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.
- 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.
- Governance and Compliance. EO recently completed a study of the impact of exempt organizations’ governance practices on compliance. Preliminary findings indicate that the presence of the following factors was associated with compliance: having a written mission statement; always using comparability data when making compensation decisions; having controls in place to ensure the proper use of charitable assets; and providing for Form 990 review by the entire board of directors before filing. The preliminary findings also suggest that having control of the organization concentrated in one individual, or in a small, select group of individuals, was associated with noncompliance. EO will continue this review and will look at whether other factors or practices are relevant.
- Community Foundations. In response to the significant increase in the number, size and complexity of community foundations over the past decade, EO sent questionnaires to 3,700 organizations asking for information on demographics, revenues, assets, investments, grantmaking and relationships. Using the responses from the questionnaire and information from the Form 990, EO selected certain community foundations for examination, particularly those organizations where donors appeared to exercise significant control over investments and grantmaking decisions. The IRS found that some of the organizations were mischaracterizing fees earned from providing administrative, clerical or grant-related services to unrelated organizations as related income.
- Private Foundations. EO continued an ongoing project to determine levels of tax compliance by large private foundations. Many of the entities selected for examination had foreign investments or made grants overseas. Nearly half of the examinations that closed resulted in additional taxes or penalties, including excise taxes on net investment income, taxes on unrelated business income, taxes on certain expenditures that are taxable when made by private foundations and employment taxes. EO will complete the examination of the remaining returns in 2013.
2013 Priorities and Goals:
- Asset Diversions and Governance. For several years, the Form 990 completed by exempt organizations has included a question about whether the organization experienced a significant diversion of assets. EO has identified 285 organizations that reported such a diversion on their 2009 Forms 990, and in the coming year, EO will conduct examinations to learn more about whether and how governance practices may contribute to or prevent diversions.
- Section 512(b)(13) Study. In response to a provision in the Pension Protection Act of 2006 directing the Secretary of Treasury to report on the administration of § 512(b)(13) (originally due by January 1, 2009), EO developed a § 512(b)(13) checksheet to be used in examinations in order to gather basic data related to the tax treatment of payments between controlled entities and their parent exempt organizations. EO has just begun to analyze the 3,000 checksheets they received during the last two years.
- Employment Taxes. 2013 is the third and final year of the IRS-wide research project on employment tax compliance. EO revenue agents have closed approximately 6,500 returns from almost 2,000 organizations and individuals from tax years 2008, 2009 and 2010. In 2013, EO will complete approximately 2,500 remaining returns and provide the data to the IRS-wide National Research Program project for further processing.
- Foreign Activities. In 2012, EO completed examinations of a sample of organizations that reported a foreign bank account on their Form 990s. The results showed that there is often a failure to file required reports of foreign bank accounts, inadequate recordkeeping, lack of discretion and control over funds sent abroad (as required for deductibility of contributions) and failure to file employment tax returns. In 2013, EO is shifting its focus to examinations of organizations with high amounts of foreign grant expenditures.
- Group Rulings. Last year EO developed a Group Rulings Questionnaire in response to a 2011 report on group exemptions by the IRS Advisory Committee on Tax-Exempt Organizations and the large number of subordinates whose exemption was automatically revoked for failing to file a Form 990-series return for three consecutive years. Last fall, EO mailed the questionnaire to over 2,000 randomly selected central organizations in group rulings.
- Self-Declared Exempt Organizations. Last year EO developed a project focusing on § 501(c)(4), (5) and (6) organizations to determine whether the organizations, which are not required to obtain a determination of exemption from the IRS, have classified themselves correctly and are complying with applicable rules. In 2013, EO will send a questionnaire to organizations that “self-declared” to examine these questions.
- Colleges and Universities. EO launched a compliance project for colleges and universities several years ago and conducted some follow-up examinations. In 2013, EO expects to complete the final report on this project.
- Level of Charitable Activity. EO is continuing a long-range study that focuses on the sources and uses of funds in the charitable sector and their relationship to charitable accomplishments. EO selected about 170 small organizations that reported high expenses on their Forms 990. After examination, some of the apparent high expense ratios turned out to be lower in actuality after a full review of the books and records was completed. EO did revoke the exempt status of four organizations due to either very little or no charitable activity or inurement to an officer. EO will complete the remainder of the examinations this year.
- Compensation Transparency. Continuing its ongoing focus on compensation, EO will begin conducting examinations this year of a random sample of 200 organizations. The organizations selected will be ones reporting high annual gross receipts with very low total compensation to all officers, directors, trustees and other key employees. EO hopes to determine whether some organizations may be circumventing the goal of transparency by not fully reporting compensation.
- Political Activity. Using Form 990 data, EO has developed indicators of potential noncompliance in the political activity arena. These indicators are now and will continue to be tested this year. The potential indicators have been used to identify organizations engaging in impermissible campaign intervention. Along with testing these indicators, EO will also determine whether exempt organizations have political activities and are required to file Form 1120-POL under § 527(f) (in addition to Form 990), and if so, whether they have filed.
- UBI. Last year EO completed compliance checks of 400 organizations that had reported taxable unrelated business income (UBI) on their Forms 990 but had not filed Form 990-T, the return used to report and pay tax on UBI. The checks resulted in more than $260,000 in tax payments. In a quarter of the cases, inaccurate reporting on their returns resulted in the organizations being examined for UBI issues. EO stated that if the organizations had reported correctly, they would likely not have been examined. This year, EO will examine organizations that report substantial gross UBI for three consecutive tax years but reported no income tax due for those years. EO is concerned that these organizations may be understating net income by not be correctly allocating and deducting expenses associated with their UBI.