IRS Speaks To Important Selected Issues

By Gary Snyder

Here are some selected comments of Nan Downing, Director, Exempt Organizations Examinations for the Internal Revenue Service at the annual Georgetown Law program on Representing and Managing Tax-Exempt Organizations on April 26

1.                IRS Exempt Organizations has seen an increase in the number of referrals from state charity regulators and tax agencies of more than 70 percent over the past six years. In FY 2011 alone, the IRS received 104 referrals from state officials in 19 different states. Common referral issues include:

• Private benefit and inurement
• Nonfilers
• Political activities by section 501(c)(3) organizations
• Employment tax issues
• Organizations not operated as required by their exempt status

2.                In a new approach to the IRS’ ongoing interest in compensation paid by exempt organizations, EO has focused on organizations reporting what appear to be abnormally low amounts of total compensation to officers, directors, trustees and key employees when compared with annual gross receipts.

IRS’ concern is whether some organizations may be circumventing the goal of transparency by hiding compensation levels.

3.                IRS uses the presence of the following factors was associated with good compliance for the group that we reviewed:

• Have a written mission statement
• Always use comparability data when making compensation decisions
• Have controls in place to ensure the proper use of charitable assets
• Provide for Form 990 review by the entire board of directors before filing

4.                EO also looked at the tax filings and publicly available online information of 285 organizations that reported a significant diversion of assets on their 2009 Forms 990.

To learn more about whether and how governance practices may have contributed to these significant diversions of assets, in FY 2013 EO will conduct examinations that will include a review of governance practices, both before and after the diversion event.

IRS hopes the exams will generate relevant information on how organizations can avoid these events, as well as help EO refine our indicators of potential noncompliance to better target our examinations resources.

5.                In FY 2012, EO completed compliance checks of 400 organizations that had reported taxable Unrelated Business Income, or UBI, activities on their Forms 990 but had not filed Form 990-T, Exempt Organization Business Income Tax Return. This work resulted in EO securing about 140 delinquent returns and more than $260,000 in tax payments.

In about one-quarter of the cases, organizations picked for UBI examination provided inaccurate reporting on their returns.

6.                This past year, EO also continued a project to determine levels of tax compliance by large private foundations, based on assets and revenues, with both § 501(c)(3) requirements and the specialized rules for private foundations. Many of the selected entities had foreign investments or made grants overseas.

About half of the examinations closed to date resulted in additional taxes or penalties. Adjustments to date included:

• Excise taxes on net investment income
• Taxes on unrelated business income
• Taxes on certain expenditures that are taxable when made by private foundations
• Employment taxes

7.                The IRS introduced the new EO Examination Resource Pages on IRS.gov. EO worked to centralize information about the examination -- or audit -- process on the IRS website. These new pages provide updated information to help familiarize organizations with what they need to know to help them prepare for an audit.

At-your-fingertips information now includes:

• Many of the reasons an organization might be selected for review
• The distinctions among various types of review, including field audits, correspondence audits and non-audits, such as compliance checks
• What to expect during an examination, from initial contact to closing letter
• Taxpayer rights, including appeals, and
• Fast Track Settlement, which is a quicker way to resolve disputes
• The Charity and Nonprofit Audits: Exempt Organizations Examinations page has the Exams organizational chart I mentioned earlier.

There are resources available for you online at www.IRS.gov/charities

There is an educational site, at www.StayExempt.IRS.gov, where you’ll find 21 courses covering the basics for new organizations to more in-depth topics.

Thanks to: Paul Streckfus, Editor, EO Tax Journal, Update 2013-74 (Wednesday, May 1, 2013)

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more Nonprofits: On the Brink (2006) Silence: The Impending Threat to the Charitable Sector (2011)