The latest report on the activities and plans for the Exempt Organizations (EO) section of the Tax Exempt and Government Entities Division of the IRS provides some insight into what's ahead for nonprofits—good to know if your organization is in a group targeted for scrutiny. EO director Lois Lerner outlines accomplishments in fiscal year (FY) 2011 and previews plans for FY 2012 in the 12-page report. It is worth reading to get an understanding of EO's priorities, but below are some highlights.
IRS Activities in FY 2011
Monitoring level remained steady. The statistics show that IRS stepped up its efforts to check on charity compliance in FY 2009, but since then, the total number of returns reviewed dropped by about 10 percent from FY 2009 to FY 2010 and another 10 percent from FY 2010 to FY 2011. But a breakout by type of review reveals:
- Audits (full examinations) of exempt organizations were stepped up dramatically in FY 2009 to 10,187 (up 30 percent from the prior year), then increased 12 percent to 11,449 in FY 2010, followed by a 2 percent rise to 11,699 in FY 2011.
- Compliance checks (in which EO asks about a specific item on a Form 990 or for more information on an organization's operations) are also being used, although not as much as in FY 2009, when the compliance checks totaled 6,773—for FY 2010, there were 3,893 and for FY 2011, there were 3,194.
Originally, the IRS stated that it wished to use compliance checks more, as they were less resource intensive, but, in fact, over the past three years, the number of compliance checks has dropped dramatically while full examinations have increased some.
Decrease in EO Staff. Total staff levels have decreased for the past three years—910 in FY 2009, 900 in FY 2010, and 889 in FY 2011. The staff in the Examinations area, however, is up slightly from FY 2009 levels, rising from 525 in FY 2009 to 538 in FY 2010, then decreasing to 531 in FY 2011. Other areas (Rulings & Agreements, Customer Education & Outreach, and Director's Office) only increased by a total of 5 from FY 2008 to FY 2010.
Other Issues of Note
- The three-year phase-in period for the revised Form 990 ended in FY 2011, so the thresholds used to define what organizations file what forms are now set. The IRS intends to use the additional data provided on the revised forms to build "risk models" that will better predict the characteristics of organizations where there might be compliance problems.
- Some regulations were changed to ease the sharing of information with state charity regulators, so that enforcement efforts could be more efficient between the two levels of government.
IRS Plans for FY 2012
IRS EO resources will focus in certain areas in 2012, including the following:
- Better Information on Revocation of Tax-Exempt Status for Nonfilers. The Pension Protection Act of 2006 required that almost all tax-exempt organizations file annually with the IRS and that organizations not filing for three consecutive years have their tax-exempt status revoked automatically. By the end of 2011, almost 400,000 nonprofits had lost their exemptions. In January 2012, the IRS created Select Check to permit users to determine more easily if an organization is eligible to receive a donation, if a tax status had been revoked, and if a Form 990-N e-Postcard had been filed.
- Tax-Exempt Hospitals and Health Care Insurance Issuers. The IRS is required to review Community Benefit Activities reports now filed by tax-exempt hospitals with their Forms 990. Although the IRS will not contact the hospitals when their reports are reviewed, the data will be used for research and compliance purposes and to target areas where further education is needed. Also, a new category for Qualified Nonprofit Health Insurance Issuers, Section 501(c)(29), was created in 2011, and filing requirements and procedures will be developed during 2012.
- Self-Declared Tax-Exempt Organizations. Social welfare organizations—501(c)(4)s; labor, agricultural, and horticultural groups—501(c)(5)s; and business leagues—501(c)(6)s—can decIare themselves tax exempt without a determination from the IRS. To ensure that these groups are in compliance with the rules, the IRS will send out a questionnaire in 2012 to a sample selected on the basis of their Form 990 filings.
- Political Activities. The IRS will continue to focus on "serious" allegations of "impermissible" political interventions, using outside resources of information as well as risk modeling from Form 990 data.
- Form 990-T Issues. If unrelated business activities are reported and no Form 990-T is filed, the IRS will be looking for an explanation. Also, the IRS will refine its risk modeling to identify the organizations that report significant gross receipts from such activities but declare no tax due.
- Governance Practices. Using the new data on governance now available from the revised Form 990, the IRS will see which practices, if any, tend to lead to improved tax compliance.
Collaboration and General
- International Organizations. The IRS will continue to focus on organizations operating overseas and those that have large foreign bank accounts to make sure that activities are consistent with their charitable purposes.
- Employment Tax Check. The employment tax returns of 500 organizations will be examined to ensure compliance with reporting and payment of employment taxes. This is the third year of this IRS-wide study aimed at improving auditing and resolution procedures.
- Colleges and Universities Final Report. An interim report based on questionnaire responses from 400 colleges and universities was summarized in May 2010. The final report and examinations of selected organizations will be completed in 2012.
- Other Issues. The IRS also will explore the issue of group rulings and focus on mortgage foreclosure assistance groups, state-sponsored workers compensation organizations, and private foundations, to ensure that exempt purposes are fulfilled and that they are in compliance with rules and regulations.
What Should a Nonprofit Do?
The IRS will continue its efforts to ensure that the nonprofit sector complies with the requirements that come with being a tax-exempt organization. As outlined above, certain nonprofits have a higher likelihood of hearing from the IRS, even though its resources are limited. All nonprofits, however, can take some simple steps to lessen the likelihood of receiving an inquiry from the IRS in the coming year.
- Make sure that what's reported in compensation on Form 990 is consistent with what is reported to other federal agencies (Social Security, unemployment compensation, etc.)
- check out what political activity is allowed and what is prohibited—consult the IRS's tax-exempt organizations and political campaign intervention resources.
- File Form 990 completely, accurately, and on time. Make sure the correct form is filed, since threshold levels have changed over the past few years. Check the 2010 tax year and later table.
- E-file. It is easy and typically inexpensive. But even more important, it eliminates the possibility of the most common mistakes—the software won't let you make math errors, forget to attach or complete required schedules, or fail to sign the return. Check out http://efile.form990.org/ for easy access to software developed by the National Center for Charitable Statistics at the Urban institute.
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 email@example.com or (877) 799-3428.