Webinar Slides: Problem Areas of Forms 990 and 990-T


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Original air date:
June 6, 2014
Repeat broadcast on June 18, 2014
Register at http://www.mhmcpa.com

Most tax-exempt organizations are required to file Form 990 with the Internal Revenue Service (IRS) each year to maintain their tax-exempt status. Similarly, many organizations also file Form 990-T annually to measure and report unrelated business income tax (UBIT). Join us for this course as experts from our Not-for-Profit & Education Practice Group discuss these forms and areas that often garner additional attention by the IRS. We will cover best practices in Form 990 preparation so that you can best present your organization in this important public-facing document and minimize organizational risk.

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Webinar Slides: Problem Areas of Forms 990 and 990-T

  1. 1. CBIZ & MHM Executive Education Series™ Problem Areas of Forms 990 and 990-T: IRS Focus Areas & How to Improve Compliance Presented by: Craig Klein and Brenda Booth June 6 and June 18, 2014
  2. 2. 2#CBIZMHMwebinar#CBIZMHMwebinar  To view this webcast in full screen mode, click on view options in the upper right hand corner.  Click the Support tab for technical assistance.  If you have a question during the presentation, please use the Q&A feature at the bottom of your screen. Before We Get Started…
  3. 3. 3#CBIZMHMwebinar#CBIZMHMwebinar  This webcast is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webcast.  External participants will receive their CPE certificate via email immediately following the webcast. CPE Credit
  4. 4. 4#CBIZMHMwebinar#CBIZMHMwebinar Any tax advice contained in this program is not intended to be used and cannot be used for the purposes of avoiding any penalties that may be imposed by the Internal Revenue Code. Circular 230 Notice
  5. 5. 5#CBIZMHMwebinar Today’s Presenters Craig Klein, CPA Managing Director, CBIZ MHM 617.761.0509 | cklein@cbiztofias.com Craig, a CBIZ Managing Director in the Not-For-Profit & Education Practice, has over 20 years experience in the tax industry and works exclusively with educational institutions, cultural organizations, health and human services providers, associations, foundations and other complex not-for-profit organizations. Craig assists clients with the preparation and review of tax returns, advice and planning regarding unrelated business income, transactions and maintenance of tax-exempt status. Brenda Booth, CPA Manager, CBIZ MHM 617.761.0729 | bbooth@cbiztofias.com Brenda is a Manager in CBIZ’s Not-For-Profit & Education Tax Practice. She has over eight years of experience working with not-for-profit organizations in the education, cultural and health and human services sectors. She provides tax return preparation and review services, and consultation regarding Form 990 reporting, tax reporting related to limited partnership investments and unrelated business income.
  6. 6. 6#CBIZMHMwebinar#CBIZMHMwebinar  Excerpt from FY 2013 IRS Workplan:  “…we [the IRS] find that the Form 990 responses of some organizations do not always accurately reflect their activities. If those organizations had been more careful in completing their returns, they might not have been identified by our indicators or selected for examination. Because of the new ways we are analyzing return data and selecting cases, it is more important than ever that organizations follow instructions, compute properly and report accurately on their Forms 990…The IRS uses the Form 990 responses to select returns for examination…” Introduction
  7. 7. 7#CBIZMHMwebinar#CBIZMHMwebinar  Form 990 Practice tips, best practices and areas of IRS focus  Form 990-T areas of IRS focus  Foreign filing requirements and FBAR Reminder (New electronic-only form due June 30) Today’s Agenda
  9. 9. 9#CBIZMHMwebinar#CBIZMHMwebinar  The principal officer should be the current principal officer (as of filing)  The number of voting members of the governing body should be as of the last day of the fiscal year  The number of volunteers can be estimated and can include unpaid board members  Best Practice: review your website (as the IRS may)!  Consider …  Prohibition on political activity  Limitations on lobbying activity  Unrelated business activity  Significant Changes:  remember NOT to include social security numbers  clarification that only hospitals should attach their audited financials Form 990, Heading and Part I - Summary
  10. 10. 10#CBIZMHMwebinar#CBIZMHMwebinar  Report new significant program services or changes in how programs are conducted on Form 990. Describe in Schedule O. Do not report to the IRS via letter.  Best Practice: Take advantage of the Statement of Accomplishments to showcase your programs and achievements to all constituents, including donors, employees, regulators, the media, etc.  The IRS is currently scrutinizing organizations with limited charitable activity (and excessive compensation). Form 990, Part III – Program Service Accomplishments
  11. 11. 11#CBIZMHMwebinar#CBIZMHMwebinar  Total expenses should tie to the program service expenses reported on the statement of functional expenses (SFE).  Total grants should tie to the grants reported on the SFE.  Revenues should generally tie to the “related” or exempt revenues on the statement of revenue. Form 990, Part III – Program Service Accomplishments
  12. 12. 12#CBIZMHMwebinar#CBIZMHMwebinar  Best practices:  To be able to answer “yes” to the question regarding compliance with backup withholding rules for reportable payments to vendors.  To be able to answer “yes” to the question regarding filing of all required federal employment tax returns.  To be able to answer “yes” to the question as to whether Form 990-T has been filed for organizations with greater than $1,000 of unrelated business gross income. Form 990, Part V – IRS Filings and Tax Compliance
  13. 13. 13#CBIZMHMwebinar#CBIZMHMwebinar  The IRS is very interested in good governance within tax- exempt organizations!  Responses to governance questions, in combination with other Form 990 data, can be expected to influence an organization’s examination risk.  Best Practices:  “yes” responses to the questions regarding:  contemporaneous documentation of meetings  providing a complete copy of Form 990 to all board members  having a written conflict of interest policy, a whistleblower policy, and document retention and destruction policy  meeting the “rebuttable presumption of reasonableness” criteria when setting executive compensation Form 990, Part VI – Governance, Management and Disclosure
  14. 14. 14#CBIZMHMwebinar#CBIZMHMwebinar  Be aware of the specific requirements for the desired “yes” response to be appropriate for each of the following questions:  providing a complete copy of Form 990 to all board members  having a written conflict of interest policy, a written whistleblower policy, and a written document retention and destruction policy  compensation setting of CEO and other officers or key employees meeting “rebuttable presumption” Form 990, Part VI Form 990, Part VI – Governance, Management and Disclosure (continued)
  15. 15. 15#CBIZMHMwebinar#CBIZMHMwebinar  Colleges and Universities Project Final Report  Examinations focused mainly on compliance with the Section 4958 Intermediate Sanctions provisions.  Organizations may pay no more than reasonable compensation to their disqualified persons, i.e. officers, directors, trustees and key employees (ODTKEs).  Rebuttable presumption of reasonableness safe harbor (RPR), when:  Use of an independent body to set the compensation  Reliance on appropriate comparability data to set the compensation, and  Contemporaneous documentation Compensation and Rebuttable Presumption
  16. 16. 16#CBIZMHMwebinar#CBIZMHMwebinar  IRS findings with compensation: The Good  Most examinees attempted to meet the rebuttable presumption standard.  94% of ODTKEs at examined institutions had compensation set using a procedure intended to satisfy RPR.  Broad existence of compensation policies.  Procedures designed to avoid conflicts of interest  Compensation setting for ODTKEs by the Board of Directors or by a compensation committee  Recusal by individuals from discussions about their compensation  Documentation of the basis for setting compensation. Compensation and Rebuttable Presumption
  17. 17. 17#CBIZMHMwebinar#CBIZMHMwebinar  IRS findings with compensation: The Bad  About 20% of examinees failed to meet the RPR standard because of problems with their comparability data, including:  Inclusion of institutions not similarly situated to the school relying on the data (location, endowment size, revenues, net assets and number of students).  The compensation studies failed to document the selection criteria for the schools included or explain why those schools were deemed comparable to the school relying on the study.  The compensation studies failed to specify whether the data included just salary or included other forms of compensation. Compensation and Rebuttable Presumption
  18. 18. 18#CBIZMHMwebinar#CBIZMHMwebinar  IRS next steps regarding compensation setting.  IRS plans to make tax-exempt organizations more aware of the importance of using appropriate comparability data when setting compensation.  In other words…education and examinations. Compensation and Rebuttable Presumption
  19. 19. 19#CBIZMHMwebinar#CBIZMHMwebinar  Every organization should report as officers 1) the top management official, and 2) the top financial official.  For “Position”, only one box should be checked for each individual, unless both a board member and officer.  Do not mark “former” if a person served in their capacity as ODTKE at any time during the fiscal year.  Significant changes:  Hours per week for related organizations now required to be reported.  Public utilities and insurance providers should not be reported as independent contractors. Form 990, Part VII – Compensation
  20. 20. 20#CBIZMHMwebinar#CBIZMHMwebinar  Donated services or use of facilities should not be reported on the Statement of Revenue.  Non-cash contributions should tie to Schedule M (if Schedule M is required).  Expense items should be reported as reconciling items on Schedule D.  Fundraising revenues and expenses should tie to Schedule G (if Schedule G is required). Form 990, Part VIII - Revenue
  21. 21. 21#CBIZMHMwebinar#CBIZMHMwebinar  Miscellaneous income that is NOT regularly carried on should be reported in the miscellaneous revenue section instead of the program service revenue section.  Significant Changes: The instructions clarify that discounts on services cannot be reported as contribution revenue. Form 990, Part VIII – Revenue (continued)
  22. 22. 22#CBIZMHMwebinar#CBIZMHMwebinar  Lobbying expenses reported here should tie to Schedule C, unless employee compensation is included within the expenses reported on Schedule C.  Professional fundraising services should tie to Schedule G (if Schedule G is required).  Significant changes: If “other fees for services” exceeds 10% of total expenses, these expenses should be listed on Schedule O.  Best practice: Pay close attention to the allocation of expenses, e.g. program vs management & general versus fundraising. Note: The IRS expects an organization with substantial income from fundraising to report fundraising expenses. Form 990, Part IX - Expenses
  23. 23. 23#CBIZMHMwebinar#CBIZMHMwebinar  Significant Changes:  The Part X instructions clarify that if any receivable is reported on line 6 (loans and receivables from other disqualified persons) then Schedule L, Part II is required.  The Part XI net asset rollforward includes new lines for unrealized gains/losses on investments, donated services and use of facilities, investment expenses, and prior period adjustments. Form 990, Parts X and XI – Balance Sheet and Reconciliation of Net Assets
  24. 24. 24#CBIZMHMwebinar#CBIZMHMwebinar  Schedule A should be prepared using the same accounting method used to prepare the overall 990. This includes the “look-back” data from prior years required to be presented on the current Schedule A.  New development: Schools described in Section 170(b)(1)(A)(ii) that follow the special rule allowing for abbreviated reporting on Schedule B will have to complete the Schedule A public support schedule and show at least 33 1/3 % public support. Schedule A – Public Charity Status and Public Support
  25. 25. 25#CBIZMHMwebinar#CBIZMHMwebinar  Schedule B should be prepared using the same accounting method used to prepare the overall 990.  If the organization uses the accrual method of accounting, pledges of non-cash contributions should be reported on Schedule B even if not received in the fiscal year  Organizations can not list a donor as “Anonymous” unless the organization does not know the donors’ identity.  Best Practice: Do NOT include Schedule B in your public disclosure copy. Do NOT post Schedule B on your website. Schedule B - Contributors
  26. 26. 26#CBIZMHMwebinar#CBIZMHMwebinar  Rev. Proc. 75-50 describes criteria for tax exemption as a school, including private secondary schools, colleges and universities.  Schedule E asks several questions that go to ongoing qualification of the school as tax-exempt.  Does the organization include a statement of its racially nondiscriminatory policy toward students in all its brochures, catalogues, and other written communications with the public dealing with student admissions, programs, and scholarships?  Has the organization publicized its racially nondiscriminatory policy through newspaper or broadcast media during the period of solicitation for students?  Does the organization certify that it complied with the applicable requirements of sections 4.01 through 4.05 of Rev. Proc 75-50? Schedule E - Schools
  27. 27. 27#CBIZMHMwebinar#CBIZMHMwebinar  For schools, make sure your organization understands the Rev. Proc. 75-50 criteria for tax-exemption.  Understand that Schedule E responses that indicate non-compliance with the Rev. Proc 75-50 criteria may invite attention from the IRS. Schedule E – Schools (continued)
  28. 28. 28#CBIZMHMwebinar#CBIZMHMwebinar  Excerpt from FY 2013 IRS Workplan:  “[the IRS] is interested in ensuring that assets and income of domestic charities are not diverted to non- charitable purposes when the funds are sent abroad, as well as whether U.S. charities comply with regulations on recordkeeping and reporting when they operate or donate funds overseas.” Schedule F – Foreign Activities
  29. 29. 29#CBIZMHMwebinar#CBIZMHMwebinar  According to the IRS, historic issues include:  Failure to file FBAR’s  Inadequate recordkeeping  Lack of discretion and control over funds sent abroad  Failure to file employment tax returns (or filing incorrect returns)  Recent IRS focus on examinations of organizations with high amounts of foreign grant expenditures. Schedule F – Foreign Activities (continued)
  30. 30. 30#CBIZMHMwebinar#CBIZMHMwebinar  To determine whether a grant expense should be reported on Schedule F versus Schedule I, look to where the money is to be spent. It is not determined by whether the individual recipient is a US citizen or not.  Consider scholarship to US student for study abroad.  Consider scholarship to foreign student for study in the US.  Grants and program service expenses should be reported separately.  Part IV of the schedule asks questions regarding foreign investments. “Yes” answers regarding transfers to foreign corporations, ownership of foreign corporations, and/or foreign partnerships, etc. indicate that additional forms MAY be required. Schedule F – Foreign Activities (continued)
  31. 31. 31#CBIZMHMwebinar#CBIZMHMwebinar  Foreign investments are reportable, by region, on Schedule F, Part I.  Significant change: new guidance confirms that a filer does not need to report in Schedule F, Part I its investments in entities domiciled overseas but traded on a U.S. stock exchange. Schedule F – Foreign Activities (continued)
  32. 32. 32#CBIZMHMwebinar#CBIZMHMwebinar  Fundraising events: The FMV of attendance at the event should be reported on Schedule G as gross receipts from fundraising.  The amount that a person paid for the event that exceeds the FMV should be reported as contributions.  Remember that the portion that is considered the FMV is not deductible to the taxpayer.  Reporting the income in this manner often results in a net loss from the fundraising event being reported on Schedule G. Schedule G - Fundraising
  33. 33. 33#CBIZMHMwebinar#CBIZMHMwebinar  To determine whether a grant expense should be reported on Schedule F versus Schedule I, look to where the money is to be spent. It is not determined by whether the individual recipient is a US citizen or not.  Consider scholarship to US student for study abroad  Consider scholarship to foreign student for study in the US  Note that on Schedule I, Part II (Grants to organizations), only grants more than $5,000 are required to be reported, whereas on Schedule I, Part III (Grants to Individuals), there is no minimum threshold for reporting. Schedule I – Grants to Recipients in the US
  34. 34. 34#CBIZMHMwebinar#CBIZMHMwebinar  Best practices –  The fewer executive perquisites reported the better.  The more boxes that an organization can check regarding different elements of the executive compensation setting process, the better.  Seek consistency between the “rebuttable presumption” responses in Part VI (governance) and the related responses on Schedule J. Best practice is to establish and report “rebuttable presumption.”  Take advantage of the Schedule J open narrative section to explain any anomalous looking compensation amounts.  Significant Change: The instructions clarify that the organization may check a box in line 3 (as for reliance on a compensation survey) if it relied on a compensation consultant that used that element. Schedule J - Compensation
  35. 35. 35#CBIZMHMwebinar#CBIZMHMwebinar  Qualification as a 501(c)(3) bond must be maintained throughout the entire time the bond is outstanding.  The IRS has an active examination program applicable to tax-exempt bonds and takes post-issuance compliance very seriously.  Schedule K is all about reporting qualitative and quantitative information relevant to the ongoing qualification of the bond.  Compliance with private use limitations  Compliance with arbitrage rules  Existence of adequate books and records and written procedures Schedule K – Tax-Exempt Bonds
  36. 36. 36#CBIZMHMwebinar#CBIZMHMwebinar  Various questions and related best practices  Does the organization maintain adequate books and records to support the final allocation of proceeds? Best practice is “yes.”  Does the organization routinely engage bond counsel or other outside counsel to review any management or service contracts relating to the financed property? Best practice is “yes” if management or service contracts exist.  Does the organization routinely engage bond counsel or other outside counsel to review any research agreements relating to the financed property? Best practice is “yes” if research agreements exist. Schedule K – Tax-Exempt Bonds (continued)
  37. 37. 37#CBIZMHMwebinar#CBIZMHMwebinar  Does the bond issue meet the private security or payment test ? The desired answer is “no.”  Has the organization established written procedures to ensure that all nonqualified bonds of the issue are remediated in accordance with the requirements under the [private use] Regulations ? Best practice is “yes.”  Has the organization established written procedures to monitor the requirements under section 148 [arbitrage] ? Best practice is “yes.” Schedule K – Tax-Exempt Bonds (continued)
  38. 38. 38#CBIZMHMwebinar#CBIZMHMwebinar  Has the organization established written procedures to ensure that violations of federal tax requirements are timely identified and corrected through the voluntary closing agreement program (VCAP) if self-remediation is not available under applicable regulations ? Best practice is “yes.”  All organizations should consider adopting these written procedures.  If such written procedures have not been adopted, check “No” to the Schedule K questions but consider making a comment in the Part VI open narrative section, if appropriate, that such written procedures are under consideration and are expected to be in place by ____________. Schedule K – Tax-Exempt Bonds (continued)
  39. 39. 39#CBIZMHMwebinar#CBIZMHMwebinar  Continued “No” responses to the Schedule K governance questions can be expected to increase your organization’s risk of a bond examination by the IRS.  Note: even if a bond examination results in “no change”, your organization may be referred for a UBIT examination. Schedule K – Tax-Exempt Bonds (continued)
  40. 40. 40#CBIZMHMwebinar#CBIZMHMwebinar  Schools that provide scholarships, fellowships, and similar financial assistance to interested persons are not required to identify the interested persons by name. See Schedule L instructions for alternative reporting requirements.  An organization is not required to provide information about a business transaction with an “interested person” it the organization is unable to obtain information regarding interested person status after making a reasonable effort to obtain the information. Schedule L – Transactions With Interested Persons
  41. 41. 41#CBIZMHMwebinar#CBIZMHMwebinar  Significant Change: the Form instructions now clarify that investment management or service fees, but not the value of investments, are reportable as business transaction amounts in Schedule L, Part IV. Schedule L – Transactions With Interested Persons
  42. 42. 42#CBIZMHMwebinar#CBIZMHMwebinar  Donated services or the donated use of facilities, equipment, or materials should not be reported.  Contributions of non-cash items should be reported even if sold immediately after receiving the item.  For the question that asks if the organization uses a third party to solicit, process, or sell noncash contributions, if the third party is a broker organization who sells publicly traded securities donated to the organization, this question should be answered "no." Schedule M – Noncash Contributions
  43. 43. 43#CBIZMHMwebinar#CBIZMHMwebinar  Best Practice:  Use Schedule O to provide additional explanation, as needed. Strong disclosures can be further amplified. Mitigating factors or explanatory language can be provided for weaker form disclosures. Schedule O – Supplemental Information
  44. 44. 44#CBIZMHMwebinar#CBIZMHMwebinar  On Schedule R, Part IV, you do not have to identify the name of a split-interest trust (e.g. charitable remainder trust, charitable lead trust, or pooled income fund) its EIN, or its address. See Schedule R instructions.  Significant changes:  Schedule R includes a new column that asks if a related trust or corporation is a Section 512(b)(13) controlled entity.  Schedule R now asks if there were any dividends received from related organizations.  The Form instructions now clarify when a VEBA is a “related organization.” Schedule R – Related Organizations
  46. 46. 46#CBIZMHMwebinar#CBIZMHMwebinar  Underreporting of Unrelated Business Taxable Income (UBTI)  34 College & University examinations resulted in:  Increases to UBTI for 90% of colleges and universities examined, totaling about $90 million  Disallowance of more than $170 million in losses and net operating losses (NOLs)  Primary reasons:  Disallowing expenses  Errors in computation or substantiation  Reclassifying exempt activities as unrelated IRS Focus
  47. 47. 47#CBIZMHMwebinar#CBIZMHMwebinar  Disallowing expenses  Lack of profit motive  70% of examinees reported losses from activities that generated consistent losses for many years.  Unrelated business income (UBI) must be generated by a “trade or business.”  An activity qualifies as a trade or business only if engaged in with the intent to make a profit.  IRS: “A pattern of repeated losses is generally sufficient to show a lack of profit motive.”  Activities were disallowed as “unrelated” where the examinee failed to show a profit motive.  More than $150 million of NOLs disallowed (from just the 34 examinations). IRS Focus
  48. 48. 48#CBIZMHMwebinar#CBIZMHMwebinar  Disallowing expenses  Improper expense allocation  Organizations may allocate expenses.  Allocations must be done on a reasonable basis.  Expenses offsetting UBI must be directly connected to UBI activities.  Expense deductions were disallowed on more than 60% of Forms 990-T examined because of improper allocations between exempt and unrelated business activities. IRS Focus
  49. 49. 49#CBIZMHMwebinar#CBIZMHMwebinar  Reclassifying activities as unrelated  Nearly 40% of examinees found to have misclassified certain activities as exempt (and not reportable on Form 990-T).  Fewer than 20% of such activities generated a loss.  The IRS reclassified these activities as unrelated, resulting in nearly $4 million of additional UBI. IRS Focus
  50. 50. 50#CBIZMHMwebinar#CBIZMHMwebinar  IRS next steps  IRS plans to focus on UBI more broadly, and especially on recurring losses, and allocation of expenses.  Per the 2013 IRS workplan, IRS will examine a sample of organizations which reported substantial gross UBI for three consecutive tax years, but which reported no income tax due for any of those years.  The IRS’ concern: whether organizations are accurately reporting their sources of UBI and correctly allocating and deducting expenses associated with it. IRS Focus
  52. 52. 52#CBIZMHMwebinar  Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation  Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations  Form 8865 - Return of U.S. Persons with Respect to Certain Foreign Partnerships  Form 5713 – International Boycott Report  Attach to Form 990-T  Heavy penalties may be applied for non-filing Foreign Forms
  53. 53. 53#CBIZMHMwebinar Important Changes to FBAR Filing  Form 114 Report of Foreign Bank and Financial Accounts replaces Treasury Department Form 90-22.1.  Filed by US residents, citizens and entities, including corporations, partnerships, and LLC’s with a greater than 50% direct or indirect financial interest or signature authority over at least one foreign financial account if the aggregate value of the accounts at any time during 2013 exceeded $10,000.  If applicable, must be filed by June 30.  Electronic filing is mandatory. No paper filing.
  54. 54. 54#CBIZMHMwebinar#CBIZMHMwebinar Questions?
  55. 55. 55#CBIZMHMwebinar#CBIZMHMwebinar  Join us for these courses:  10/7 and 10/22: Potential Changes in the Not-for-Profit Reporting Model  12/4 and 12/10: Key Tax Issues Facing Not-for-Profit Organizations  Read these related news items:  IRS Releases Changes to 2013 Form 990 and 990-EZ  Join us in D.C. for the 2014 AICPA National Not-for-Profit Conference  Web Presence and Internet Concerns for Nonprofit Organizations: Hyperlinks  Sign up for our Not-for-Profit Viewpoint e-newsletter If You Enjoyed This Webcast…
  56. 56. 56#CBIZMHMwebinar#CBIZMHMwebinar Connect with Us linkedin.com/company/ mayer-hoffman-mccann-p.c. @mhm_pc youtube.com/ mayerhoffmanmccann slideshare.net/mhmpc linkedin.com/company/ cbiz-mhm-llc @cbizmhm youtube.com/user/ BizTipsVideos slideshare.net/CBIZInc MHM CBIZ