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Not For Profit/Exempt Organizations Blog

Internet Fundraising for Tax-Exempt Organizations

By Jamie Bowles on Posted in Charitable Giving

The IRS recently released an Information Letter, written in response to a congressman’s inquiry about an unidentified charity’s unidentified practices, confirming that Section 501(c)(3) organizations may use the internet to raise funds.  The IRS stated that solicitations made through a website or e-mail should comply with the same rules that apply to other solicitations.  However, any organization raising funds over the internet should consider any state laws and regulations that may apply.

The IRS reminded organizations of several important considerations for Section 501(c)(3) organizations, whether or not they use the internet to raise funds:

  • Deductibility of donations.  An organization that is raising funds, but has not yet received recognition as a tax-exempt organization under Section 501(c)(3), must include a clear and conspicuous statement on its solicitation materials (including its website) stating that it has not received Section 501(c)(3) recognition, and, therefore, donations may not be deductible.
  • Professional fundraisers.  An organization should consider whether any fees that a fundraiser or other private party charges could be excessive or whether the fees violate the rules against private benefit or private inurement.
  • Quid pro quo contributions.  If an organization provides something of value in exchange for a donation, then the organization must consider whether this arrangement violates the rules against private benefit or private inurement.  The organization must also comply with any substantiation and disclosure requirements for quid pro quo contributions.
  • Disclosing fundraising information.  An organization that is applying for recognition of Section 501(c)(3) status must describe its actual and planned fundraising activities and its fundraising expenses on its application for exemption (Form 1023).  Expenses relating to fundraising incurred by an organization must be reported on the organization’s annual information return (Form 990, Form 990-EZ or Form 990PF).

IRS Issues Wake Up Call to Colleges and Universities — Congress to Hold Hearings

By Jacob I. Friedman on Posted in IRS Filings

The IRS released its Final Report on its five year study of the audit results of colleges and universities.  Lois G. Lerner, Director of the Exempt Organizations division of the IRS announced the “long awaited” posting of the report.

In 2008, the IRS sent a 33 page questionnaire to 400 randomly selected colleges and universities.  In 2010, the IRS released an Interim Report.  Following review of the responses and Forms 990 and 990-T, the IRS selected 34 schools for audit.  The audits were limited to two specific areas, unrelated business income tax (UBIT) and executive compensation.

The Final report was released on April 25, 2013.  The IRS points out that because the 34 organizations that were audited were not randomly selected, the schools do not represent a statistical sample.

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Recent IRS Guidance Concerning 403(b) Plans

By Lisa A. Berkowitz Herrnson on Posted in IRS Filings

Correction of Plan Errors

Final Internal Revenue Code Section 403(b) regulations which became effective January 1, 2009 require that plan sponsors adopt written 403(b) Plan documents.  A 403(b) Plan is a form of defined contribution retirement plan that may only be offered by employers that are tax-exempt entities under Section 501(c)(3) of the Internal Revenue Code or that are public educational organizations and for the benefit of certain clergy members.  If a 403(b) Plan sponsor did not adopt a written plan document by December 31, 2009, the sponsor’s 403(b) plan is technically no longer considered to be a qualified tax-deferred retirement plan as of January 1, 2009.  The benefit of correcting the written document failure is that all money that has been contributed to the 403(b) Plan will remain tax-deferred and that all investments under the 403(b) Plan will retain their tax-favored status.

To help 403(b) Plan sponsors voluntarily correct any plan document errors, the IRS recently updated its Employee Plans Compliance Resolutions System (referred to as EPCRS).  Plan document errors are cured through the voluntary correction program (referred to as VCP) by having the 403(b) Plan sponsor adopt a written plan document that complies with the final regulations, make a VCP submission, and pay a compliance fee based on the number of employees eligible to participate in the 403(b) Plan.  To simplify this procedure, the IRS has made available a 403(b) VCP Submission Kit, and to encourage 403(b) Plan sponsors to take advantage of this program, the IRS has reduced the compliance fee by 50% if the VCP filing is made by December 31, 2013.

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IRS Sends Questionnaire to More Than 1,300 Self-Declared Section 501(c)(4), (5) or (6) Organizations

By Jamie Bowles on Posted in IRS Filings, Political Campaign Activity

IRS Exempt Organizations group has sent out more than 1,300 questionnaires to self-declared Section 501(c)(4) social welfare organizations; 501(c)(5) labor, agricultural or horticultural organizations; or 501(c)(6) business leagues.  The questionnaires are part of IRS efforts to increase voluntary compliance, learn more about self-declared exempt organizations, and determine whether self-declared exempt organizations are complying with applicable tax-exempt law.  The questionnaires are directed to organizations that are not recognized by the IRS as tax-exempt, but claim exemption under Section 501(c)(4), (5) or (6) and filed a Form 990 for tax years beginning in 2010 or 2011.  Unlike most Section 501(c)(3) organizations, these types of exempt organizations are not required to apply to the IRS for recognition of exemption.

The questionnaire contains questions about the organization generally, its activities and related organizations, revenue and expenses, and compensation of directors, officers, trustees and key employees.  While the range of questions is broad, there is a particular focus on political activity, like political campaign intervention.  While 501(c)(4) organizations are allowed to engage in some political activity, it must not be their primary purpose.  In recent years, the IRS, members of Congress, and advocacy groups have been concerned that 501(c)(4) organizations are engaging in political activity beyond what is permitted by law.  In fact, this initiative was anticipated in the IRS Exempt Organizations FY 2013 work plan.  The questionnaire also has a number of questions about whether the organization received professional advice in determining its tax status and whether activities constituted an unrelated trade or business.

Only the organization that receives the letter may complete the questionnaire.  Although the questionnaire is a voluntary compliance instrument, the IRS may refer the organization for examination if the organization does not complete the questionnaire.  The IRS has not indicated when results from the survey will be analyzed and made available to the public, but this usually takes a year or two.

Lawyers As Nonprofit Directors – Maximizing Opportunities, Mitigating Risks

By Lesley Rosenthal on Posted in Governance

Note:  This article is a recap of Lesley Rosenthal’s presentation at Proskauer’s 17th Annual Trick or Treat Tax Exempt Seminar, November 29, 2012

Attorneys can reap enormous rewards by serving on nonprofit boards.  Lawyers derive tremendous personal satisfaction in governing an organization that is meaningful to them.  They can do the public good by participating in a charity that feeds the poor, heals the sick, enlightens through culture and education, or preserves the environment.

Nonprofit board service is prestigious, and invaluable for professional networking.  It is also a great remedy for the ennui that sometimes sets in when lawyers work inside big law firms, corporate departments or government agencies, and a cure for the isolation of solo or small-firm practice.  A lawyer who serves as a nonprofit trustee is likely to quickly become a trusted and valued member of the team, whose individual contributions markedly enhance a worthwhile enterprise.

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Recaps from Proskauer’s 17th Annual Trick or Treat Tax Exempt Seminar

By Amanda Nussbaum on Posted in Governance

Proskauer’s 17th Annual Trick or Treat Seminar discussed:

  • Key Provisions of the Affordable Care Act
  • Cybersecurity Threats and Identity Theft
  • Lawyers as Nonprofit Directors

Here are some take-away points from each presentation:

 Key Provisions of the Affordable Care Act

 Peter J. Marathas, Jr. reviewed some of the key provisions of the Affordable Care Act (“Act”), reminding those attending that many of the Act’s requirements are already in effect, and many more are set to go into effect in 2013 and 2014.  Mr. Marathas specifically addressed the “counting rules” under the Act, which will be used to determine whether an employer employs 50 or more full time equivalent employees and is therefore subject to the 2014 “play or pay penalties,” and the number of full-time employees employed by an employer for purposes of determining the extent to which a penalty may apply.  Mr. Marathas also discussed issues related to so-called “variable hour employees,” those who work on an as-needed or similar basis, and how they are counted for purposes of the Act.  He reminded employers that implementation of the Act continues in full force, with the federal agencies releasing important guidance.  Working closely with knowledgeable counsel and other advisors is therefore essential.  For additional information on the Affordable Care Act click here.

 Cybersecurity Threats and Identity Theft

Kristen Mathews discussed cybersecurity threats and online identity theft. Ms. Mathews emphasized that cybersecurity risks for not-for-profit organizations are similar to those to profit-making enterprises, as they collect and maintain personal, health and financial information of employees, donors and customers.  Not-for-profit entities also have the same or similar legal obligations with respect to those types of information.  Common data security threats were highlighted, including politically motivated hacking, data theft for profit, and employee negligence.  As a case in point, Ms. Mathews recounted a recent incident in which a journalist’s online accounts, computer and mobile device were accessed and controlled and his personal data destroyed by hackers who used social engineering techniques to exploit flaws in the account security procedures of major online service providers.  She followed up with recommendations for improved online account security practices for individuals as well as service providers.  For identity theft prevention tips click here.

Lawyers as Nonprofit Directors

Lesley Rosenthal, Vice President, General Counsel and Secretary, Lincoln Center for the Performing Arts, discussed the role of lawyers serving on nonprofit boards.  Scott Harshbarger facilitated the discussion.  Ms. Rosenthal pointed out that both the lawyers and nonprofit organizations can benefit from a lawyer serving on the board.  Ms. Rosenthal also addressed certain pitfalls which can result from the dual roles of lawyer and board member and how to avoid them.  A forthcoming blog post will discuss Ms. Rosenthal’s presentation in further detail.

A Full Plate for the IRS: IRS Releases 2012 Exempt Organizations 2012 Annual Report and 2013 Workplan

By Bradley A. Dillon on Posted in IRS Filings

At the end of January, 2013, the IRS Exempt Organizations Group (“EO”) released its annual report, highlighting EO’s 2012 accomplishments and outlining its priorities for 2013.  This year’s report was significantly more detailed and informative than last year’s report and workplan.  Some accomplishments and priorities of interest are described below, with something for nearly everyone in the tax-exempt sector.

2012 Highlights:

  • Exchange of Information with States.  EO continued to see an increase in the number of referrals from state charity regulators and tax agencies regarding potential exempt organization tax law violations.  In FY 2011, EO received 104 referrals from 19 different states.  Some of the most common issues that are referred to the IRS from the charity regulators involve private benefits and inurement, nonfilers, political activities by § 501(c)(3) organizations, employment tax issues and organizations not operated as required by their exempt status.  Conversely, under recently expanded authority, the IRS is allowed to disclose to certain state charity regulators significantly more information about exempt organizations, including proposed and final revocations of tax exemption for § 501(c)(3) organizations, proposed and final notices of deficiency for Chapter 42 excise taxes, § 501(c)(3) exempt organizations applications in process and proposed or final denials of these applications.  At present, only eight state tax and charity agencies in seven states have met the requirements to receive these disclosures; nonetheless, these agencies received approximately 27,000 disclosures in FY 2011.
  • Hospital Community Benefit Reviews.  As we have previously noted, EO is required under the Affordable Care Act to review the community benefit activities of all tax-exempt hospitals every three years.  This work continued in the past year.  EO will use the information from the reviews for research, reporting and compliance purposes, as well as to identify areas where additional guidance, education or Form 990 changes are needed. Continue Reading

In Annual Procedure Update (Usually a Yawner), IRS Imposes 27-Month Deadline For Filing Exemption Applications For All Types of Exempt Organizations Seeking Retroactive Recognition of Exemption And Denies Retroactive Recognition of Exemption if Forms 990 Not Filed

By Elizabeth M. Mills on Posted in Formation, IRS Filings

The IRS continues to implement the “three years and you’re out” rule for Form 990 non-filers added by the Pension Protection Act of 2006 (the “PPA”).  That legislation amended Section 6033 of the Internal Revenue Code to provide that exempt organizations required to file a Form 990-series return (i.e., a Form 990, Form 990-EZ or Form 990-N) that do not file the return for three consecutive years will have their tax-exempt status automatically revoked going forward.  Organizations subject to automatic revocation are required to file exemption applications with the IRS to regain exempt status, even if they were not originally required to file an application for recognition of exempt status.  Further, exempt status will not be restored retroactively unless the IRS finds there was reasonable cause for the failure to file.

In June of 2011, the IRS completed the process of identifying organizations in its exempt organizations database that failed to file during the three years following the PPA effective date and therefore were subject to automatic revocation.  Since then, the IRS has been identifying organizations subject to automatic revocation on an ongoing basis and has made this information available to the public on its website.  The IRS is now taking the next step: ensuring that past non-filers subject to automatic revocation don’t get retroactive exemption determinations (and, accordingly, cannot have their tax-exempt status retroactively reinstated unless they establish reasonable cause for the failure to file).

In this year’s annual update (Rev. Proc. 2013-9) of the revenue procedure establishing procedures for granting exemption determination letters, the IRS explains that only a few types of exempt organizations, such as Section 501(c)(3) organizations, have a deadline for filing an exemption application.  This is because many other types of exempt organizations are not actually required to apply to the IRS for recognition of exempt status, although they may voluntarily do so.  When such an organization voluntarily applies to the IRS for recognition of exemption, it has been the IRS’s practice to grant a determination letter recognizing exemption retroactively to the date of formation as long as the organization has always met the applicable requirements, which can be a number of years.  This is demonstrated on the Form 1023, or application for recognition of Section 501(c)(3) status, which asks if the filing organization wishes to ask for retroactive recognition of its status as a Section 501(c)(4) organization if it has missed the Section 501(c)(3) filing deadline.

The IRS has now changed its procedures to conform this practice with the 27-month deadline for filing exemption applications already imposed by Section 508 of the Internal Revenue Code for Section 501(c)(3) organizations, even though there has been no statutory change imposing this limit.  The IRS has also changed its procedures to conform to the PPA prohibition on tax exemption for non-filing organizations.

This makes it more important than ever for any organization that believes it is tax-exempt but has not applied to the IRS for a determination letter recognizing its exemption to do so promptly and to make sure that the necessary Form 990-series return is filed annually and on time. Failure to timely apply can mean generally foregoing the ability to receive a determination letter that recognizes the organization’s exemption retroactively to the date of its formation.  Further, in the event that the organization is ever subject to automatic revocation, the organization will not be able to have its exempt status reinstated retroactively unless it can establish reasonable cause for its failure to timely file the applicable Form 990-series return for three consecutive years.

IRS Issues Final and Temporary Regulations on Supporting Organizations

By A. Nicole Campbell on Posted in IRS Filings

Many practitioners have been anxious to leaf through regulations to confidently determine whether an organization is a “functionally integrated” or “non-functionally integrated” Type III supporting organization, and the implications of either classification.

On December 28, 2012, the Internal Revenue Service released the long-awaited final regulations for Type III supporting organizations, as well as temporary regulations addressing annual distribution requirements.  The text of the temporary regulations also serves as the text of the proposed regulations.  The final regulations describe all of the other requirements (outside of the annual distribution requirement explained below) of a Type III supporting organization’s relationship with its supported organization. Continue Reading

The American Taxpayer Relief Act of 2012: Stealth Impact on Charities

By Elizabeth M. Mills on Posted in Charitable Giving

The American Taxpayer Relief Act of 2012 (“TRA”) (H.R. 8) passed by the Senate on January 1, 2013, passed by the House of Representatives early on January 2, 2013 and signed by President Obama, in large part addresses income and other tax rates without direct effect on tax-exempt organizations. Several provisions, however, will be of interest to tax-exempt organizations: the extension of several incentives to make certain charitable donations; the return of deduction limitations for certain individuals, including the charitable deduction; the absence of new limitations on tax-exempt financing; and the end of grants and loans to co-op nonprofit insurers exempt under the new provisions of Section 501(c)(29) of the Internal Revenue Code.

Extensions

The Pension Protection Act of 2006 contained several time-limited provisions for favorable tax treatment of certain contributions. These provisions generally expired at the end of 2007 and have been extended several times for two-year periods, most recently in 2010 . Some, but not all, of these provisions are extended by the TRA. Specifically, TRA extends the following through the end of 2013:

• IRA Charity Contribution (Code Section 408(d)(8)(F), permitting a distribution of up to $100,000 tax-free from an IRA to a qualifying charity by those over 70 ½. As in the previous extension, taxpayers have the month of January 2013 to elect to make charitable distributions treated as effective in 2012;

• Contribution of Conservation Easement (Code Section 170(b)(1)(E)(vi)), permitting favorable deductions for donating conservation interests in capital gain real property to charity;

• Contribution of Food Inventory (Code Section 170(e)(3)(C)(iv)), permitting enhanced deductions for contributions of food inventories; and

• Contributions of property by S corporations (Code Section 1367(a)), limiting an S corporation shareholder’s reduction in basis of the S corporation’s stock to a pro rata share of basis (rather than fair market value) of property contributed by the corporation.

However, two provisions for enhanced charitable deductions – contributions of book inventories to public schools and corporate contributions of computer inventory – were not extended. These were in Code Sections 170(e)(3)(D)(iv) and 170(e)(6)(G), respectively.

The TRA also extends the special rule limiting an exempt organization’s taxable income on interest and other payments from controlled corporations to only the amount of payment in excess of fair market value, provided that the contract for the payments was in effect in 2006 (Code Section 512(b)(13)).

Overall Deduction Limitation

After an absence of several years, the overall limitation on itemized deductions – the so-called Pease provision – is back permanently. This will affect charities by reducing high-income individuals’ benefit from charitable contribution deductions. As before, if individuals’ adjusted gross income exceeds a threshold amount, their itemized deduction total will be reduced by the lesser of: 80 percent of otherwise allowable deductions; and 3 percent of adjusted gross income in excess of the threshold amount. This can reduce the amount of a charitable contribution that can be deducted to as little as 20 percent of the contribution amount. Threshold amounts have been almost doubled from the previous levels; thus, no limitation applies for married couples filing jointly with adjusted gross income of up to $300,000. On the other hand, estate tax charitable deductions remain unlimited.

Tax-Exempt Financing

Governmental entities issuing tax-exempt bonds, and Section 501(c)(3) organizations which borrow the proceeds of tax-exempt bonds, were concerned that the tax-free nature of the interest on such bonds would be further limited. These bonds are, of course, an important source of capital for governments and Section 501(c)(3) organizations. The TRA did not impose any additional limitations, but limitations may be considered in further talks about sequestration and spending reductions, or if wholesale tax reform goes forward.

Co-op Health Insurers

The Affordable Care Act, or health reform act, allocated federal funds for grants and loans to a new type of nonprofit cooperative health insurer, to be made before July 1, 2013. Code Section 501(c)(29) provides for tax exemption for such cooperative health insurers but only if they have received a grant or loan under the Affordable Care Act provisions. The TRA rescinded budget authority for grants and loans effective immediately, so organizations that planned to become Section 501(c)(29) organizations but had not yet received a grant or loan will not have this opportunity.