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Not-For-Profit Insights: Now Available: IRS Exempt Organizations FY 2012 Annual Report and FY 2013 Work Plan

The IRS Exempt Organizations Division (“EO”) recently issued its FY 2012 Annual Report and FY 2013 Work Plan (“Report”). Among other topics, the Report discusses EO tax compliance projects that are either planned or in progress.

Suggested Action:
Review this Alert to determine whether any of the EO tax compliance initiatives may affect your exempt organization and review the steps that your organization can take to prepare for possible EO scrutiny and/or address any tax compliance issues.

The EO tax compliance activities discussed in the Report include the following:

Using Form 990 Information in Compliance Efforts – The Report states that EO uses information from Form 990, Return of Organization Exempt from Income Tax, to select returns for examination, and that it is more important than ever that organizations file a complete and accurate return. The following are EO tax compliance projects that drew on data from Form 990 filings:

  • Charitable Spending Initiative – EO will identify for examination a group of medium to large organizations that reported certain high expense ratios on Form 990 (e.g., relatively large fundraising expenses compared to expenditures for charitable purposes).  EO will also focus on organizations that report substantial income from fundraising but little or no fundraising expenses. 
  • Compensation Transparency – EO will begin examining a random sample of 200 organizations that reported on Form 990 high annual gross receipts with very low total compensation to officers, directors, trustees, and key employees.
  • Political Activity – EO will continue to review cases referred from outside sources, as well as organizations that filed Form 990 indicating possible intervention in a political campaign. In addition, EO will determine whether organizations are required to file Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations.
  • Form 990-T and Unrelated Business Income (UBI) – EO will examine a statistical sample of organizations reporting substantial gross UBI for three consecutive years but reporting no income tax due for any of those years.

Form 990-N Misfiles – EO will examine about 200 organizations that did not provide sufficient information in response to a previous EO compliance check about their eligibility to file Form 990-N. EO will also contact over 1,000 organizations that “dual-filed” both Form 990-N and another Form 990-series return for the same tax year.

IRC Section 501(c)(4), (5), and (6) “Self Declarers” – EO will send a questionnaire to organizations that have “self-declared” to be tax-exempt under Section 501(c)(4), (5), or (6) without seeking an IRS determination letter recognizing their tax-exempt status.  Such organizations that filed Form 990 for tax year 2010 or 2011 will be asked to complete the questionnaire online and submit it electronically. EO will analyze the responses and determine if the organizations have classified themselves correctly and are complying with applicable rules.

Tax Exempt Group Rulings – The Report states that in early FY 2013, EO mailed a questionnaire to over 2,000 randomly selected central exempt organizations that hold group rulings. The purpose of the questionnaire is to help EO learn about the relationship between central exempt organizations and their exempt subordinates and the ways in which such organizations satisfy their filing requirements.

International Activities of Charities – In FY 2013, EO will focus on examinations of organizations with high amounts of foreign grant expenditures.  EO will also complete its examination project to determine levels of tax compliance by selected large private foundations, many of which had foreign investments or made grants overseas. Further, EO will complete its examinations of certain charities that participate in “Gifts-in-Kind” programs in which charities send non-cash items to other domestic or foreign organizations. More such cases are being reviewed for possible examination, with specific emphasis on organizations with limited charitable activity and excessive compensation.

Additional Projects – The Report states that EO will:

  • Examine a statistical sample of  501(c)(3) and (4) organizations using a check sheet to gather information about their governance practices;
  • Conduct examinations that will include a review of governance practices of certain organizations that reported a significant diversion of assets on their Forms 990;
  • Continue to monitor 501(c)(3) organizations’ qualification for public charity status, as reported on Schedule A (Form 990 or 990-EZ);
  • Continue to perform compliance checks on intermittent non-filers of Form 990 or 990-EZ;
  • Complete the examination of about 2,500 employment tax returns and provide the data to the IRS-wide National Research Program project for further processing;
  • Analyze the approximately 3,000 512(b)(13) check sheets that were completed by EO Revenue Agents to be used in examinations;
  • Continue reviewing  certain 501(c)(27) state-sponsored workers’ compensation organizations;
  • Conduct compliance reviews of about 280 exempt organizations that appear to be providing mortgage foreclosure services; and
  • Complete a final report on the nonprofit colleges and universities tax compliance project.

Please visit CohnReznick’s Not-for-Profit and Education webpage and contact Thomas Lanning, Partner, at 646-834-4108 or Phil Royalty, Director, at 916-930-5222.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

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