According to the first Annual Report on the Exempt Organizations, published in November 2008, the IRS wants to:
- improve IRS service to achieve voluntary compliance;
- continue enforcement of the tax law and ongoing tax compliance initiatives;
- launch five new tax compliance initiatives in 2009; and
- continue efforts to streamline the determination process.
New IRS Approach on ComplianceThe IRS is now using data in its files and publicly available information to select nonprofits for further review. Called a ROO (Review of Operations), this initial step does not require any involvement with the organization but can lead to more IRS follow-up—such as a traditional full examination, more ROO follow-ups in subsequent years, or a full compliance check by the EOCU (Exempt Organization Compliance Unit).
An EOCU compliance check, which does involve the organization, determines if recordkeeping and reporting requirements are being met and if activities are consistent with the organization's stated tax-exempt purpose. By using the non-traditional ROOs and EOCU compliance checks, the IRS almost doubled its enforcement contacts from FY (fiscal year) 2004 to FY 2008, to a current total of more than 14,000.
The IRS tries to focus these efforts on organizations that have a higher potential for noncompliance and those that are delinquent in filing returns or don't file at all, although required to do so. If your organization is selected for an examination, there is now an 80 percent chance that you will face "corrective action" when the IRS is done.
Outreach from the IRS on the New FormsThe revised Form 990 requires more information on internal policies and practices, executive compensation, governance, and fundraising. The IRS is offering a variety of help options on its Web site (on-line mini-courses, Webinars) as well as very detailed instructions to help nonprofits complete the form accurately.
Beginning in 2008, small organizations (those with annual gross receipts of $25,000 or less) were required to file Form 990-N postcards (and file them electronically). Although almost 200,000 postcards were e-filed, the IRS is continuing to reach out to make sure that all organizations know their filing responsibilities. The penalty for noncompliance is severe—no filing for three consecutive years means an automatic loss of tax-exempt status. Researchers have long suspected that there are a lot of defunct organizations included in the IRS files, so this new filing requirement should result in a more accurate count of active organizations in the nonprofit sector by 2011.
What Organizations Will Most Likely Be Reviewed by the IRS?Colleges and Universities—In October 2008, the IRS sent 400 questionnaires to small, mid-sized, and large public and private four-year colleges and universities, with a focus on relationships among the related and unrelated entities that make up these often complex organizations, unrelated business income, endowments, and executive compensation. There will be a public report on the survey results in 2009, and the IRS will conduct examinations on a sample of the respondents, looking particularly at unrelated business income and executive compensation.
Political Activities—With the 2008 election over, the IRS will report on its Political Activities Compliance Initiative, designed to promote compliance with the prohibition against political intervention by certain tax-exempt organizations and to include recommendations on future actions needed. Another possible project is reviewing the flow of funds among the various types of tax-exempt organizations that might be used to avoid disclosure of political contributions and activities.
Hospitals—The IRS completed an interim report on hospitals in 2007. This year will bring a follow-up report focusing on executive compensation and community-benefit expenditure amounts and types.
Community Foundations—As a result of more than 3,000 questionnaires sent to organizations thought to be community foundations, the IRS has concluded that a follow-up project to classify them better is needed in 2009. The compliance checks were also used to identify certain organizations that will undergo full examinations in 2009.
Non-filers—Although all IRS compliance initiatives include searching for non-filers, the IRS has identified three particular problem areas and will complete examinations and reports on them in 2009. The first is gaming, where an IRS comparison of federal and state databases found 800 organizations that failed to file Forms 990, along with other delinquent tax filings. The second area is a match of data reported to the Social Security Administration (on Form W-2) with employment data reported to the IRS (on Form 941). This program, which was designed to identify delinquent filings, inconsistencies in reporting, and incorrect credit balances, will continue in 2009.
The third focus is looking for potential non-filers by reviewing organizations with the following characteristics:
- have large gross receipts but file Form 990 or Form 990-PF only intermittently;
- file Form 990-T with substantial business income gross receipts without filing a corresponding Form 990; and
- file a Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) reporting high-dollar donations without a corresponding Form 990.
And New IRS Initiatives for 2009Even if your organization doesn't fall into any of the categories listed above, keep reading! Here are the IRS initiatives for 2009:
Charitable Spending—The IRS will launch a long-term study of how nonprofits raise and use their funds, with an initial focus on organizations that have unusual fundraising levels and those that report unrelated business activity and low levels of program service expenditures.
Gifts-in-Kind—If non-cash gifts (pharmaceuticals, used clothing, etc.) are reported, how are they valued? If contributed to other charities, what are the expenditures reported for the transaction? The IRS will investigate the accuracy of the reporting on Forms 990.
Governance—The IRS will continue its education program about governance for its staff and develop a checklist for agents to help determine if governance practices affected tax compliance issues. The goal is to identify the answers on Form 990 governance questions that in conjunction with other Form 990 information signal that there might be compliance problems.
Mutual Organizations—These cooperative organizations, exempt under section 501(c)(12), have to meet certain criteria for member income and provision of specific services to their members. The IRS will send compliance check letters to organizations that appear not to meet the criteria.
Student Loan Organizations—The IRS will complete a ROO to identify student loan organizations with related for-profits that may be providing impermissible benefits to insiders or third parties. In particular, executive compensation, in relation to program service revenues and expenditures and gross receipts, will be reviewed.
So now you know the IRS focus for 2009. Filing your Form 990 accurately and on time and disclosing what you need to disclose will go a long way toward ensuring a year spent advancing your mission, not answering IRS questions!
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 email@example.com or (877) 799-3428.