IRS Attention on Exempt Organizations in 2010

March 5, 2010

The IRS will begin several new initiatives and programs in 2010 dealing with tax-exempt organizations. This attention appears to indicate the intention of the IRS to focus on increasing compliance of exempt organizations in the future by continued oversight and audits.

First, the exempt organizations unit of the IRS will participate in the National Research Program for the first time. The IRS will randomly select approximately 500 exempt organizations and 90 governmental units for examinations that are expected to focus on employment tax. The findings will be included in the overall report after analysis by the IRS National Research Office. The IRS expects to gain data that will help target employment tax audits that could also lead to examinations of issues surrounding executive compensation generally, fringe benefits, worker classification, and employee expense reimbursements.

Second, Lois Lerner, the IRS director of exempt organizations, announced that the 2010 exempt organizations work plan will include a long-range study on the sources and uses of funds, and the impact on accomplishment of charitable purposes. The first part of the study will likely focus on types and amounts of unrelated trade or business activity, unusual fundraising expenses, and low levels of expenditures for program activities.

Third, the IRS recently issued a guide sheet for agents to use when completing the governance check sheet for exempt organizations and determining if an organization uses certain governance practices that might indicate whether the organization is in compliance with the rules for maintaining tax-exempt status. For example, the check sheet asks about the organization’s mission statement, compensation arrangements and advance approval of these arrangements, control of the organization including family or business relationships with other directors, officers, trustees, or key employees, financial oversight of the organization, and board review of the organization’s Form 990.

The IRS plans to use the data collected by the governance check sheet in a long-term study of the intersection between governance practices and tax compliance. The IRS has not indicated whether the compiled data from exempt organizations’ answers to the check sheet will affect the process of selecting organizations for audit, but organizations should be aware that this guide sheet might be used as a way for the IRS to determine which organizations will be selected for a more extensive review of operations.

Fourth, the IRS will soon release the interim report on colleges and universities compiled from answers to the compliance check questionnaire sent out to 400 colleges and universities in 2008. The IRS has already begun audits of 40 colleges and universities.

Finally, the IRS intends to examine international transactions undertaken by exempt organizations. As more exempt organizations become involved in international activities, the IRS becomes more concerned that assets are being diverted overseas for non-charitable purposes. The EO Division will publish information on international issues, the rules applicable to foreign charities, international grant making, and reporting requirements for domestic organizations that conduct activities abroad.

Exempt organizations need to be aware of the new environment of IRS attention on exempt issues and enforcement of the various rules that are applicable to tax-exempt entities. These initiatives could be only the first wave of efforts by the IRS to increase compliance.

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