2013-08-15 eo in the spotlight

Thrive. Grow. Achieve.

Exempt Sector in the IRS

Spotlight – Is Your

Organization Prepared?

Frank H. Smith Aaron M. Fox

Tax Partner Senior Tax Manager

August 16, 2013

AGENDA

IRS EO Workplan

New Released 990 FAQ’s

Self-Declarer Project

Auto-Revocation Update

IRS Compensation Audits

Intermediate Sanctions and Compensation

Results from IRS survey of higher education, applicability

Path forward for IRS EO division

Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? -

POLL QUESTION


POLL QUESTION


How many of you have been involved with

organizations that have undergone an IRS

examination or review?

IRS EO WORKPLAN

National research program

1,500 organizations with 500 selected randomly over 3 years

Analysis of controlling tax-exempts

§512(b)(13) – More than 50% controlled entities

Group exemptions compliance check

Over 2,000 group central organizations questioned

Form 990-N misfilers


IRS EO WORKPLAN

Charitable spending initiative

170 small exempt organizations selected

High fundraising expenses compared to program OR

No fundraising expenses along side contribution income

Reassess methodology

Check documentation

Compare with IRS instructions

6 Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page

IRS EO WORKPLAN

Political activity

Approximately 300 cases identified using Form 990 data

Civil servant committee reviews file using public

information

Referrals by state regulators or anonymous third-parties

501(c)(3)’s

Political activities strictly prohibited – Cannot promote,

attack, support or oppose any candidate for public office –

such political activities results in penalty tax and may result

in loss of tax exemption.


IRS EO WORKPLAN

501(c)(4)’s

May conduct political activities, so long as not primary

activity – otherwise may lose tax exemption.

May conduct 501(c)(3) appropriate non-partisan voter education,

registration and mobilization activities

May endorse candidates

Must follow federal and state election laws if engaging in political or

electioneering activities

527 organizations

Purpose is to influence elections – unlimited

Subject to tax on non-political activities


IRS EO WORKPLAN

Compensation transparency

IRS focus on high annual gross receipts but low compensation

Inconsistent with other organizations similarly sized

Roll out interactive application for recognition of exemption

Not used to file electronically

Form 990-T and UBI

Consistently reporting no income tax due

Three or more years


NEW RELEASED 990 FAQ’S

Governance

If an organization adopted a policy or practice after the close if its tax year but before it filed the Form 990 for such year, may it report that it had such policy or practice in place for purposes of answering Part VI?

A: Most questions specify timing, those that don’t (like line 12b whether certain persons are required to disclose potential conflicts of interest) may be answered yes.

Is an organization required by federal tax law to provide a copy of Form 990 to its board or governing body, or have its board or governing body review the form, before it is filed with the IRS?

A: No. Question 10 is still required though.

If the filing organization is controlled by an organization with a conflicts of interest policy, whistleblower policy, and document retention and destruction policy, should the filing organization answer yes or no to Part VI, Questions 12a, 13, and 14?

A: Because these questions are referring to the filing organization, answer yes only if the filing organization’s governing body (or subcommittee) has adopted the policies of the controlling organization. Otherwise, no. Schedule O can be used to explain.



Public Disclosure

In general, what public disclosure requirements apply to tax-exempt

organizations and what are our organization’s public disclosure obligations for the

Form 990?

A: In general, exempt organizations must make available for public

inspection its federal Form 990 as well as its Application for Exempt Status.

Returns must be available for a three-year period beginning with the due

date of the return (including any extension of time for filing) or, if later, the

date it is actually filed. For this purpose, the return includes any schedules

and attachments that are filed with the form. Note, however, that an exempt

organization, other than a private foundation, need not disclose the name

and address of any contributor.

Copies usually must be provided immediately in the case of in-person

requests, and within 30 days in the case of written requests. The tax-exempt

organization may charge a reasonable copying fee plus actual postage, if

any.



Compensation

Some amounts reported on Form 990 as current year compensation may have

also been reported in a prior year’s Form 990 or 990-EZ. This could overstate the

cumulative compensation reported as paid to the individual. May the organization

back out this duplicate amount on the current year’s form?

A: No, however if person is listed on Schedule J, report duplicate amount in

column (F) of Part II.

How do we know whether the compensation we’re paying to our officers and key

employees is reasonable?

A: Reasonable compensation is the value that would ordinarily be paid for

like services by like enterprises under like circumstances. Reasonableness

is determined based on all the facts and circumstances. (see later

discussion of Intermediate Sanctions.)


SELF DECLARER PROJECT

What are self-declared organizations?

501(c)(4)’s, 501(c)(5)’s, and 501(c)(6)’s declaring themselves

tax-exempt without IRS ruling

Questionnaire

36 questions completed online

Form 14449 available in PDF

New 120 day rule

Alternate means of self-certification


AUTO-REVOCATION UPDATE

As of July 2013:

504,742 organizations auto-revoked

37,000 requested reinstatement

44,500 private foundations revoked

400 requested reinstatement

Reinstatement process

1023/1024 Application backlog

Select Check


IRS COMPENSATION AUDITS

IRS selection criteria

Matching problems

Classification inconsistencies

Spelling

Focused on classifying independent contractors as EE’s

Backup withholding correctly withheld



Employee versus independent contractors

Behavioral – Does the company control or have the right to

control?

Financial – Are business aspects of the worker’s job

controlled by the payer?

Type or Relationship – Are there written contracts or

employee type benefits?

Interns are rarely independent contractors



Documentation

Form W-9

Form W-4

Vendor and employee files

Form 941’s and 940’s

Payroll registers

General IRS audit strategies

Determine scope of audit with agent early in process

Schedule audit to be conducted off-site

Electronic materials versus hardcopy


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INTERMEDIATE SANCTIONS AND

COMPENSATION

Compensation Transparency – Focusing on high annual gross receipts and low total compensation

Excess Benefit Transactions and Intermediate Sanctions

What is intermediate sanctions?

How can they affect me and my organization?

What type of transactions give rise to intermediate sanctions?

Who may be subject to intermediate sanctions?

What are the penalties?

Why should I be concerned?

What can I do to avoid intermediate sanctions?


INTERMEDIATE SANCTIONS AND

COMPENSATION

Compensation must be reasonable to TDOKE

Who determines what’s reasonable?

Rebuttable presumption of reasonableness

Using an independent body to review and determine the

amount of compensation;

Relying on appropriate comparability data to set the

compensation amount; and

Contemporaneously documenting the compensation-setting

process.

Results related to the Higher Education survey


HIGHER EDUCATION SURVEY

Survey background

“Issues discussed in this survey may well be present

elsewhere across the tax-exempt sector.”

UBI

Profit Motive

Incorrect Expense Allocation

Errors in computation or lack of substantiation of NOL’s

Misclassification of activities as exempt


HIGHER EDUCATION SURVEY

Employment tax and employee plan returns

Failure to include in income the value of personal use of automobiles, housing, and social club memberships;

Failure to include in income the value of certain graduate reimbursements;

Failure to withhold taxes for wages paid to non-resident aliens; and

Worker misclassification.

Written advisories

Takeaway


PATH FORWARD

EO division under continued scrutiny after recent scandal

501(c)(4)’s are still the vehicle of choice for anonymous

political intervention

Possible changes could be percentage-of-expenditure test

Increased disclosure obligations

Change which 501(c) organizations can participate in

political activities


PATH FORWARD

New Leaders

Michael Julianelle – Commissioner, TEGE

Heather Maloy – Dep. Commissioner Services & Enforcement

Ken Corbin, Director, EO

Karen Schiller, Director, Rulings and Agreements, EO

Accountability Review Board

Streamlined Process for 501c4’s

Removal of “be-on-the-lookout” lists


PATH FORWARD

Bright Lines Project

Addresses vague “facts and circumstances” test

Redefining political activity

A safe harbor would exist for communications shaped to

influence official action, if the communication has a ‘direct,

limited and reasonable relationship” to officeholder actions,

assuming no risk of candidacy or election.

If fail under safe harbor, facts and circumstances test still

available

F&C not available for communications that are made through paid

mass media or

Targeted to states or districts in which there is a close election.


PATH FORWARD

Simplification Proposals

Make political activity laws more consistent

Elimination of unnecessary restrictions, like those on PF

grants for non-partisan voter registration efforts

Simplify lobbying as well, such as eliminating grassroots vs

direct distinction

Increase lobbying cap

Realities of Passing Reform


IMMEDIATE FUTURE

Expect more:

Reliance on questionnaires

Utilization of Form 990 analytics to identify risk

Delays in processing 1023’s, 1024’s

Delays in private letter rulings at National office

Expect less:

Openness and transparency

Progress being made on 2013 workplan

Willingness to pursue inappropriate political activities


QUESTIONS

Aaron M. Fox

Senior Tax Manager

Raffa Helping Great Organizations Thrive

Phone: 202.955.6701

Fax: 877.289.8541

Email: [email protected]

LinkedIn: http://www.linkedin.com/in/aaronfox

Frank H. Smith

Partner, Tax

Raffa Helping Great Organizations Thrive

Phone: 202.955.6735

Fax: 877.289.8541

Email: [email protected]

LinkedIn: http://www.linkedin.com/in/frankhsmith


mailto:[email protected]

http://www.linkedin.com/in/aaronfox

mailto:[email protected]

http://www.linkedin.com/in/frankhsmith

2013-08-15 eo in the spotlight

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