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Insights from the IRS on Nonprofits—What's New

In a recent speech, Lois Lerner, director of IRS Exempt Organizations (EO), shed some light on current issues for the IRS staff. Some of her comments should be of great interest to all nonprofits.

No Social Security Numbers, PLEASE!

According to the IRS, there should be no Social Security numbers (SSNs) on any Form 990 itself, on any schedule, or on anything else attached to the return. The IRS doesn't ask for Social Security numbers on the Form 990, and it doesn't want them. If fact, if they are included in the Form 990 filing, the IRS cannot redact them—the filing must be made publically available as it is filed, and that means the SSNs are included.

No one wants to make identity theft easier. The IRS message is simple: Don't put Social Security numbers on your 990, because the IRS must make the form available to the public as submitted. So don't just append that list of scholarship winners with their SSNs to your form, or prepare the form and add your own SSN as the preparer (that is what PTINs—preparer taxpayer identification numbers—are for). Just don't do it!

Does Nonprofit "Good Governance" Lead to Tax Compliance?

The EO staff thinks so. Now they have some preliminary evidence to back up that assertion.

For the past few years, every IRS compliance check included a check sheet on governance practices for the organization under examination. Obviously, the roughly 1,300 nonprofits in this group had already been selected for a check for reasons unrelated to governance, so it is not a statistically representative sample of nonprofits. But analysis of some key data points shows interesting results.

Organizations are more likely to be compliant if they:

  • have a written mission statement,
  • always use comparability data when making compensation decisions,
  • establish procedures for the proper use of charitable assets, and
  • have the Form 990 reviewed by the entire board of directors.

This initial analysis covers only 501(c)(3) public charities that were already selected for exam based on other criteria, but according to Lerner, it does provide some possible indicators of tax compliance. And now an IRS strategic planning group is developing a proposal to expand the data analysis to a statistically representative sample of all nonprofits. The IRS hopes to have the data to support its premise that good governance leads to good tax compliance.

In the meantime, filling out the governance questions on Part VI of the Form 990 is important to the IRS, and "wrong" answers in this section (for example, no comparability data used for compensation decisions) could end up leading to a review by the IRS. It is hard to envision a successful organization that does not have a written mission statement and procedures to protect assets. A review of Form 990 by the entire board is easily implemented. And comparability data are easily available—at GuideStar, at ERI Economic Research Institute, and through more traditional wage survey reports.

Significant Diversion of Assets

One of the governance questions in Part VI of the 990 covers the "significant diversion of assets," and the IRS is going to use answers on this question to help identify common indicators of serious cases and of cases where the organizations were able to self-correct. Sometimes, the problem is only missing information—no explanation on Schedule O. But in other situations, the IRS wants to know what internal controls or good governance practices were present before the excess benefits transactions took place and if such practices were modified to make sure that the organization's assets would be protected in the future. Although the IRS will then be able to offer better advice to avoid excess benefit transactions, another focus will be refining the IRS risk models so that the scarce compliance resources can be used more efficiently.

The IRS is always looking for ways to identify efficient ways to use its limited compliance resources. Nonprofits may not only improve their chances of success but also lessen the probability of an IRS investigation by implementing some simple good governance practices.

Who Is Filing Form 990-N—and Who Should Be?

The Form 990-N postcard is to be filed by the smallest nonprofits—and not by other organizations. In the past few years, the IRS redesigned the Form 990, but not the Form 990-EZ or the Form 990-PF, and implemented the eight-question Form 990-N, electronically filed by the smallest organizations. Not filing with the IRS for three consecutive years can lead to revocation of tax-exempt status, and almost 400,000 organizations have had their status revoked. The IRS wants you to file, but it also wants you to file the correct return, and the Form 990-N won't count if you exceed the filing thresholds or don't meet certain other requirements.

The IRS has noticed that several thousand organizations filed a Form 990-N and then filed another version of Form 990 in the same year. About 1,600 of these organizations are now getting letters asking for more information (a compliance check review). There is a second group of organizations that appear to have filed the Form 990-N when, based on information that IRS collected from other sources, such as employment tax filings and 990-T data, they should have been filing another form. This second group of about 1,000 will also receive compliance check questionnaires. And some supporting organizations also filed Form 990-Ns, which the regulations say is not allowed.

How Long to Determine Tax-Exempt Status

A few years ago, the IRS started to sort applications for exemption (about 60,000 each year) into four categories to help speed up the decision time for tax-exempt status:

  • approve immediately—application fully completed;
  • approve after seeking minor additional required information;
  • need substantial additional information to complete application; and
  • need further development by an IRS agent to determine if the application meets the requirements for tax-exempt status.

The process worked, and the continual large backlog of cases was reduced. Waiting times were reduced for most applications, unless the application fell into that fourth category and needed to be assigned to an agent. Now the backlog is again growing, as organizations that recently lost their tax-exempt status because of nonfiling for three years reapply.

What Nonprofits Should Do

As usual, the IRS is using the information on the 990s to try to identify organizations that are not in compliance. Following the rules and not raising red flags is always a good policy. Based on the current list of issues of interest to IRS, tax-exempt organizations should:

  • File the correct version of Form 990 (no Form 990-N unless it is the right one!) and do it every year.
  • Review answers on the Form 990 governance questions—make sure they are what IRS wants to see.
  • And please, no SSNs on the forms!

Linda M. Lampkin, ERI Economic Research Institute
© 2012, ERI Economic Research Institute

Linda M. Lampkin is research director of ERI Economic Research Institute, 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 linda.lampkin@erieri.com or (877) 799-3428.

Topics: Policy