Frank Smith & Aaron Fox 8/15/13 Webinar

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
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3. POLL QUESTION
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4. POLL QUESTION
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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
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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
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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.
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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
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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
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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.
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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.
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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.)
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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
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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
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15. IRS COMPENSATION AUDITS
IRS selection criteria
Matching problems
Classification inconsistencies
Spelling
Focused on classifying independent contractors as EE’s
Backup withholding correctly withheld
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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
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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
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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?
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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