It’s that time of year again. The IRS just released its Exempt Organizations 2011 Annual Report & 2012 Work Plan. Under the signature of Lois Lerner, Director of Exempt Organizations, the Report & Work Plan addresses quite a number of issues of importance to 501(c)(3) and other nonprofits. The following is a summary of a few key topics covered.
2011 saw a typical number of tax exempt organizations examined by Uncle Sam. Specifically, 11,699 organizations experienced the pleasure of a “traditional” examination (meaning full audit), while 3,194 nonprofits received a less-intrusive compliance review. These numbers are roughly in line with numbers we’ve seen over the past several years.
Fast Track Settlement (FTS) Program
The IRS is pilot testing a new program that aims to speed up the process of resolving EO disputes, including getting to them at an early stage. This program involves using an Appeal Official as a neutral party with the goal of saving both time and money for both the IRS and the filing organization.
Automatic Revocation of Form 990 Nonfilers
Though considerable space was dedicated to this topic, no real changes are expected. Nonprofits that fail to file Form 990 for three consecutive years will continue to have their tax exempt status revoked. The IRS will continue to update that list monthly. That list, available at www.irs.gov , is easily searchable for both revoked nonprofit and those still in good standing. One interesting statistic in the report is that 5,000 small nonprofits have now filed for reinstatement of tax exemption using the IRS Transitional Relief initiative.
Tax Exempt Hospitals
Rules being implemented under ObamaCare requires review of the community benefit activities of hospital organizations at least once every three years. According to the IRS, “These reviews are not examinations (audits) and the group does not expect to contact hospitals while conducting the reviews.”
501(c)(4), 501(c)(5) and 501(c)(6) Self Declaration
This is a significant…and somewhat puzzling…rule change. Essentially, the IRS will begin allowing social welfare, agricultural/labor, and business leagues to “self-declare” that they are tax exempt without filing Form 1024 as has been required in the past. These self-declarers will still be required to follow all ongoing compliance requirements, including the annual Form 990. The IRS will review organizations to ensure that they have classified themselves correctly and that they are complying with applicable rules. Expect this scrutiny to increase given the grace being extended on the front end.
It is important to note that Form 1024 applications will still be accepted for these organizations. Until we see how the implementation of the so-called review process pans out, it will remain a best-practice recommendation to not risk a self-declaration. It is difficult for us to see the long-run advantage of this rule change to the organizations themselves. Nothing can substitute for an actual determination letter.
The IRS will increase its scrutiny of political activity by nonprofits, especially in this election year.
The new Form 990 has given the IRS a great deal of information about organizational governance practices. In FY 2012, the IRS will be using this data to look at connections between certain governance practices and tax compliance.
Private Foundation Audits
The IRS has announced that it will increase examinations of some of the largest private foundations to ensure compliance with how they treat substantial assets.
This post only addresses a few of the topics in the original report. What’s clear is that the trend continues to point in the direction of ever-increasing scrutiny of the nonprofit community. Trust Foundation Group to keep you informed.