If you feel like the IRS might be watching you a little bit more closely these days, a new report from the Exempt Organizations Division (EO) of the Tax Exempt and Government Entities of the IRS provides some basis for that observation. EO Director Lois Lerner outlines accomplishments in fiscal year (FY) 2010 and previews plans for FY 2011 in the 29-page report. It is worth reading the entire report to get an understanding of EO's priorities, but below are some highlights.
What Happened in FY 2010
Increased Monitoring. The statistics show that IRS has stepped up its efforts to check on charity compliance. For example:
- Audits of exempt organizations increased from 7,861 in FY 2008 to 10,187 in FY 2009 (a 30 percent rise) and to 11,449 in FY 2010 (another 12 percent).
- 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 extensively—they require fewer resources and, as the report delicately puts it, enable the IRS to "touch more organizations than by using an exclusively exam-based strategy."
- Collaborations with the Social Security Administration and the states also allowed EO to identify more effectively nonfilers and noncompliant organizations so that the cases selected for exams were more likely to result in finding significant issues.
Growth in EO Staff. One reason for the increased enforcement is more EO staff—the total has grown from 837 positions in FY 2008 to 910 in FY 2009, with another increase to 942 in FY 2010. Even more telling, 100 of these new positions over the two-year period were in the Examinations area. In contrast, staffing in all other major 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 to Note
- The revised Form 990 was first used for filing for organization year 2008, so the first full year of filings using the revised forms is close to complete, and the second well underway. There are some indications of improvements in compliance in the second year of the new form's use (organization year 2009). For example, all Form 990 filers are required to complete some information on Schedule O—in 2008, about 79 percent of the filers included it; that figure increased to 90 percent for those filing so far for 2009. Improved, but not there yet.
- More organizations are filing electronically (about 13 percent e-filed Forms 990 and 990-EZs in 2007; that figure grew to 19 percent in 2008.) Only the largest organizations are typically required to e-file, but many others are discovering the ease and cost savings of doing so. Check out the e-filing program developed by the National Center for Charitable Statistics at the Urban Institute, available for free or a minimal cost, depending on organization size.
What's Planned for FY 2011
Part of the rationale for the revised Form 990 was to collect the data that the IRS needed to ensure compliance. Now the IRS will be using the information to focus its limited resources.
- Cross checks of compensation reporting. Now that time frame (calendar year versus organization fiscal year) for Form 990 reporting of compensation conforms with W-2 reporting, the Form 990 information can be compared to what a nonprofit employer reports to the Social Security Administration. The IRS will be looking to see if compensation is reported on Form 990 but nothing is reported on Form W-2 or 941, or if there are other reporting discrepancies.
- Confirmation of charitable purpose. Consumer Credit Counseling and Down Payment Assistance programs will continue to be scrutinized to see if they really have been established for a charitable purpose or if they are primarily self-serving. Supporting organizations, typically set up to benefit one charity, are also targeted for special review.
- Reporting of loans. Over the past several years, IRS investigations of loans to officers, directors, trustees, and key employers has resulted in tax assessments of over $5.5 million and over $480,000 in employment taxes. There were also many errors in reporting that needed adjustment. The IRS plans to continue its review of these loans.
- Prohibited political activity for charities. The IRS will continue to investigate allegations of prohibited political activity by those exempt under IRC Section 501(c)(3), based on the IRS experience in the past few election cycles and has developed better processes to deal with them.
What Nonprofits Should Do
The IRS will be continuing its efforts to ensure that the nonprofit sector complies with the requirements that come with being a tax-exempt organization. Nonprofits 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 matches what is reported to other federal agencies.
- Confirm that income taxes and other payments related to employees, such as Social Security and unemployment compensation (if required), are correctly reported and transmitted to the appropriate agencies.
- If loans have been made to executives, trustees, and other key employees, be aware that IRS will be reviewing them and be sure to report accurately.
- Check out what political activity is allowed and what is prohibited—an updated IRS publication is available.
- File Form 990 completely, accurately, and on time. The threshold levels for organizations allowed to file the Form 990-EZ have changed significantly in the past several years, allowing the phase-in of the revised Form 990. So many organizations that have been filing Form 990-EZ for two years may now have to change to the full Form 990. Check out which form is required.
- 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.
Linda M. Lampkin, ERI Economic Research Institute
© 2011, 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.