The Exempt Organization division of the Internal Revenue Service (IRS) recently issued its 2013 Workplan. The purpose of the workplan is to provide an update on various ongoing projects that have been undertaken by the IRS with respect to exempt organizations, as well as new projects that the IRS will begin in 2013. Below is an overview of some of these key projects. As a reminder, all organizations should review their operations, policies and activities in order to minimize risk and ensure compliance with IRS requirements.
Beginning in 2008, the IRS substantially revised the Form 990 in order to promote transparency and improve compliance. The revised form requires filing organizations to provide more in-depth information than previous years’ versions had required. The IRS is using this information to develop potential indicators of noncompliance for use in its examination process. The IRS is still in the early stages of identifying potential indicators and testing them.
As the IRS has examined organizations that were selected through this data-driven approach, it has found that the Form 990 responses of some organizations do not always accurately reflect their activities. The IRS believes that if these organizations completed their returns more accurately, they might not have been identified by IRS indicators or selected for an examination. The IRS is using the Form 990 responses to select returns for examination; therefore, filing a complete and accurate return is in the best interest of all organizations,
The following are 2012 compliance projects which used data from the Form 990 and in which indicators of non-compliance were tested by the IRS. These compliance projects will be continuing into 2013:
In about 25% of the cases, inaccurate reporting on returns resulted in these organizations being examined for UBI issues. Examiners determined that if the organizations had reported correctly, they would not have been examined.
In 2013, the IRS will examine a statistically valid sample of organizations reporting gross UBI for three consecutive tax years, but reporting no income tax due for any of those years. The IRS’s concern is whether these organizations are accurately reporting their sources of UBI and correctly allocating the expenses associated with the UBI activity.
Action item: We recommend that all organizations review the activities that they engage in which the IRS believes may result in UBI. Organizations should document their conclusions as to whether a particular activity is UBI and the methodology used to allocate expenses to UBI.
The IRS has gathered information on a random sample of 200 organizations through the internet and internal sources, and will begin examinations with a focus on compensation reporting in 2013.
In about one-third of the completed examinations, the high expense ratios turned out to be lower after the books and records were examined. It was determined by examiners that the high expense ratios were a result of inaccurate reporting.
More than 150 examinations have been completed, and the remainder will close in 2013. These examinations have resulted in the loss of exemption of four organizations due to either very little charitable activity or inurement to an officer. In addition, these examinations have resulted in assessed UBI tax to three organizations.
In 2013, the IRS will use information learned from these examinations, as well as similar criteria, to identify a group of medium to large organizations to examine. The IRS will also be focusing on organizations reporting substantial income from fundraising, but little or no fundraising expenses.
Action item: In light of the above, organizations should periodically review their expense allocations between program service, management and fundraising to ensure that the allocation properly reflects the activities of the organization.
The IRS has completed its analysis of 1,300 checklists from 501(c)(3) organizations, and has released its preliminary findings. The IRS points out that these results are not statistically representative of the overall population since the analysis included only public charities that had been selected for examinations based on other criteria. However, the IRS does believe that these findings may provide some insight into which governance practices might be useful indicators of tax compliance.
The following factors were associated with compliance for the group that was examined:
Having control of the organization concentrated in one individual, or a small, select group of individuals, was associated with non-compliance.
In light of its initial findings, the IRS will examine a statistical sample of organizations in 2013 using a checksheet to gather information on governance practices. The IRS will be examining whether other factors or practices are relevant to compliance vs. non-compliance.
Action item: All organizations should ensure that written policies and procedures related to governance and management are in place and are being adhered to. Upon examination by the IRS, the organization will be asked to provide substantiation for those governance and management policy questions which were answered “yes” on Part VI of the organization’s Form 990. In addition, organizations which do not provide the full Form 990 to the entire board may want to consider changing their policy in order to answer “yes” to the Form 990 review question on Part VI.
The IRS continues its interest in international activities of charities. In 2012, it completed examinations of a sample of organizations that reported foreign bank accounts on their Form 990s. The results of the exams reflected four problem areas:
In 2013, the IRS will be shifting its focus to examinations of organizations with high amounts of foreign grant expenses.
Action item: Organizations with foreign activities and investments should ensure proper recordkeeping and reporting for these items. Organizations should review their alternative investments to ensure that all foreign investments have been identified and are monitored for any transactions or ownership interest threshold which may require reporting to the IRS. In addition, all Schedule K-1s from partnership investments should be closely reviewed to identify foreign and other reporting requirements that are required due to the partnership’s investments in other entities.
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