If you saw the announcement that the IRS had (fairly) recently released Strategic Plan 2009-2013 and thought, "Oh, no. Something else I have to make time to read," relax. You don't need to spend a lot of time studying the plan. The word charity does not appear in it at all, and nonprofit mentions are concentrated on a single page of the 36-page document. There are better places to look for IRS plans that may affect the nonprofit sector, which are mentioned below. But first, let's look at the big picture.
The plan focuses on how the IRS will adapt to six major trends (increasing complexity of the tax code; looming retirements for a huge proportion of the IRS workforce; increased need for technological sophistication; accelerating globalization; expanding use of third-party practitioners, such as paid preparers and software; and changing business models, from corporations paying corporate tax to "pass-through" companies, where profits are taxed on the member/owner individual tax returns). In light of these trends, specific objectives and strategies are outlined to meet two major goals, and finally measures of performance in reaching the goals are listed. Two of these 12 measures are directly related to nonprofits.
IRS Goal #1: Improve service to make voluntary compliance easier
The focus for this goal is to make it easier for taxpayers to comply with the law, with objectives that include getting more feedback from affected taxpayers and expediting and improving issue resolution. The IRS also pledges better guidance and outreach and strengthened partnerships with those third parties that IRS now calls "tax partners." (The IRS notes that 87 percent of taxpayers use tax preparers or software for their initial interaction with the IRS!)
IRS Goal #2: Enforce the law to ensure that everyone meets their obligation to pay taxes
The first objective under this goal says the IRS will act more quickly, to minimize both IRS and taxpayer burden. The second emphasizes alternatives to traditional enforcement—letters to taxpayers and other non-audit contacts that educate, provide information to the IRS, and encourage self-correction.
The third objective brings the first mention of the nonprofit sector—"taxpayers with international activities—including individuals, businesses, and tax-exempt organizations—are growing in number and variety." IRS strategies to manage international tax administration better include developing more expertise and awareness among staff and a commitment to target areas of significant risk aggressively.
Objective 4 continues IRS use of research to identify enforcement activities that have the greatest impact on compliance—flow-through entities, high-income individuals, and corporations are specifically mentioned.
Objective 5 ("Continue focused oversight of the tax-exempt sector") is detailed below and followed by Objective 6, which calls for the third parties to adhere to professional standards and follow the law. The IRS commits to a system of sanctions and penalties and more research to identify the areas of abuse by tax practitioners, tax preparers, and other third parties.
IRS Goal #2, Objective #5: Continue focused oversight of the tax-exempt sector
The size of assets controlled by tax-exempt organizations (more than $15 trillion if totaled with assets of tax-exempt retirement programs and financial instruments) is listed as a reason for more careful oversight and advisory support. The plan outlines commitment to three strategies:
- outreach and guidance by the IRS to ensure adherence to tax-exempt status requirements;
- proactive efforts by the IRS to address misuse of tax-exempt organizations and/or tax-exempt status; and
- continued focus on universities, hospitals, and other major segments of the tax-exempt community.
And that is all there is about the nonprofit sector in the strategic plan. A final section lists some metrics to measure the progress on these broad long-range goals. Only two mention tax–exempt organizations: #3—the percentage that E-file—and #6—the amount of non-revenue enforcement activity.
Some More Insight about IRS Activities
Remarks by Lois Lerner, director of exempt organizations, at a Georgetown University conference in April and by Sarah Hall Ingram, the new commissioner of tax exempt and government entities, at Georgetown in June provide a little more insight into upcoming activities. Points of particular interest from Lerner's comments include:
- Payment of employment taxes by tax-exempt organizations—she warned that there is personal liability for those responsible for reporting and depositing the amounts withheld from employees to for-profit and nonprofit employers alike.
- "Charitable Spending Initiative"—this long-range study is investigating the sources and uses of funds in the charitable sector. The first phase is identifying organizations with unusual fundraising levels, those with high levels of unrelated trade or business activity, and those with relatively low levels of program service expenditures.
- Concern about executive compensation packages and practices—although AIG bonuses and the executive salary caps were in the for-profit world, there is lots of scrutiny of nonprofit executive compensation, and the redesigned Form 990 provides much more comprehensive compensation reporting.
- Additional staff—Both the EO examination function and Rulings & Agreements have been given additional staff so that the IRS can deliver on its promises to provide better oversight of the sector.
As part of a larger discussion of nonprofit governance and EO actions to promote it, Ingram presented four principles that define "good governance":
- Publicly defined mission—an exempt organization needs to be able to demonstrate that it is providing a public benefit.
- "Engaged, informed and independent" board—"the board should have real responsibility and authority."
- "Proper use and safeguarding of assets"—executive compensation and conflict of interest policies and support for annual financial reviews support this principle.
- Transparency—documenting board decisions, retaining records for an appropriate amount of time, having a whistle-blower policy, and filing complete and accurate Forms 990 fall into this category.
"One size does not fit all," Ingram acknowledged. "But it is fair to ask all organizations whether they have in place systems, safeguards, or controls to minimize the risk of events occurring that contravene the Code’s requirements for tax-exemption."
Actions for Your Nonprofit
Keep doing what you should. Pay the proper employment taxes on your staff; use appropriate comparable wage data to set executive compensation and document your decisions; file Form 990 promptly and accurately (and electronically, if possible); use efficient fundraising methods; and spend most of your revenues on achieving your tax-exempt purpose. Tax-exempt organizations that don’t may find themselves dealing with unwanted attention from the IRS as it strives to meet its 2009-2013 goals.
Linda M. Lampkin, ERI Economic Research Institute
© 2009, ERI Economic Research Institute
Linda M. Lampkin is research director of ERI Economic Research Institute (www.erieri.com), a company that provides Form 990 compensation data for use by nonprofits, and former director of the National Center for Charitable Statistics at the Urban Institute. She can be reached at firstname.lastname@example.org or (877) 799-3428.