Nonprofit Insider

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July 2011 Vol. 2 No. 3

U H Y LLP C e r t i f i e d P u b l i c A c c o u n t a n t s
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Not-for-Profit Tax Update

By Jennine Anderson, partner

he IRS Office of Exempt Organizations (EO) of the Tax Exempt and Government Entities Division released its report on accomplishjanderson@uhy-us.com ments and findings of its 2010 fiscal year and revealed its work plan for 2011. The findings are interesting for the guidance provided as to what behavior EO finds objectionable and areas of potential IRS enforcement going forward. For FY2010, nearly 15,000 returns were examined in FYE 2010 either through traditional examinations or the less exhaustive compliance check program. Collaboration with outside agencies such as the states and the Social Security Administration gave EO access to electronic data that enabled EO to focus efforts on noncompliant organizations. Here are some areas the IRS highlighted:

raised concerns about substantial loans to officers, directors, trustees and key employees with issues involving proper reporting and potential excess benefit issues. The Loans Project followed with 169 single-issue examinations and found problems with: Misclassification on the Form 990 balance sheet and lack of proper reporting of section 4858 adjustments; Omitted reporting on the Forms 941 and 945 and omitted reporting on the Form 1040; 11% resulted in proposed revocation or termination; Over $5.5 million in section 4958 taxes and $880,000 in employment taxes and individual taxes were assessed; and Only 22% of the 169 examinations resulted in no change. As a result, EO has stated that they will continue to look at loans in future compensation evaluations.

organizations about permissible and impermissible activities in the political arena. EO examined over 250 organizations based on allegations of political activity during the 2004, 2006 and 2008 federal election years. Over half of the allegations were substantiated and EO revoked the tax-exempt status of seven organizations while issuing warnings to comply to the remainder. Among the infractions: distributing printed documents supporting candidates; endorsing candidates from the pulpit during normal services; permitting others to endorse a candidate during a speech at an organization function; endorsing candidates on the organizations websites and making a contribution to a political campaign. The IRS is still addressing 2010 infractions and will be continuing to focus on this area during the 2012 federal election cycle.

Impact of Recent Legislation

EO is examining organizations claiming credits under the The Hiring Incentives to Restore Employment (HIRE) Act. Under the HIRE Act taxexempt organizations are eligible to claim the payroll tax exemption and new hire retention credit for eligible newly-hired employees. EO is also examining those organizations taking advantage of the 65 percent COBRA subsidy established by the American
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Executive Compensation Compliance Initiative: Loans Project

Initiated in 2004, the Executive Compensation Compliance Initiative

Political Activities Compliance Initiative

The IRS has devoted significant resources to educating 501(c)(3)

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July 2011 Vol. 2 No. 3

Not-for-Profit Tax Update

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Recovery and Reinvestment Act (ARRA) and extended by the Continuing Extension Act of 2010.

International Focus
EO has a continued interest in whether the charitable assets of exempt organizations are being diverted internationally for noncharitable purposes. Currently there are efforts underway exploring charities that participate in Giftsin-Kind programs, where valuation issues surface when charities send non-cash items to foreign organizations; large private foundations with international operations or international transactions; charities reporting foreign addresses on Forms 990; information referred from the Joint International Tax Shelter Information Center; and foreign entities receiving IRS recognition of exemption from U.S. tax. The good news is that EO is developing new publications describing the special rules that apply to both foreign charities and domestic charities that conduct activities abroad.

reimbursements, and non-filers. Tax year 2008 returns are currently being examined, and examinations of tax year 2009 returns have begun. Based upon first hand client experience with a few of these examinations, document requests are quite extensive and beyond what one would initially expect for a payroll tax inquiry.

high ratios of officer compensation in comparison to program service expenditures, and organizations with low levels of program service expenditures in comparison to total revenue. These examinations will continue into FY 2011. EO is using the updated Form 990 to identify non-compliant and potentially non-compliant organizations for examination and to develop targeted compliance projects and to inform and supplement educational efforts. The EO research office is developing risk models and refining compliance queries. This highlights the importance of completing the Form 990 accurately and completely. EO has begun using a check sheet to capture governance practices and the related internal controls of the organizations being examined. EO will analyze the data to gain a better understanding of the relationship between governance practices and tax compliance.

Gaming Non-Filer Project

EO is using information from state gaming regulatory tax agencies to cross-reference with its own Form 990 database. They discovered that a large number of organizations had filed at the state level in order to maintain eligibility to continue gaming activities, but had not filed Form 990 with the IRS. Examinations resulted in the filing of 1,300 delinquent information, tax and employment returns. Although not mentioned specifically in the EO report, cross-referencing may also identify those organizations which should have completed Form 990 Schedule G. Remember that you may need to file Schedule G with your 990 if you are putting on gaming events.

Section 501(c) (4), (5) and (6) Organizations

Beginning in FY2011, the focus of EO is shifting to section 501(c) (4), (5) and (6) organizations. Using the additional information on the revised Form 990, EO will look at issues including political activity, inurement and the extent of compliance with the requirement for tax exemption by organizations that self-identified themselves as a 501(c) (4), (5) and (6) organization. The best defense against EO examination is to make sure that all filings are complete and accurate. You may still be selected but the outcome will be positive.

National Research Program-Study of Employment Tax Returns

The IRS has implemented a comprehensive IRS-wide study to measure compliance with employment tax reporting requirements. EO is examining the employment tax returns of 1,500 organizations, with 500 selected randomly each year over a threeyear period. Focal points are worker classification, fringe benefits, officer compensation, employee expense

Charitable Spending Initiative

In FY 2010, the EO began studying the sources and uses of funds in the charitable sector and their relationship to the accomplishment of charitable purposes. The first phase is looking at organizations with high levels of fundraising expenses, organizations reporting unrelated trade or business activity with relatively low levels of program service expenditures, organizations with

The statements contained herein are provided for informational purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. Furthermore, such statements are not presented or intended as, and should not be taken or assumed to constitute legal advice of any nature, for which advice it is recommended that you consult your own legal counselors or professionals. UHY Advisors, Inc., provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of UHY Advisors. UHY Advisors, Inc., and its subsidiary entities offer services from offices across the United States. UHY Advisors, Inc., and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent CPA firm that performs attest services. UHY Advisors, Inc., and UHY LLP are independent U.S. members of Urbach Hacker Young International Limited.