Exempt Organization Update

April 30, 2008

The Internal Revenue Service (“IRS”) has recently announced two new initiatives.

Revisions to Form 990

The IRS recently released for public comment a discussion draft of a redesigned Form 990, Return of Organizations Exempt From Income Tax. The Form 990 is the information return filed by many public charities and other exempt organizations.

The redesign of Form 990 is based on three guiding principles: (1) enhancing transparency to provide the IRS with a realistic picture of the organization and its operations, along with the basis for comparing the organization to similar organizations; (2) promoting tax compliance by accurately reflecting the organization’s operations and use of assets so that the IRS can efficiently assess the risk of noncompliance; and (3) minimizing the burden on the filing organization by asking questions in a manner that makes it relatively easy to fill out the form without imposing unwarranted additional recordkeeping or information gathering burdens.
The redesigned Form 990 consists of a ten page core form that each Form 990 filer must complete. In addition, it has fifteen schedules requiring information reporting only from those organizations that conduct particular activities. A brief summary of the ten page core form follows:

Part I is a summary page which provides the organization’s identifying information and a snapshot of the organization. By looking at the summary page, users will find a breakdown of the organization’s revenues, expenses, assets, liabilities, and net assets, to quickly see the size and key financial measures of the organization.
Part II requires the organization to report information about compensation of officers, directors, trustees, and certain other employees. As with the current Form 990, organizations must list each officer, director, trustee, or key employee of the organization, even if not compensated.

Part III requires each organization to provide certain corporate governance information. This information includes the composition of its board or governing body, certain governance and financial statement practices, and the means by which the organization is accountable to the public by making certain governance information publicly available. This requirement reflects the IRS’s continuing belief that good governance and accountability practices provide safeguards for tax-exempt organizations.

Parts IV, V, and VI require the reporting of revenues, expenses, and balance sheet items. A major change, however, moves much of the current supplemental financial information from the main part of the Form 990 to a separate schedule.

Part VII requires information about the organization’s general activities. Many of the questions are ones that will, depending on the response, trigger the need for an organization to complete an additional schedule.

Part VIII requests information about the organization’s employment tax, excise tax, unrelated business income tax, and other filing obligations. Depending on the answer, these questions may also trigger the need for an organization to complete an additional schedule.

Part IX requires information on the organization’s program service and exempt function activities. It also asks the organization to describe its most significant accomplishment for the year.

The fifteen schedules are designed to require reporting of information only from those organizations that conduct particular activities. The IRS believes that certain schedules, such as Schedules A and B, will generally need to be completed only by public charities. The IRS also anticipates that most of the remaining schedules will be completed by only a small percentage of the organizations filing the main form, but nearly every organization will be required to complete at least one portion of the Schedule D, Supplemental Financial Statements.

Additional information about the Form 990 is available online.

Potential Voluntary Compliance Program

The IRS Advisory Committee on Tax Exempt Organizations has recommended that the IRS establish a voluntary compliance program for exempt organizations. The June 13, 2007 report and recommendation of the Advisory Committee suggested that this voluntary compliance should enable charities and other nonprofit organizations to address inadvertent noncompliance with the tax laws. Currently, there is no voluntary compliance program for charities and other nonprofit organizations. Instead, the IRS addresses issues as they arise on a case-by-case basis.

The Advisory Committee suggested that the voluntary compliance program have five basic elements: (1) it should be available only to a defined set of eligible exempt organizations; (2) it should resolve specific issues; (3) it should be clearly structured with written guidance addressing process and procedure; (4) it should be voluntary; and (5) it should provide finality through binding closing agreements or other documentation.

The Advisory Committee has recommended that the IRS implement the voluntary compliance program in a series of phases with the ultimate goal of creating a comprehensive program. To that end, it suggested an initial transitional program, designed to prevent the loss of tax-exempt status for organizations that fail to file Forms 990 for three consecutive years (a new provision of the Pension Protection Act of 2006), leading to a longer term program addressing the same issue.

The key feature of the transitional program is to allow all tax-exempt organizations not under audit, in appeals, or in litigation to file outstanding Forms 990, 990-EZ, 990-PF, or 990-T for the most recent three tax years, as well as outstanding Forms 941, 1099, and W-2. The tax-exempt organization would be required to pay all taxes due, with interest, but would not be subject to penalties.

The longer term program would build on the transitional program by establishing a formal, structured, and open-ended program to address similar problems, albeit with a higher entry threshold, such as a reasonable cause requirement and a showing that the tax-exempt organization is not subject to excise taxes for self-dealing, failure to distribute income, excess business holdings, taxable expenditures, lobbying, political activity, excess benefit transactions, prohibited transactions by donor advised funds, or premiums paid on personal benefit contracts or the private foundation termination tax.

Notably, although the Advisory Committee proposed that the longer term program address “other” compliance issues, these compliance issues do not appear to include failure to identify, report, and pay the excise taxes described above. As a result, the voluntary compliance program may not have the breadth or depth necessary to insure its success.

The Advisory Committee was established in May 2001 under the Federal Advisory Committee Act to provide an organized public forum for discussion of issues affecting tax exempt organizations and government entities. The Advisory Committee provides regular input to the IRS relating to the development and implementation of policy concerning employee plans; exempt organizations; tax-exempt bonds; and federal, state, local, and Indian tribal government issues. The Advisory Committee currently has twenty-one members. The members include representatives who deal with employee retirement plans; tax-exempt organizations; tax-exempt bonds; and federal, state, local, and Indian tribal governments. Advisory Committee members are appointed by the Secretary of the Treasury, meet annually, and generally serve two-year terms.