Noncompliance can lead to significant penalties, including the loss of your tax-exempt status.
Nonprofits: How to Manage Increased IRS Scrutiny of International Activities
With the IRS’ increased attention to the international activities of nonprofits, it is now more important than ever for your organization to understand its operations and reporting obligations. Noncompliance in this area may lead to significant penalties, including loss of tax-exempt status. Today’s atmosphere of increased scrutiny may have implications for nonprofits across the United States.
In its 2011 Annual Report and 2012 Work Plan, the IRS Exempt Organizations Division says it will be focusing on whether assets of exempt organizations that are dedicated for international charitable purposes are being diverted for noncharitable purposes. Particular attention will be given to large private foundations, but any other organization reporting ownership of a foreign bank account or foreign activities is subject to scrutiny. According to the IRS work plan, key monitoring areas will include:
- Books and records, to ensure assets are used for charitable purposes
- Compliance with all filing requirements
The difficulty in assessing the risk of noncompliance lies in determining when and if an organization has met various thresholds for filing. Identifying the reporting requirements can be a challenge, but understanding the basic activities that may trigger IRS scrutiny is the foundation for full and timely compliance.
What activities may require reporting?
Activities requiring reporting and disclosure range from grant making to investments in foreign organizations. Although not all-inclusive, the following examples illustrate activities requiring some level of reporting:
- Financial interest in, or signature authority on, a foreign bank account
- Maintaining offices, employees, or agents outside of the United States
- Aggregate revenues or expenses of $10,000 or more from grant making, business, investment, or program services outside of the United States
- Foreign investments valued at $100,000 or more
- $5,000 or more of grants or assistance to:
- Any organization/entity outside of the United States
- A domestic organization/entity for the purpose of engaging in activities outside of the United States
- Any individual outside of the United States
- A domestic individual for the purpose of engaging in an activity outside of the United States
- Certain transfers of cash or property to, or equity interest in, a foreign organization
In addition to these examples, most of which relate to financial transactions, a nonprofit may have a filing requirement if it has operations held in, or related to, a boycotting country. According to the IRS, an organization has operations in a boycotting country “if you have an operation that is carried out, in whole or in part, in a boycotting country, either for or with the government, a company, or a national of a boycotting country.”
To mitigate an organization’s risk of noncompliance, it must have a clear understanding of the foreign activities that can trigger reporting requirements. To do so, it should:
- Establish monitoring processes for tracking foreign activities
- Educate personnel on the types of activities that may result in a reporting requirement
U.S.-based charities and foundations make significant contributions to good work carried out throughout the world. Compliance with IRS rules and reporting requirements is an important step toward ensuring the helping hand remains extended to those in need.
Patrick Speltz, Nonprofit Accountant
firstname.lastname@example.org or 612-397-3154