Patrick McAssey | February 9, 2016
Whether you are a board member, executive director, accounting manager or CFO of a non-profit organization, you should be aware that the Internal Revenue Service (IRS) is increasing their audits of the Form 990.
Effective for tax years beginning in 2008, the IRS extensively revised Federal Form 990 to include a new summary page, a new governance section, enhanced reporting of executive compensation and an organization’s relationships with insiders and other organizations and new reporting for non-cash contributions, foreign activities, tax-exempt bonds and hospitals.
Now that several years have passed since the 990 revisions, the IRS has commenced auditing Form 990s based on “data-driven” criterion. This means organizations will be automatically selected for audit if certain data is detected by this automated process. The shift to “data-driven” assessments of an organization’s compliance with the federal tax laws, means that Form 990 preparation is more critical than ever. A properly prepared and executed information return will ensure that an organization’s chances for random audit selection are minimized and that exposure to income taxes, both on unrelated business income tax as well as other income by virtue of loss of exempt status, are kept at the lowest level possible.
Based on recent discussions with an IRS agent, some of the most common indicators that result in a non-profit organization’s selection for audit under this data-driven audit selection process are as follows:
- Form 990 – Part IV, Checklist of Required Schedules: Question 3: Did the organization engage in direct or indirect political campaign activities on behalf of, or in opposition to, candidates for public office?If the answer is yes, common findings have been inaccuracies in the completion of Schedule C, Political Campaign and Lobbying Activities. A common omission is on Schedule C – Part I-A describing the organization’s direct and indirect political activities and the political expenditures associated with those activities.
- Form 990 – Schedule G, Part II, Fundraising Events, is not completed when line 18 of Part IV: Checklist of Required Schedules, is marked ‘Yes,’ indicating that the organization reported more than $15,000 in total of fundraising event gross income and contributions.
- Form 990 – Part VI, Section A: Governance Management and Disclosure: Question 5 – Governing Body and Management: Was there a significant diversion of the Organization’s assets?A diversion of assets includes any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to embezzlement or theft. Does Schedule O: Supplemental Information to Form 990, clearly explain the diversion? If there is a significant diversion, one must complete Schedule O, Supplemental Information on Form 990 and clearly explain the diversion.
- Form 990 – Part VIII, Statement of Revenue: Line 6 – Gross Rents: When there is debt on the books, was the rental income subject to unrelated business income?In general, rental income received from debt-financed real property is generally includible in unrelated business income. The IRS is looking for the reporting of the rental income on Form 990-T, Exempt Organizations Business Income Tax Return.
- Form 990 – Part IX: Statement of Functional Expenses: Lines 11a through 11g – Fees for Services (non-employees).If amounts are identified on these lines, were 1099s issued and indicated on 990 line 1a (number of 1099s reported on Form 1096) of Part V, Statements Regarding Other IRS Filings and Tax Compliance?
- Form 990 – Part IV: Checklist of Required Schedules. The omission of other required schedules based on responses in Form 990 – Part IV.
As the IRS continues to identify organizations with potential non-compliance indicators, it is more important than ever, that tax-exempt organizations monitor and report accurately all required information with respect to their activities on their Form 990.
For more information please contact Patrick McAssey at pmcassey@blumshapiro.com or (401) 330-2726.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.
