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2013-08-15 EO in the Spotlight

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Frank Smith & Aaron Fox 8/15/13 Webinar

Frank Smith & Aaron Fox 8/15/13 Webinar

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  • 1. Thrive. Grow. Achieve. Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? Frank H. Smith Aaron M. Fox Tax Partner Senior Tax Manager August 16, 2013
  • 2. AGENDA  IRS EO Workplan  New Released 990 FAQ’s  Self-Declarer Project  Auto-Revocation Update  IRS Compensation Audits  Intermediate Sanctions and Compensation  Results from IRS survey of higher education, applicability  Path forward for IRS EO division Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 2
  • 3. POLL QUESTION Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 3
  • 4. POLL QUESTION Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page4 How many of you have been involved with organizations that have undergone an IRS examination or review?
  • 5. IRS EO WORKPLAN National research program 1,500 organizations with 500 selected randomly over 3 years Analysis of controlling tax-exempts §512(b)(13) – More than 50% controlled entities Group exemptions compliance check Over 2,000 group central organizations questioned Form 990-N misfilers Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 5
  • 6. IRS EO WORKPLAN Charitable spending initiative 170 small exempt organizations selected High fundraising expenses compared to program OR No fundraising expenses along side contribution income Reassess methodology Check documentation Compare with IRS instructions 6Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page
  • 7. IRS EO WORKPLAN Political activity Approximately 300 cases identified using Form 990 data Civil servant committee reviews file using public information Referrals by state regulators or anonymous third-parties 501(c)(3)’s Political activities strictly prohibited – Cannot promote, attack, support or oppose any candidate for public office – such political activities results in penalty tax and may result in loss of tax exemption. Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 7
  • 8. IRS EO WORKPLAN 501(c)(4)’s May conduct political activities, so long as not primary activity – otherwise may lose tax exemption. May conduct 501(c)(3) appropriate non-partisan voter education, registration and mobilization activities May endorse candidates Must follow federal and state election laws if engaging in political or electioneering activities 527 organizations Purpose is to influence elections – unlimited Subject to tax on non-political activities Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 8
  • 9. IRS EO WORKPLAN Compensation transparency IRS focus on high annual gross receipts but low compensation Inconsistent with other organizations similarly sized Roll out interactive application for recognition of exemption Not used to file electronically Form 990-T and UBI Consistently reporting no income tax due Three or more years Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 9
  • 10. NEW RELEASED 990 FAQ’S Governance If an organization adopted a policy or practice after the close if its tax year but before it filed the Form 990 for such year, may it report that it had such policy or practice in place for purposes of answering Part VI? A: Most questions specify timing, those that don’t (like line 12b whether certain persons are required to disclose potential conflicts of interest) may be answered yes. Is an organization required by federal tax law to provide a copy of Form 990 to its board or governing body, or have its board or governing body review the form, before it is filed with the IRS? A: No. Question 10 is still required though. If the filing organization is controlled by an organization with a conflicts of interest policy, whistleblower policy, and document retention and destruction policy, should the filing organization answer yes or no to Part VI, Questions 12a, 13, and 14? A: Because these questions are referring to the filing organization, answer yes only if the filing organization’s governing body (or subcommittee) has adopted the policies of the controlling organization. Otherwise, no. Schedule O can be used to explain. 10Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page
  • 11. NEW RELEASED 990 FAQ’S Public Disclosure In general, what public disclosure requirements apply to tax-exempt organizations and what are our organization’s public disclosure obligations for the Form 990? A: In general, exempt organizations must make available for public inspection its federal Form 990 as well as its Application for Exempt Status. Returns must be available for a three-year period beginning with the due date of the return (including any extension of time for filing) or, if later, the date it is actually filed. For this purpose, the return includes any schedules and attachments that are filed with the form. Note, however, that an exempt organization, other than a private foundation, need not disclose the name and address of any contributor. Copies usually must be provided immediately in the case of in-person requests, and within 30 days in the case of written requests. The tax-exempt organization may charge a reasonable copying fee plus actual postage, if any. 11Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page
  • 12. NEW RELEASED 990 FAQ’S Compensation Some amounts reported on Form 990 as current year compensation may have also been reported in a prior year’s Form 990 or 990-EZ. This could overstate the cumulative compensation reported as paid to the individual. May the organization back out this duplicate amount on the current year’s form? A: No, however if person is listed on Schedule J, report duplicate amount in column (F) of Part II. How do we know whether the compensation we’re paying to our officers and key employees is reasonable? A: Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonableness is determined based on all the facts and circumstances. (see later discussion of Intermediate Sanctions.) 12Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page
  • 13. SELF DECLARER PROJECT What are self-declared organizations? 501(c)(4)’s, 501(c)(5)’s, and 501(c)(6)’s declaring themselves tax-exempt without IRS ruling Questionnaire 36 questions completed online Form 14449 available in PDF New 120 day rule Alternate means of self-certification Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 13
  • 14. AUTO-REVOCATION UPDATE As of July 2013: 504,742 organizations auto-revoked 37,000 requested reinstatement 44,500 private foundations revoked 400 requested reinstatement Reinstatement process 1023/1024 Application backlog Select Check Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 14
  • 15. IRS COMPENSATION AUDITS IRS selection criteria Matching problems Classification inconsistencies Spelling Focused on classifying independent contractors as EE’s Backup withholding correctly withheld Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 15
  • 16. IRS COMPENSATION AUDITS Employee versus independent contractors Behavioral – Does the company control or have the right to control? Financial – Are business aspects of the worker’s job controlled by the payer? Type or Relationship – Are there written contracts or employee type benefits? Interns are rarely independent contractors Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 16
  • 17. IRS COMPENSATION AUDITS Documentation Form W-9 Form W-4 Vendor and employee files Form 941’s and 940’s Payroll registers General IRS audit strategies Determine scope of audit with agent early in process Schedule audit to be conducted off-site Electronic materials versus hardcopy Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 17
  • 18. INTERMEDIATE SANCTIONS AND COMPENSATION Compensation Transparency – Focusing on high annual gross receipts and low total compensation Excess Benefit Transactions and Intermediate Sanctions What is intermediate sanctions? How can they affect me and my organization? What type of transactions give rise to intermediate sanctions? Who may be subject to intermediate sanctions? What are the penalties? Why should I be concerned? What can I do to avoid intermediate sanctions? Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 18
  • 19. INTERMEDIATE SANCTIONS AND COMPENSATION Compensation must be reasonable to TDOKE Who determines what’s reasonable? Rebuttable presumption of reasonableness Using an independent body to review and determine the amount of compensation; Relying on appropriate comparability data to set the compensation amount; and Contemporaneously documenting the compensation-setting process. Results related to the Higher Education survey Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 19
  • 20. HIGHER EDUCATION SURVEY Survey background “Issues discussed in this survey may well be present elsewhere across the tax-exempt sector.” UBI Profit Motive Incorrect Expense Allocation Errors in computation or lack of substantiation of NOL’s Misclassification of activities as exempt Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 20
  • 21. HIGHER EDUCATION SURVEY Employment tax and employee plan returns Failure to include in income the value of personal use of automobiles, housing, and social club memberships; Failure to include in income the value of certain graduate reimbursements; Failure to withhold taxes for wages paid to non-resident aliens; and Worker misclassification. Written advisories Takeaway Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 21
  • 22. PATH FORWARD EO division under continued scrutiny after recent scandal 501(c)(4)’s are still the vehicle of choice for anonymous political intervention Possible changes could be percentage-of-expenditure test Increased disclosure obligations Change which 501(c) organizations can participate in political activities Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 22
  • 23. PATH FORWARD New Leaders Michael Julianelle – Commissioner, TEGE Heather Maloy – Dep. Commissioner Services & Enforcement Ken Corbin, Director, EO Karen Schiller, Director, Rulings and Agreements, EO Accountability Review Board Streamlined Process for 501c4’s Removal of “be-on-the-lookout” lists Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 23
  • 24. PATH FORWARD Bright Lines Project Addresses vague “facts and circumstances” test Redefining political activity A safe harbor would exist for communications shaped to influence official action, if the communication has a ‘direct, limited and reasonable relationship” to officeholder actions, assuming no risk of candidacy or election. If fail under safe harbor, facts and circumstances test still available F&C not available for communications that are made through paid mass media or Targeted to states or districts in which there is a close election. Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 24
  • 25. PATH FORWARD Simplification Proposals Make political activity laws more consistent Elimination of unnecessary restrictions, like those on PF grants for non-partisan voter registration efforts Simplify lobbying as well, such as eliminating grassroots vs direct distinction Increase lobbying cap Realities of Passing Reform Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 25
  • 26. IMMEDIATE FUTURE Expect more: Reliance on questionnaires Utilization of Form 990 analytics to identify risk Delays in processing 1023’s, 1024’s Delays in private letter rulings at National office Expect less: Openness and transparency Progress being made on 2013 workplan Willingness to pursue inappropriate political activities Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page 26
  • 27. QUESTIONS Aaron M. Fox Senior Tax Manager Raffa Helping Great Organizations Thrive Phone: 202.955.6701 Fax: 877.289.8541 Email: afox@raffa.com LinkedIn: http://www.linkedin.com/in/aaronfox Frank H. Smith Partner, Tax Raffa Helping Great Organizations Thrive Phone: 202.955.6735 Fax: 877.289.8541 Email: fsmith@raffa.com LinkedIn: http://www.linkedin.com/in/frankhsmith 27Exempt Sector in the IRS Spotlight – Is Your Organization Prepared? - Page