Recently, the Exempt Organizations Office (“EO”) of the IRS released a list of 2011 initiatives, including international activities and compliance. The following are just a few of the items on the IRS’s radar for the coming year.
Employment Tax Examinations. In 2011, the EO plans to conduct full examinations of 500 exempt organizations to determine compliance with employment tax rules as part of a project reviewing employment tax practices of both taxable and tax-exempt organizations. The EO will be examining randomly selected returns for information regarding worker classification, fringe benefits, officer compensation, employee expense reimbursements, and non-filers. However, it is likely that the exempt organizations examinations will extend to other compensation-related issues such as excess benefits, self-dealing, and private inurement.
501(c)(4), (c)(5), and (c)(6) Organizations. In 2011, the IRS plans to begin a new project focused on section 501(c)(4), (c)(5), and (c)(6) organizations, examining political activities, inurement, and compliance.
Governance. Exempt organization governance will continue to be a focus for the IRS in 2010. The EO plans to examine the governance check sheets completed in 2010 for information regarding governance practices and internal controls.
International Activities. The IRS will continue to focus on international transactions and their potential to divert charitable assets for non-charitable purposes. The IRS plans to look at foreign entities receiving an exemption, exempt organizations with foreign addresses listed on their Forms 990, valuation of non-cash items sent by exempt organizations to foreign organizations, and large private foundations with foreign activities.
Non-Filer and Gaming Non-Filer Initiatives. This year, the EO will continue efforts to combat non-filing by conducting compliance checks on intermittent filers. In addition, the EO will review state filings to identify gaming activities that may have federal filing requirements.
Because it is commonplace in the tax exempt environment, gaming can be a “trap for the unwary” for non-profits. Many organizations are unaware of the laundry list of federal and state laws potentially triggered by a bingo game, poker night, or duck race. Organizations considering these types of activities should consult with legal counsel to ensure compliance with both federal and state law.
Form 990 Compliance. With the Form 990 revisions, the EO anticipates gathering a more complete picture of each exempt organization. Going forward, the updated form will be used to develop target compliance projects in order to identify non-compliant organizations as well as to create more focused educational efforts.
The EO is also planning to review submitted Forms 990-N for eligibility to file, issue final regulations to implement the Form 990 revisions, and modify the public support test.
Supporting Organizations. In recent years the EO has focused heavily on supporting organizations, making efforts to combat abuse and incorporating changes made by the Pension Protection Act of 2006 into its compliance process. In September 2009, the IRS issued temporary regulations regarding the new requirements for Type III supporting organizations. This year, the IRS plans to finalize these regulations.
Other Areas of Focus. In addition to the above, the IRS has numerous other guidance projects in its 2010-2011 Priority Guidance Plan. Many of these have been on the IRS’s agenda for several years:
- Continuation of the Charitable Spending Initiative, as previously discussed in Haynes and Boone’s February 2010 Alert - Issues on the IRS Horizon for Tax-Exempt Organizations in 2010.
- Guidance to update grantor and contributor reliance criteria.
- Guidance on excess business holdings rules, as amended by the Pension Protection Act.
- Guidance on program-related investments.
- Regulations on new excise taxes on donor advised funds and fund management, as added by the Pension Protection Act.
- Regulations on group returns.
- Guidance regarding certain annual return requirements.
- Regulations to update final regulations, relating to disclosure to state charity agencies.
- Final regulations relating to church tax inquiries and examinations.
- Guidance to facilitate modernizing administrative processes.
- Final regulations regarding disclosure of administrative actions required to be made public.
- Final regulations regarding updated appraisal requirements for certain charitable contributions.
- Regulations addressing application of the lookback interest rules to certain pass-through entities with tax-exempt owners.
- Regulations regarding interest on overpayments by tax-exempt organizations.