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IRS scrutiny of nonprofits - five risk areas you didn’t know you had

Aaron Fox Aaron Fox

The IRS Exempt Organization division is looking at ways to further crack down on nonprofits. There are five areas that “open the door” to invite the IRS in, and once they get in they can look for any issue.

  • Fundraising Expenses. The IRS selected about 170 small exempt organizations with high fundraising to program expense ratios for examination in recent years. They are scaling this operation up and applying it to larger nonprofits in the coming years.
  • Compensation Competence. There is an army of agents looking over automatically generated ‘discrepancies’ that indicate potential misclassifications of employees, under-reporting of wages and underpayment of taxes.
  • UBI Expense Allocation. Of interest to the Service are nonprofits showing losses in activities year after year that don’t appear to have a profit motive and using them to offset gains.
  • Parent and Subsidiary Transaction. This area is easily overlooked when planning inter-company activities. Whether it is a rental agreement to a wholly-owned subsidiary company, a management agreement between a 501(c)(3) and 501(c)(4) sister company, or a loan to a parent company, there is the risk of creating taxable income.
  • Political Activity. The IRS knows more and more political activism is coming from the exempt sector. Every election shows higher levels of contributions being directed to nonprofits for political purposes. The IRS has already identified and examined 300 cases of potential violations.

Not sure if you have these issues? Seek an independent opinion.

1. Ask a peer organization--though they may not know what to look at themselves.

2. Hire another CPA that supports 100 plus nonprofits. They will be able to identify if issues exist.

For additional information, please contact Aaron Fox, Senior Tax Manager at Raffa, PC: afox@raffa.com or 202-822-5000.

The preceding is a guest post by Aaron Fox, a manager in Raffa's Tax practice. He has more than seven years of experience working with tax-exempt organizations to improve compliance and help solve the unique challenges facing nonprofits. He is responsible for managing Raffa's tax compliance operation which includes federal and state tax returns, tax planning, tax consulting, and research memos, among other duties. He was instrumental in developing the template used by Raffa clients for accumulating information necessary to complete the revised federal Form 990. Aaron consults with clients on unrelated business tax and board governance issues, represents clients to the IRS, prepares exempt status applications, and manages retirement plan compliance. He is often called to provide staff and client education on a range of topics related to nonprofit tax, including lobbying regulations, nonprofit governance trends, Form 990 best practices, and compliance foreign filing requirements. Prior to joining Raffa, Aaron worked as a tax and audit senior serving high net worth individuals, corporations, partnerships, estates and trusts. Aaron is a CPA in the state of Virginia and graduated from George Mason University with a B.A. degree in Accounting.

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