Every year the IRS publishes its work plan for the following year. The work plans contain continuing and new projects and provide insight into the issues that are top of mind for the Service.
501(c)(4), (5) and (6)
When the Exempt Organizations unit released its 2011 work plan on December 15, it included a new project that will look at the activities of organizations that are exempt under Section 501(c)(4), (5) and (6) of the Internal Revenue Code. The IRS will be looking at political activity, inurement, and the extent to which those organizations that self-identify comply with the requirements for tax exemption. While 501(c)(3) organizations must receive a determination from the IRS that they are exempt under 501(c)(3), organizations that are exempt under 501(c)(4), (5) or (6) may claim the exemption without an IRS determination. Sometimes these organizations misclassify themselves and the Service will be looking to correct those classifications. The IRS will use the expanded questions on the Form 990 to review these organizations and their activities. Organizations that have self-identified as being exempt under 501(c)(4), (5) or (6) should not be surprised to hear from the IRS in 2011.
The IRS also plans greater scrutiny of 501(c)(3) activities including loans made to top officials and employment tax payments. Audits of charities increased 32% from 2008 to 2010 with 11,449 charitable organizations being audited in 2009. This increase is attributed to increased staffing for the IRS unit that handles audits of charities. Increased cooperation with the Social Security Administration and staff regulators has provided electronic data that the IRS has used to identify organizations that are not paying appropriate employment taxes. The IRS assessed more than $5 million in penalties last year to charitable organizations that did not correctly report loans to officers and senior staff. The IRS will continue to look at loans to insiders and employment tax reporting in 2011.