Each year, the IRS publishes a report detailing what its focus will be regarding nonprofit organizations and compliance during the year to come. The following are some of the highlights from the 2012 Exempt Organizations Work Plan. The entire report can be found here.
Self-Declared Section 501(c)(4), (5) and (6) Organizations
These groups – social welfare organizations; labor, agricultural and horticultural groups; and business leagues – can declare themselves tax-exempt without seeking a determination from the IRS. The IRS will conduct reviews to ensure the organizations have classified themselves correctly and are complying with applicable rules. In FY 2012, the IRS will send a comprehensive questionnaire to organizations based on Form 990 filings to assess compliance in this area.
Auto-Revocation for Non-Filers
This program was part of the 2006 Pension Protection Act and requires that the IRS revoke the tax-exempt status for any organization that fails to file a return for three (3) consecutive years. The IRS began revocations in 2011 and will continue to implement the program in 2012. The list of revoked organizations will be updated monthly and can be found at: http://apps.irs.gov/app/eos
Requirements for Tax-Exempt Hospitals
The 2010 Affordable Care Act added new requirements that tax-exempt hospitals must meet to maintain tax-exempt status. The IRS is required to review the community benefit activities of hospital organizations at least once every three years. These reviews will be used for research, reporting and compliance purposes, and to identify areas where additional guidance, education or Form 990 changes are needed.
Section 501(c)(29) Organizations
Notice 2011-23, issued by the IRS in March 2011, provides guidance on the requirements for tax exemption under section 501(c)(29) which created Qualified Nonprofit Health Insurance Issuers as a new type of exempt organization. Revenue Procedure 2012-11 sets out the procedures for issuing determination letters and rulings on the exempt status of organizations applying for exemption under this section.
The IRS will continue to enforce the rules relating to political campaigns and campaign expenditures. The IRS will combine what it has learned in past years with information from the redesigned Form 990 to focus its examination resources on serious allegations of impermissible political intervention. Additionally, information from outside sources and other potential violations identified through risk modeling will be reviewed by a committee of career civil servants which will focus on identifying cases to refer for examination.
The IRS will be looking for exempt organizations that report unrelated business activities/income (UBI) of more than $1,000 on Form 990, but do not also file Form 990-T. Form 990-T is required for all organizations that report UBI of $1,000 or more.
The new Form 990 has given the IRS a great deal of information about organizational governance practices. In 2012, the IRS will use this data to look at connections between certain governance practices and tax compliance.
The IRS will examine exempt organizations that operate overseas to ensure that those activities are consistent with their charitable purposes. The examination will include a large number of private foundations that have international activities with revenue or assets greater than $500 million. The IRS will be looking at compliance issues unique to private foundations such as self-dealing, failure to distribute income, excess business holdings, jeopardy investments and taxable expenditures.
Additionally, the IRS will continue to look at organizations that report ownership of a foreign bank account to determine: (a) whether the organization maintains adequate books and records to ensure assets are used for charitable purposes, (b) whether the organization has maintained proper discretion and control over funds that have left the United States, (c) whether the organization has met all filing requirements, and (d) how foreign operations and grantmaking further the organization’s exempt purpose.
The immediate effort of the charitable community to raise and distribute funds for relief presents an unfortunate opportunity for organizations to abuse tax law. The IRS will work in 2012 to identify compliance issues that are most commonly associated with disaster relief efforts and will help educate new and existing organizations about the rules and responsibilities in this area.
Mortgage Foreclosure Assistance
The IRS will focus on the activities of these organizations to ensure they are fulfilling their exempt purpose and complying with the requirements of Section 501(q) of the Code.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.