Hot Nonprofit Issues with the IRS

In a typical year, the IRS releases an Exempt Organization (EO) work plan by January or February for its fiscal year.  The work plan is a document that describes its projects, initiatives, and issues of interest for the year.  Unfortunately, for 2010, for whatever reason, no work plan has been released and the IRS has decided it is now too late to do so.  However, many initiatives from 2009 and prior years will continue into this year.  Additionally,  through speeches at various meetings and conferences, IRS officials have indicated some pretty clear areas of interest that are certain to be emphasized in the near future.

Continuing from the 2009 Work Plan:  

• Charitable Spending Initiative:  a “long-range” study to learn about sources and uses of funds—fundraising, contributions, grants, related/unrelated income, and expenses — no reports have been released on this program yet.
• Gifts In Kind:  Valuation of non-cash gifts is the main focus here.   This is a program of examinations with the stated purpose of gathering information on these programs for the IRS.  Filings of 8282 and 8283 forms, acknowledgements, and charitable use of these gifts are is definitely being emphasized.
• Governance:  In addition to all the new 990 reporting, the IRS now has a governance checklist for revenue agents doing EO examinations. See governance training materials on IRS website (IRS.gov).
• Student Loan Organizations:  Information gathering project targeting student loan organizations that have relationships with for-profit entities owned by officers of the EO.
• Mutual Organizations:  Compliance check program addressing 501(c)(12) organizations failing to meet the 855 member income test.

On-Going Initiatives from Prior Years:

• Colleges/ Universities:  A compliance check questionnaire project started in 2008.  This project was focused primarily on compensation and UBIT, and is indicative of IRS interests in the entire sector.
• Political Activity Compliance Initiative:  501(c)(3) project done every two- year election cycle to identify charities that are violating the prohibition against political activity.  Expect this to be repeated in 2010.
• Hospitals:  Based on results of 2007 hospital compliance check, expect executive compensation to be on the radar.
• Non-Filers:  
  • Gaming by EOs—to focus on income tax withholding, employment, and UBIT.  This is an examination project with no report issued to date.
  • Employment tax matching project—comparison of W-2 reporting to Social Security vs. Form 941 reporting.  No report issued to date.
  • Form 990 non-filers:  three categories of interest: —intermittent filers, 990-T filers without a corresponding 990, and 1098-C (vehicle donation form) filers without a 990.  As of this year, lack of filing for 3three consecutive years is an automatic revocation of exemption.

Areas of Interest Perper IRS Officials:

• Colleges and Universities:  As result of compliance check questionnaire (see above), a couple of dozen institutions (including some very high profile universities) are already being examined even though no report has been issued on the project yet.  Expect more activity in this area.
• Employment Taxes:  This is a three year project being done across the spectrum of entities—both for-profit and non-profit.   IRS is convinced that compliance is not as good as it should be.  Proper classification of employee vs. contractor and proper reporting are to be among the areas of interest.
• Community Foundations:  Examination program based upon responses to previous questionnaire project (some regional balance expected).
• Dirty Dozen Tax Scams:  Every year IRS released its top 12 tax scams of which taxpayers should be aware.  Included on this list is “abuse of charitable organizations and deductions.”.  Improper shielding of income/assets from taxation, attempts by donors to control donated assets, and overvalued donations are among the areas of concern here.
• FBAR (Foreign Bank Account Reporting):  This remains an area in which the IRS will be stepping up enforcement.  There are recent announcements, so look for continuing developments in this area.

Conclusion:
It is always best to be forewarned.  By knowing the areas of highest interest to the IRS, organizations should be able to take an inward look at their activities and determine if they have any exposure. Correction prior to an IRS examination is always the best tactic.