In October, 2009, the IRS announced a substantial savings - $650 off the $850 User Fee - for using their "Cyber Assistant" to prepare your application for 501(c)(3) status.  Naturally, many groups are asking themselves whether it makes sense to wait for this web-based tool, scheduled to be released some time in 2010.  Here's my advice:

How Long Will the Wait Be?

We don't know exactly when the Cyber Assistant will be available.  The IRS was careful not to be more specific that "2010" for the roll-out date.  Back in 2006, 2007, and 2008, the Cyber 1023 was also expected "next year."  (On May 7, 2010, the IRS announced that the Cyber Assistant will be delayed.  It will not be released during calendar year 2010.)

An exchange between an IRS representative and an attendee at a conference held in Baltimore in February, 2010, made it sound as if even a 2010 release date is in doubt:

Attendee: When do you expect it to be available?

IRS: The Cyber Assistant tool?  It is being tested right now and I know that they ran into glitches with it and until those glitches get worked out, it's not going to be available and I don't know when that is.

Attendee: Sometime this year, maybe?

IRS: I don't know when the glitches are going to be perfected.

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.

Reputation

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.

Computer Glitches

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.

Fees

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.

Other Factors

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.

At one time, I thought the IRS was aiming to have the Cyber Assistant ready by May, 2010, when the IRS will begin revoking the exempt status of organizations that have failed to file a return for three years in a row.  Approximately 200,000 charities will lose their exempt status that month, and if they want it back, they will be required to submit a new Form 1023.  This could mean an even higher IRS inventory of applications, and even greater processing delays.