Nonprofit organizations must be compliant with rules from many different agencies. Here is a look at some of the current Internal Revenue Service issues to be aware of.
501(c) (4), (5) and (6) Self-Declarers
Social welfare organizations; labor, agricultural and horticultural groups; and business leagues,such as a trade association – can declare themselves tax-exempt without seeking a determination from the IRS. The IRS will review organizations to ensure that they have classified themselves correctly and that they are complying with applicable rules. In FY2012, they will send a comprehensive questionnaire to organizations based on Form 990 filings to assess compliance in this area. If your organization did not submit a Form 1024 to receive official status from the IRS, you may receive one of these letters.
990-T and UBIT
In FY2012, the IRS will analyze Form 990-T data to develop models that will help identify organizations that consistently report significant gross receipts from unrelated business activities but declare no tax due. They will use this work in connection with a coming UBIT project. This makes it the perfect time to review your cost allocations to ensure that they are consistent, supported by data and well documented.
The new Form 990 has given the IRS a great deal of information about organizational governance practices. In FY2012, the IRS will be using this data to look at connections between certain governance practices and tax compliance. Lois Lerner, Director, Exempt Organizations for the IRS, noted very preliminary findings from the governance checksheets they are using during their audits of nonprofit organizations. Tax compliance is better in organizations that follow these practices:
- Have a written mission statement
- Use comparability data for compensation decisions
- Have internal control procedures in place for the proper use of charitable assets
- The 990 is reviewed by the entire board of directors, so they are engaged in what is being reported on
Conversely, organizations where control is concentrated in one individual or a small, select group of individuals were less likely to be tax compliant. As the IRS further develops their knowledge in this area, you can be sure they will apply it when reviewing your organization’s 990, and making those dreaded audit decisions. Review page six of your 990 and implement the policies that matter most.
The IRS will be looking at organizations that report ownership of a foreign bank account to determine whether:
- They maintain adequate books and records to ensure assets are used for charitable purposes
- They have maintained proper discretion and control over funds that have the United States
- They have met all filing requirements
- Foreign operations or grantmaking furthers their exempt purpose
Reporting foreign operations on 990 Schedule F will also cause the IRS to take a closer look in this area. They will be releasing two new publications describing the applicable rules this year. In the meantime, if you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The due date for this form, for all organizations, is June 30th. There are no extensions available and heavy fines if you are late.
We will address compliance with other agencies’ rules in a future email.