The IRS Christmas Letter for the Year 2010

December 22, 2010

At the close of the calendar 2010, the IRS has taken the opportunity to review its accomplishments in the administration of the tax-exempt organizations area. The letter from the director of the Tax-Exempt Organizations Division can be found on the IRS website. We will identify those areas reported on, and refer you to guidance that has been published on McGuireWoods’ website for further information.

  • Consumer Credit Counseling Project. Examined 63 of the largest organizations and revoked tax exemption of 41. IRS sent questionnaires to the remaining organizations, revoking 59% of the group under newly enacted section 501(q).
  • Down Payment Assistance Project. Seller financed minimum down payment mortgage and closing costs assistance to buyers is not a 501(c)(3) activity, and organizations engaged in such activities are not tax exempt. IRS revoked exemption of 80 such organizations. In 2008, Congress passed legislation prohibiting assistance programs funded by individuals having a financial interest in the sale.
  • Executive Compensation Compliance Initiative; Loans Project. Identified substantial loans to directors and officers, improper reporting, and potential excess benefit issues resulting in the collection of $5.5 million in section 4958 excise tax and $400,000 in discrepancy adjustments. See Using the Initial Contact Exemption in Setting Executive Compensation.
  • Investment Income IRC 501(c)(7). Resulted in the revocation of 80 social clubs organizations, delinquent return Form 990T filing and the changes of status of 60 of the examined organizations.
  • Non-Exempt Charitable Trusts Project. Failure to file Form 1041, in addition to Forms 990 or 990PF, resulted in requiring the trusts to establish that funds for charitable purposes were set aside, and Form 1041 returns were required from non-complying organizations. New IRS Form 990 Stresses Compliance.
  • Political Activities Compliance Initiative. 250 organizations examined for the years 2004, 2006 and 2008. More than half received warnings to comply in the future, and seven were revoked. ” A new project for 2011 will focus on section 501(c)(4), (5) and (6) organizations engaged in electoral and other activity. See McGuireWoods’ A Premier on How to Avoid the Pitfalls of Electioneering from a Tax Perspective.
  • Qualified State and Local Political Organizations. Reviewed 3,600 state and local 527 PAC organizations for failure to file Form 8872 to ascertain the accuracy of the organization’s permitted non-filing status.
  • 509(a)(3) Supporting Organization Project. 300 Type III organizations were examined, resulting in 30 terminations, 72 tax-exempt status revocations, and 59 reclassification as private foundations. See Proposed Regulations for Type III Supporting Organizations.
  • Form 990 has been dramatically expanded to include new Schedule H for hospitals; Appendix K addressing contributions; Part XI on reconciliation of net assets; Schedule D on supplemental financial statements including audited financial statements; reporting on stock value of investments in foreign countries among many other changes. See Challenges of New Form 990 for Nonprofits.

New Focus Areas for 2011

  • International Tax Enforcement ” Foreign Entities Receiving IRS Recognition ” Charities Reporting Foreign Addresses on Form 990 ” Charities Participating in “Gifts in Kind” Programs ” Large Private Foundations with International Operations

See McGuireWoods’ website, The Globalization of Philanthropy: International Charitable Giving in the Twenty-First Century, Real Property Trust and Estate Law Journal, Vol. 45, Number 3, Winter 2010. Also see International Charitable Giving and Estate Planning.

The Exempt Organizations Division is developing new publications describing the special rules for charities conducting activities abroad.

  • Medical Residents. IRS-initiated programs to determine exemption from FICA (Social Security and Medicare tax) based on the student exception.
  • National Research Programs Study of the Employment Tax Returns. Misreporting has caused a large part of $54 billion tax gap. IRS is reviewing 1,500 tax-exempt organizations for years 2008-2011.
  • Controlling Organizations – §512(b)(13) Project. Reviewed payments between controlled organizations and parent organizations regarding allocation of income, deductions and transfer of property. Information gathering has begun through the college and university project.
  • College and University Project. In 2008, 400 questionnaires sent to public and private four-year colleges and universities on UBIT, endowments, executive compensation, and governance. More than 30 entities are under examination. See McGuireWoods’ website articles IRS Releases Interim Report on College and University Questionnaire; Government Accountability Office Releases Study on College and University Endowments, IRS Starts University Audits. For a comprehensive review of IRS questionnaire and audits by McGuireWoods’ attorneys see New Scrutiny of College and University Executive Compensation and Unrelated Business Activity, Journal of College and University Law, Vol. 37, Number 1, 2010.
  • Charitable Spending Initiative. Organizations will be selected for examination that have high levels of fundraising expenses, unrelated trade or business activities with low levels of program service expenditures in comparison to total revenue. Congress requested the information and study.
  • Form 990-N Mis-filers Project. Identifying organizations who incorrectly file Form 990-N reserved for small organizations with yearly gross receipts of $25,000 or less.
  • Governance Practices. Examination check sheets kept by IRS personnel capturing governance practices and related internal controls of examined organizations will be used to develop further requirements and guidance.
  • Mortgage Foreclosure Assistance Project. Review of organizations engaged in foreclosure assistance compliance with section 501(q).

It was a busy year for the IRS examination function. Year 2011 appears to be shaping up as an even busier year, as the IRS closes its study on college and universities, and initiates additional examinations on controlled organizations and employment tax matters; prepares regulations on section 501(r) for charitable hospitals; and reports to congress on compensation, UBIT, employment tax and other issues.

McGuireWoods attorneys will keep you updated on developments as they occur.

McGuireWoods’ Nonprofit & Tax-Exempt Organizations Group

Our Nonprofit and Tax-Exempt Services lawyers provide advice and guidance that enable charities and other nonprofits to operate efficiently and effectively in today’s increasingly complicated, regulated and competitive environment.