“Nonprofits should ensure they are adhering to tax regulations and appropriately reporting activities within the Form 990 — the IRS is utilizing analytical methods from the tax data to access noncompliance.” — Karen Gries, Nonprofit and Government Partner
IRS Tax-Exempt Groups’ 2012 Work Plan Focuses on Compliance
The IRS’ Exempt Organizations Division (EO) will focus on compliance among nonprofit hospitals, organizations that self-declare their exempt status, and organizations with international activities, according to the recently released Exempt Organizations FY 2012 Work Plan.
“Nonprofits should ensure they are adhering to tax regulations and appropriately reporting activities within the Form 990—the IRS is utilizing analytical methods from the tax data to assess noncompliance,” says Karen A. Gries, a CliftonLarsonAllen nonprofit and government partner.
“We have seen the IRS’ focus on tax compliance with colleges and universities and tax-exempt hospitals. The same processes are now being utilized to address noncompliance with other types of nonprofit organizations. According to the work plan, the IRS is using statistical information from Form 990s to develop risk models for nonprofits and ensure nonprofits are adhering to regulations,” she added.
Form 990 compliance
EO plans to use data from previously filed Forms 990 to focus on several aspects of compliance, including the connections between certain governance practices and tax compliance. For instance, it will review organizations exempt under Sections 501(c)(4), (5) and (6), since they can self-declare their exempt status without seeking a determination from the IRS. These organizations will receive a comprehensive questionnaire from the EO to ensure they are classified correctly and are complying with applicable rules.
Organizations that report certain unrelated business income will also come under scrutiny: those that have reported unrelated business activities on their Form 990, but failed to file a Form 990-T; and those that consistently report large amounts of unrelated business income, but have no resultant tax liability.
Health care implementation
Health care reform continues to be a significant area for EO this year, and the work plan indicates EO will focus on three types of organizations in response to new health care regulations:
- Tax-exempt hospitals. EO Exam created a Review of Operations group that will examine the activities of 501(c)(3) hospitals for compliance with Section 501(r). EO continues to work with the U.S. Department of Treasury develop guidance on 501(r) regulations.
- Qualified nonprofit health insurance issuers. EO will continue to work with qualified nonprofit health insurance issuers seeking tax exemption under Section 501(c)(29).
- Medicare Shared Savings Program participants. EO will continue to liaise with organizations seeking to participate in the Medicare Shared Savings Program through accountable care organizations (ACOs).
As a result of the globalization trend, EO will focus on groups with assets that are dedicated for international charitable purposes, and whether these amounts are diverted for non-charitable purposes. It will examine large private foundations that have international activities or assets, and organizations that report ownership of a foreign bank account.
Revoked tax-exempt status
Approximately 380,000 organizations had their tax-exempt status revoked as of November 2011 for failing to file a return for three consecutive years. The revocation process will continue in fiscal year 2012. EO is also working to reinstate the tax-exempt status of organizations that take corrective actions.
Because this is a presidential election year, EO will also closely examine impermissible political activities by nonprofits.
In addition to investigating the tax compliance of certain organizations, EO will pursue other endeavors this year, including:
- Continuing an analysis of group exemptions by developing a questionnaire for central/parent organizations.
- Issuing the final report on a long-term study of colleges and universities.
- Adding a summer internship program the Academic Institutes Initiative and an educator’s resource page to its website.
- Finishing a three-year study of employment tax matters by examining 500 employment tax returns filed by tax-exempt organizations.
- Concluding a study of how EO can help small tax-exempt organizations receive tax-related information.
How we can help
EO has indicated it will scrutinize the tax compliance of a range of nonprofit organizations in 2012. Consult your tax advisor to develop a proactive approach that promotes consistency and timeliness in your tax reporting.
Karen A. Gries, Nonprofit and Government Partner
email@example.com or 703-825-2164