IRS Issues Fact Sheet on Tax Exempts' Examination
and Compliance Check Procedures

On Feb. 5, the IRS issued Fact Sheet 2008-14, which explains the methods used to make sure that tax-exempt organizations comply with tax laws, with the main emphasis on audit examinations and compliance checks. The fact sheet also outlines the types of documents a revenue agent might request in the course of an on-site field examination and discusses some of the criteria for selecting organizations for examination or compliance checks. The IRS’s Exempt Organizations (EO) division is responsible for administering these procedures. A review of a tax exempt organization falls into two broad categories: (1) compliance checks; and (2) examinations.

Compliance Checks

A compliance check is a review to determine adherence to recordkeeping and information reporting requirements and does not directly relate to determining a tax liability for any particular period. EO specialists conduct the checks by corresponding with exempt organization representatives, inquiring about an item on a return or determining whether specific reporting requirements have been met or whether an organization’s activities are consistent with its stated tax-exempt purpose. The IRS will not examine books or records or ask questions regarding tax liabilities under a compliance check, but has the option of opening a formal examination. For more information, see Publication 4386, Compliance Checks.

Examinations

An examination (“audit”) is a review of a taxpayer’s books and records to determine tax liability. It may involve the questioning of third parties and, for exempt organizations, determines qualification for tax-exempt status. EO conducts two different types of examinations: correspondence and field examinations.

Correspondence Examinations: limited in scope and focusing on only one or two items on a return, the examination is conducted through letters and phone calls with the organization’s representatives. If the issues become complex, or if the organization does not respond to a letter or call, EO may require the submission of records. EO may convert a correspondence examination into a field examination.

Field Examinations: more comprehensive and conducted at the organization’s place of business, there are two types – the Team Examination Program (TEP) and the General Program. TEP examinations are field examinations of large, complex organizations that may require a team of specialized revenue agents, and General Program examinations typically are performed by individual agents. The following documents typically will be requested:

1. Governing instruments (articles of incorporation, bylaws, charter and amendments)

2. Pamphlets and other printed literature describing the organization’s activities

3. Forms 990 for the years before and after the year under examination

4. Minutes of meetings of the board of directors and standing committees or councils, all books and records of assets, liabilities, receipts and disbursements, auditor’s reports, other federal tax returns filed, including employment tax returns and any related workpapers.

The revenue agent usually conducts a comprehensive interview and tours the organization’s facilities to gain a basic understanding of the organization’s purposes and activities. If disagreements between the revenue agent and the organization’s representatives cannot be resolved, the organization may pursue its case through the IRS appeals process. For additional information on the appeals process, see Publication 892, EO Appeal Procedures for Unagreed Issues.

Selecting Organizations for Examination or Compliance Checks

In its annual Implementing Guidelines, EO describes its proposed examination and compliance check activities for the year. To determine which organizations should be targeted, experienced specialists analyze information from Forms 990 and other sources (including media, Congress and general public complaints), resulting in the selection of a group of returns for examination or compliance check.

Complaint Process For Tax Exempt Organizations (FS 2008-13)

Fact Sheet 2008-13 discusses the review by EO of complaints alleging the abuse of tax exempt status. A complaint (“referral”) is any communication alleging that a tax-exempt organization is in potential noncompliance with the tax law. Complaints are received from the general public, members of Congress, federal and state government agencies, and other parts of the IRS. Referrals voluntarily may be made by submitting Form 13909, Tax-Exempt Organization Complaint (Referral) Form. EO revenue agents use a “reasonable belief” standard to determine whether EO should take further action, such as whether to examine an organization.

Quick Hits

Baucus, Grassley Ask Colleges for Information
Senators Baucus (D-Mont.) and Grassley (R-Iowa) of the Senate Finance Committee have written to the 136 U.S. colleges with endowments of $500 million or more, asking a series of questions about endowment growth and spending on student aid. The senators are seeking answers in light of a National Association of College and University Business Officers study showing explosive college endowment growth, a news release said. The study, released Jan. 24, reported double-digit endowment growth at hundreds of colleges over the past year. Federal law requires most private foundations to pay out 5 percent of their assets each year toward their charitable purpose, but there is no such requirement for university endowments.

Ohio Attorney General Files Suit against COACHE
Attorney General Marc Dann has filed a lawsuit in Clark County alleging that trustees of the Central Ohio Association for Children’s Higher Education (COACHE) embezzled hundreds of thousands of dollars in bingo proceeds. The lawsuit also alleges that COACHE operated a lucrative bingo game but made only nominal charitable contributions to the community, and in one recent year provided only $6,000 in charitable support despite generating more than $3 million in bingo revenues. More than $844,000 is unaccounted for and believed to have been diverted to personal use by the organization’s leaders. Current Ohio law states that proceeds from charitable gaming must be directed toward specific charitable purposes. The COACHE Board of Trustees has agreed to surrender its bingo license to the Ohio Attorney General.

E-Postcard Filing Available on IRS Website for Small Tax-Exempt Organizations
The IRS has announced the launch of a simple electronic filing system that small tax-exempt organizations may use to comply with a new law requiring them to file an annual return. Now that tax-exempt organizations that normally have annual gross receipts of $25,000 or less must file an electronic Form 990-N for tax years beginning in 2007, the organizations will have to provide a few basic pieces of information:

• Employer identification number

• Tax year

• Legal name and mailing address, and any other names used

• An Internet address if one exists

• The name and address of a principal officer and a statement confirming the organization's annual gross receipts are normally $25,000 or less.

The due date for filing Form 990-N is the 15th day of the fifth month after the close of the tax year. Organizations that do not file Form 990-N for three consecutive years will lose their tax-exempt status. The IRS also has launched a disclosure site on www.IRS.gov where the public can view a particular organization’s e-Postcard.