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May 2008
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IRS to Issue Revenue Procedure
on Resolving
Exempt Organization
Mistakes
An IRS revenue procedure outlining the voluntary
resolution of tax mistakes by an exempt
organization is going through the review process
at the national office and should be released later
this year. For example, under statutory law, an
organization that does not file a Form 990 for
a three-year period will have its exempt status
revoked. However, a forthcoming voluntary compliance
program will provide some type of transition
program relating to noncompliance issues. This
will be helpful for groups which sometimes have
gross receipts of more than $25,000 a year, requiring
the filing of Form 990, but which in other years
have gross receipts below $25,000, allowing an
exemption from filing. Under the new program,
an organization must file its delinquent returns
based on gross receipts and assets, and the IRS has
suggested that it likely will look back six years to
check compliance.
Current Measures Available to
Organizations
There are typically three types of situations where
an organization will want to resolve tax mistakes:
(1) Correction of errors in tax returns. In this situation,
an organization may file an amended tax
return. General Counsel Memorandum 38,760
provides a list of crucial items that an organization
should consider, including errors in gross
receipts, expenses, compensation and totals on
balance sheets or support schedules.
(2) Correction of nonfiling issues. In this situation,
an organization might need to discuss the problem
with an IRS area manager. The organization
should prepare delinquent returns, provide an
explanation as to why the forms were not filed,
and then tell what steps were taken to prevent
a recurrence of the problem. IRS Policy Statement
(P-5-133) outlines agency policy on the
enforcement of delinquent returns. The IRS
normally goes back for enforcement for a
six-year period. It will consider the taxpayer’s
history of noncompliance, whether income is
from illegal sources, whether the organization
has a high profile, and whether the amount
of anticipated revenue is worth the costs and
resources used to collect the taxes.
(3) Correction of mistakes regarding type of exemption.
Examples of such mistakes include
political activities and unrelated business
income. One way to resolve these types
of mistakes is through the use of a closing
agreement.
Closing Agreements
Internal Revenue Manual Section 4.75.25 deals
with exempt organizations examination closing
agreements. A “walk-in” closing agreement can
resolve issues prior to an audit as the organization
is initiating voluntary compliance with the issues.
The IRM stipulates that in order to get a closing
agreement with the IRS, the organization has to be
in complete compliance, but in a walk-in situation
the organization may receive some consideration
as to penalties and interest. The IRS must get
sufficient facts to make a determination and is not
required to reach an agreement with the organization.
The closing agreement must be clear and
must include all specific and relevant facts, and
it requires the organization to perform a certain
action. If there was noncompliance, the organization
must put policies and procedures in place to
ensure future compliance prior to the signing of
the closing agreement. In the walk-in process,
an organization should be able to explain to the
IRS why the closing agreement is appropriate and
how the government will benefit. There should
be a detailed description of the noncompliance
activities and a step-by-step list of corrections. The
organization also should describe what its tax return
would look like and should consider whether its action
might cause the revocation of its tax-exempt status.
IRS Shares Interest Areas as Deadline
Nears For
Draft Form 990 Instructions
Comments
With the June 1 deadline for the draft Form 990 Instructions
nearing, the IRS has solicited comments on
the draft instructions. The IRS intends to finalize the
instructions this summer. According to the IRS, some
of the comments on the instructions that have been
the most helpful are those on the definition of “key
employee” and the interplay of that term and “officer.”
In particular, the IRS is considering the 5 percent test
and whether it is seen as too low. It also is interested
in whether the $150,000 amount that serves as a floor
for listing key employees’ compensation is too high.
The IRS also wants comments on the compensation
matrix, or table, telling charities when and where to
report compensation.
Definitions
The definition of “officer” has been tweaked from state
law, but it always includes the top management official
of the organization. The IRS wants every organization
to report at least one officer. On definitions relating to
governance, the IRS would like more information on
voting members and directors, and what it means for
board members to be independent. It is asking how
the standards and definitions should apply for committees,
and whether they are advisory or those who
have power to act on the board. On Schedule F for
foreign activities, the IRS has asked that information
be reported based on regions. There are nine World
Bank-driven regions. The definitions of what IRS
calls “outside” and “inside” the U.S. are critical. The IRS also expects
to come up with a listing of indicators of program
service accomplishments it expects to see in different
sectors of the tax-exempt community, such as
hospitals or schools.
Complexity Complaints
Practitioners continue to complain about the complexity
of the Form 990 and the amount of information the
IRS is requesting. Many question whether the IRS has
struck the right balance between the information desired
by the public, auditors, watchdog groups and the
media, and what charities can reasonably provide.
Quick Hits
Nonprofit
Consolidation and Equity
Method
Final Guidance Issued by FASB
On May 19, the Financial Accounting Standards Board
issued final guidance (FASB Staff Position (“FSP”) No.
SOP 94-3-1; AAG HCO-a) changing consolidation
and equity method accounting for nonprofit organizations,
effective for fiscal years beginning after June 15,
2008. The FSP’s changes, found in both SOP 94-3 and
the health care guide, include the elimination of the
requirement allowing temporary control exceptions
to consolidation for financially related but separate
nonprofit organizations.
The FSP states that the sole
corporate membership of one nonprofit organization
in another is considered a controlling financial interest
unless control does not rest with the sole corporate
member. An organization is deemed to have a “majority
voting interest in the board of another entity” if it
has the direct or indirect ability to appoint individuals
that together constitute a majority of the votes of the full
constituted board.
Nonprofits are excluded from the
scope of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, and FASB therefore applies
pertinent Emerging Issues Task Force Guidance--which
FIN 46 had nullified--related to special-purpose entities
(SPEs). Also according to the FSP, nonprofits must
apply the guidance in AICPA SOP 78-9, Accounting
for Investments in Real Estate Ventures, on equity
method accounting in several specific situations. The
complete FSP is available on the FASB website.
IRA Distributions Fact Sheet Update
The Congressional Research Service released an updated
fact sheet on April 25 on an
individual retirement account rollover provision in the
Pension Protection Act of 2006 (Pub. L. No. 109-280),
which allows tax-free distribution from IRAs for charitable
purposes. The rollover provision expired Dec. 31,
2007. The fact sheet summarizes legislation introduced
in the 110th Congress to extend the provision for one
or two years or make it permanent. See H.R. 3596,
H.R. 3970, H.R. 3996, H.R. 4086, S. 819/H.R. 1419,
S. 2264, and S. 2886.
Payout Requirements for Supporting
Organizations
Being Considered by IRS
and Treasury
The Treasury Department and IRS are in the process
of issuing regulations on the payout requirements for
Type III supporting organizations that are not functionally
integrated. The regulators must develop a test for functional integration
and must determine the meaning of the term
“but for.” With the mandatory payout requirements
now being imposed on exempt organizations, organizations
more often want to qualify as functionally integrated. The “but for” test requires that a supporting
organization perform activities that carry out
the purposes or functions of one or more supported
organizations. Such activities normally would be performed
by the supported organizations if the supporting
organization were not doing them. The Treasury and
IRS also are considering the Pension Protection Act
of 2006 charitable trust provisions, under which an
organization no longer can rely on the special trust rule
to meet the responsiveness test that applies to supporting
organizations. Specifically, the IRS is considering
the responsiveness test with regard to charitable trusts
and the policy or practical needs to hold such trusts
to different standards. The IRS and Treasury also are
considering limiting to five the number of beneficiaries
a nonfunctionally integrated type of organization
can support.
"Commensurate Doctrine" Use For
Assessing Services of
Charitable Groups
under Study by IRS
The IRS has stated that over the next 18 months, it
will develop a program to look into invoking the
“commensurate doctrine,” which says that a charitable
organization should be providing services that are
commensurate with its resources, as a way of ensuring
that these organizations are fufilling their charitable
mission. The idea of using the commensurate doctrine
has become a popular topic of late. In Canada, if a
charity receives contributions in year one, the charity
has to spend 80 percent of those contributions in year
two. Although the IRS reports that it will not impose
such a rule, it is designing a study. The IRS’s major
related study for this year, which is a follow up to last
year’s study of hospitals, will be on public and private
four-year colleges and universities. In 2008, 400 to
500 institutions will receive the IRS’s questionnaire,
which will ask questions in the following four areas:
(1) organizational information—demographics on
how large the organization is, what area it serves, and
its related organizations; (2) the types of activities in
which an organization engages and whether they are
reported on Form 990-T; (3) endowment funds – the
types, restrictions, and the types of investments the
endowment uses; and (4) executive compensation,
including the pay of the top six highest paid employees,
including coaches.
Federal Trade Commission Wants
Authority
Over Tax-Exempt Groups
The Federal Trade Commission is looking to extend its
authority over tax-exempt organizations. The definition
of “corporation” under the current Federal Trade
Commission Authorization Act is unclear, allowing
the FTC to go after charities in some limited instances.
The FTC has lobbied Congress for more authority to go after fraudulent and inefficient charities. The FTC
proposal would expand the definition of “corporation”
to explicitly cover 501(c)(3) and 501(c)(4) organizations.
The IRS also increasingly stresses the need to
police charities’ efficiency, effectiveness and abuse.
Congress also wants to provide greater oversight in
the area.
IRS Releases Results of Post-Issuance
Compliance Check of 501(c)(3)
Organizations
On April 23, the IRS released the results of a post-issuance
compliance check of 501(c)(3) organizations
that have used tax-exempt bonds for financing, finding
that while
98 percent of the charity responders said they had
written procedures and guidelines in place to ensure
compliance, only 15 percent could verify conclusively
that they actually implemented written procedures. The
questionnaire was sent to many 501(c)(3) organizations
that listed outstanding tax-exempt bond liabilities on
their Forms 990 for the year 2005. Approximately 33
percent indicated that they had detailed, written procedures,
but suggested that performance was on an ad
hoc basis. Another 28 percent appeared to be relying
solely on the requirements stated in the tax certificates
or descriptive bond documents as their written procedures,
without developing additional safeguards.
Respondents also overwhelmingly indicated that an
assigned individual was responsible for ensuring post
issuance compliance, with more than 90 percent saying
that responsibility was vested with the board of directors or management
officials.
IRS Issues Rules on Information Returns
Related to
Donations of Intellectual
Property
In final regulations effective April 7, the IRS eliminated
transition rules issued in 2005 on the filing of information
returns for donations of qualified intellectual
property, but otherwise finalized the regulations with
only minor changes. The final regulations reflect
changes to the law made by the American Jobs Creation
Act of 2004. The temporary regulations related to
information returns by donees for contributions of this
type of property under tax code Section 6050L, requiring
donees generally to file an information return on or
before the last day of the first full month following the
close of the donee’s taxable year. Transition rules were
provided in those rules to take into account those filing
requirements before a form was prescribed by the IRS
and for donees’ taxable years ending prior to or on the
date of issuance of the regulations. However, the IRS
since has issued a new Form 8899 on which donees
must report qualified donee income, so the transition
rules are no longer needed.
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