On October 1, Joe Kroll, Internal Revenue Service Exempt Organizations Audit Manager spoke at the Bar Association of San Francisco on “Tax Issues Affecting Nonprofits and the IRS”. Since IRS EO programs are in continual evolution, this was worth a run downtown on BART, and Kroll did not disappoint with a well organized PowerPoint outline and in-depth knowledge to answer questions from experienced practitioners. The presentation specifically covered audits, the new Form 990 with focus on 501(c)(3) public charities.
IRS is not doing random EO audits but looking to known problem areas and practitioners (file multiple applications without adequate c3 purposes or multiple clients with same problem catagory) and to the exempt organization community to police itself with complaints from competitor organizations or even anonymous allegations of lack of charitable activities, for example a letter from a disgruntled employee. IRS never discloses the identify of an informant.
5 Risk issues for audits:
1. Inurement, i.e. private benefit to either insiders or outsiders must be incidental. IRS uses a clipping service to monitor reports of charity improprieties and scandal. There are shaded differences between an elaborate volunteer appreciation party and actually distributing cash/equivalent to “appreciated” volunteers.
2. Attempts to influence legislation: lobbying is allowed but IRS recommends c3 use the (h) test.
3. Political activity: endorsing a candidate for public office – example, full page ads by churches or a candidate speaking at a church. (Note: churches may but do not have to file for exemption yet can lose exempt status by running afoul of requirements.) IRS has an elaborate system to monitor election cycles and is still working on the presidential election with complaints still coming in.
4. Urelated Business Income (UBIT) – (taxable starting at $1K UBIT revenue) IRS gets information from state and local agencies.
5. Worker characteristics: IRS prefers employees to independent contractors but has no specific program to target and noted it’s not uncommon for organizations to do withholding but never actually pay IRS.
Filing requirements (due by 15th day of 5th month following end of fy, automatic 3 mos extention, 2nd 3 mos extention with application and receipt); all processed in Ogden; IRS wants everyone to file electronically as it reduces errors.
IRS’s master file of organizations still has every applicant with none yet removed even though many apply and never begin operations or just stop in exhaustion. Now, the 990N filing requirement (currently revenues under $25K annually but rising to $50K ) Organizations that do not file (tax years 2007, 2008, 2009) will be dropped from the master list and have exemptions revoked. In 2010, revenues up to $50K annually will be included in the 990N instead of the Form 990-EZ. The challenge for IRS has been lack of contact addresses. (Note – A frequent problem for volunteer animal organizations for all legal compliance areas.) Small organizations can and should use the extension process, but if you are responsible for one (or more) of these that have not filed, GO AHEAD AND FILE ASAP, no late filing penalty and as required to avoid the announced cutoff in 2010 from which there may or may not be any leeway.
The completely revised Form 990 (2008) is essentially an information return, open to public inspection and developed with stakeholder input, particularly from donors and states. 40 states are using this. There is an 11 page core form with 16 schedules, one a blank Schedule O that must be used to provide additional information as NO ADDITIONAL ATTACHMENTS are allowed now. (Note, Guidestar images 990s but does not include attachments, so this discrepancy from Guidestar will be eliminated. Guidestar uploads IRS filings but is not error free. Guidestar does not satisfy IRS requirement for EOs making filings publicly available.) 990PF and 990EZ forms have not changed, and the threshold for the 990 is either $2.5 million in assets or $1 million gross receipts, so that more entities can use these while IRS “works the bugs” out of the new 990. The 990 had not changed for 30 years but the exempt organization industry had. The new 990 is 75% an activity/governance report and $25% financial report (last 3 pages)with the demand for more activity reporting coming from the funding/donor community. The first page now resembles a grant application with information about the mission, board, employees and growth allowing organizations to attract donors looking for transparency and actual activity. The 990 instructions are now written in plain English and include a glossary and appendices on things like inurement and excess benefit transactions. Note that the prior 5-year advance ruling for public charity status has been discontinued as a separate process, BUT the equivalent information is now included in the new Form 990. (Note, small organizations should have the equivalent information even if not required to file the detailed form.)
Customer Service 877-829-5500 for inquiries about exempt status, etc. and now can furnish copy of lost determination letters.
http://stayexempt.org An IRS site based on computer training, useful for new board members.
The monthly email update, subscribe at http://www.irs.gov – go to the Charities & Non-profits tab on navigation bar.