remained stagnant. Not surprisingly, the IRS has been exploring ways to streamline the application process. One step the IRS took was the elimination of the "Advance Ruling" process back in 2008. Another was the establishment of a project to develop a fully interactive on-line Form 1023 application, known as the "Cyber-Assistant."
The Cyber Assistant has gotten off to a slow start. Originally conceived in 2002, the Cyber Assistant was not ready for IRS-announced release dates in 2007, 2008 or 2009. Hopes were raised in 2010, when the IRS announced a reduced fee for filing on-line ($200), but as of early 2012 the Cyber Assistant still had not been released.
In its 12/31/2011 Report to Congress, the National Taxpayer Advocate noted that the IRS has delayed the release of the Cyber Assistant "until further notice," and recommended that Congress require the IRS to implement the Cyber Assistant.
In response, the IRS said, "Software testing revealed problems requiring correction prior to public launch, and the IRS had to delay the release. Because the IRS must balance a number of competing information technology needs, we cannot presently predict when Cyber Assistant will be available."
If you are still considering waiting for the Cyber Assistant, and the lower fee it will bring, here's my advice:
27 Month Rule
A 501(c)(3) has until the end of the 27th month after it is created to file its exemption application. If your organization is closing in on the end of its 27 month grace period, you should not wait for the Cyber 1023. Avoiding the hassles of missing the 27 month deadline is definitely worth the extra money.
Delayed 501(c)(3) Benefits
501(c)(3) status offers a number of benefits other than exemption from Federal income tax: deductibility for contributions, bulk mailing permits, state, local and property tax exemptions, and eligibility for foundation grants, to name a few. Only you can weigh the $650 discount against the costs of postponing these valuable benefits for your group.
In some cases, lost benefits can be recouped once the IRS recognizes 501(c)(3) status. There is one benefit, though, that once lost may be gone forever: your non-profit's reputation. If you think there is any chance your organization will be in the news sometime soon, don't wait for the Cyber 1023. Savvy journalists check the IRS website when writing articles about local charities. A news story pointing out that your group has not yet taken care of its IRS paperwork can do lasting damage.
Hard working men and women are spending years of their lives to bring us the Cyber 1023, but of course there will be glitches.
The Cyber Assistant will not quite be a fully interactive on-line form. Applications will still have to be filed the old-fashioned way - on paper, through the mail. Special bar coding inserted by the Cyber Assistant when the application is printed will alert the IRS that the applicant is eligible to pay the lower User Fee.
The glitches I know about have to do with printing your form.
Printing your 501(c)(3) application before it is finished will result in a form with a "Draft" watermark, and no bar codes. This means you will not be able to submit the form unless the Cyber Assistant software thinks it is complete. When describing the Cyber Assistant in June of 2006, one IRS official said,
"At the end of the day, you have to print out the 1023 and send it in. But lo and behold, if you left something blank that needs to be filled in, it won't print. If you are supposed to put numbers in a particular area and you've put text, it won't print."
In addition to possible confusion about when an application is "complete" there seems to be some question about whether home computer printers will be able to print bar codes that can be read by IRS equipment. This problem seems to be behind the current delays, and it remains to be seen how this will be resolved.
Although using the Cyber 1023 will save your organization up to $650 in IRS fees, it is not clear whether other fees may apply. This taxpayer-education and consistency-check tool will not be on www.irs.gov. Instead, it will be hosted by private party partners on their websites. This is the real world, and these partners, both for-profit and non-profit, will have to recoup their costs somehow.
My guess is that there will at least be a fee for having the private party vendor print your 501(c)(3) application on a specialized printer so that it can be scanned by IRS equipment.
The Cyber 1023 relies on partnerships with private parties. Another IRS program operated through private sector partnerships is their "Free File" program, started in 2002. Free File has not been an unqualified success. Problems have ranged from confusing rules and murky oversight, to high-pressure/misleading sales tactics aimed at selling financial services, to privacy concerns. Let's hope the Cyber Assistant program is able to avoid similar problems.
If significant numbers of organizations decide to wait for the Cyber 1023 in order to save $650, there could be processing delays due to an increased inventory when the web-based assistant is finally up and running.
In the fall of 2010, the IRS began revoking the exempt status of hundreds of thousands of non-profit organizations. To get their exempt status back, these organizations will need to submit new exemption applications. If significant numbers of these revoked groups apply using the Cyber Assistant, this could mean even greater processing delays.