Nonprofit Accounting Basics
IRS Exempt Organizations Annual Report and Workplan: What the IRS is Up To!
On February 8, 2012, the IRS Exempt Organizations (EO) Group released its annual report and workplan. This document highlights EO’s accomplishments in the prior fiscal year and its priorities and initiatives for the current fiscal year. It is important in that it lets us know where the IRS will be focusing in terms of nonprofit organizations, activities, and issues. In this article we will discuss key highlights of both the annual report and the workplan. The full text is available online at http://www.irs.gov/pub/irs-tege/fy2012_eo_work_plan_2011_annrpt.pdf.
The Annual Report:
- The total number of EO employees has decreased from 910 to 889 over the past three years, with the largest decrease occurring in Rulings and Agreements. Other areas (including Examinations) have remained fairly flat.
- Examinations of nonprofits decreased from 15,342 in the prior year to 14,863 in FY 2011, with about 3,000 being compliance audits and the remainder being the traditional audit. Compliance audits are based upon one or two issues the IRS has identified through data mining of 990 nformation or through survey data. Expect compliance audits to increase in the next few years since these are a more efficient way for the IRS to examine what it has identified as the most significant areas.
- Exempt Organizations Select Check (http://apps.irs.gov/app/eos) was unveiled as an online research tool that allows users to select an exempt organization and check certain information about exempt status. This consolidates three former search sites into one, providing expanded search capability and a more efficient way to search for organizations.
- New Form 8940, Request for Miscellaneous Determinations was introduced which can be used to request: advance approval of certain private foundation set-asides; advance approval of private foundation voter registration activities; advance approval of private foundation scholarship procedures; exemption from 990 filing requirements; change in (or initial determination type of) 509(a)(3) supporting organizations; advance determination that a potential grant is an unusual grant, reclassification of foundation status, advance ruling request for termination of private foundation status; and termination of private foundation status under Section 507(b)(1)(B).
- There is a new EO examinations office in Ogden, UT, for resolving certain problems resulting from examinations (e.g., misapplied tax payments or use of wrong EIN).
- Certain audit letters have been updated with “plain language” in order for organizations to better understand.
- Proposed Regulation 301.6104(c)-1 revised and eased barriers for disclosure of information to state charity regulators. This will make it easier for the states to obtain information about charities operating in their states.
- Revenue Procedure 2011-33 was released and updated an old Rev. Proc. providing for grantor reliance on Publication 78 (listing of organizations eligible to receive charitable contributions). Under this procedure, private foundations and other grantors may also rely on the EO Master File for charitable status. This is important because Pub 78, for a number of reasons, does not always include all organizations with legitimate 501(c)(3) status.
FY 2012 Workplan:
- The IRS is conducting a survey of randomly selected exempt organizations to analyze how to reduce the burden of preparing and filing annual exempt organization returns. The survey includes methods of preparing, recordkeeping, time spent on tax-related activities, and fees associated with reporting compliance. The survey is voluntary and only organizations randomly selected may participate. The results are to be used only for statistical and research purposes.
- 501(c)(4),(5), and (6) “self declarers:” These organizations (social welfare organizations, labor unions, and trade associations) are not required to file Form 1024 and obtain a determination letter in order to operate as tax exempt entities (although most such organizations do obtain a determination in order to be sure they qualify). The IRS will be reviewing a selection of self declarers to ensure they are classified properly and complying with the rules.
- In the hospital arena, the Review of Operations group, which started in 2011, will be completing its community benefit review and will utilize this information for research, education, and compliance purposes. Additionally, the IRS is continuing to work with the Treasury to develop guidance on the new 501(r) requirements which resulted from the recently passed health care legislation.
- As in previous election years, the IRS will be enforcing the rules about political activity and campaign expenditures (principally with charities that are prohibited from political activity). The IRS will focus its examination resources on serious allegations. Additional potential violations will be identified through risk modeling of Form 990 data. The risk models will be refined based on examinations.
- 990-T and Unrelated Business Income Tax: Examinations will be focused on organizations reporting unrelated business income on Form 990 but not filing Form 990-T. Risk models will be developed for organizations with significant gross UBI but that don’t pay any tax. This work will be used in a future UBIT project (i.e., examination program).
- In the international arena, the IRS will continue to focus on organizations that operate overseas to ensure such activities are consistent with exempt purposes. Examinations will include a number of large private foundations with international activities and assets or revenue greater than $500M as well as organizations who report foreign bank accounts. Plans are underway to release two new publications describing the special rules applicable to foreign and domestic charities engaged in international activities.
- An employment tax initiative (which we have written about previously – Payroll Audit Program by IRS) will continue in its third and final year, with some 500 nonprofit organizations being examined.
- The final report on a college and university study, based upon questionnaires sent to 400 colleges in 2008, should be released this year. In the preliminary report issued in 2010, it appeared the major concerns of the IRS were compensation and unrelated business income.
- The IRS will identify compliance issues related to disaster relief efforts and develop a communications plan to educate organizations in this area.
- A questionnaire will be developed to be sent to a cross section of group ruling holders; education will be expanded on group rulings.
- A selection of the largest private foundations will be examined based upon information contained in Forms 990-PF.