Will the IRS Be Looking at Your Nonprofit in 2012?

by Linda M. Lampkin, Senior Nonprofit Compensation Specialist 23. February 2012 09:07
The latest report on the activities and plans for the Exempt Organizations (EO) division of the Tax Exempt and Government Entities of the IRS provides some insight into what’s ahead for nonprofits – good to know if your nonprofit is in a group targeted for some scrutiny. EO Director Lois Lerner outlines accomplishments in Fiscal Year (FY) 2011 and previews plans for FY 2012 in the 12-page report. It is worth reading to get an understanding of EO’s priorities, but below are some highlights.
  • Better Information of Revocation of Tax-Exempt Status for Nonfilers: The Pension Protection Act of 2006 required that almost all tax-exempt organizations file annually with the IRS and that organizations not filing for three consecutive years would have their tax-exempt status revoked. By the end of 2011, almost 400,000 had lost their tax-exempt status. In January 2012, the IRS created Select Check to permit users to more easily determine if an organization is eligible to receive a donation, if a tax status had been revoked, and if a Form 990-N post card had been filed.
  • Tax-Exempt Hospitals and Health Care Insurance Issuers: The IRS is required to review Community Benefit Activities reports now filed by tax-exempt hospitals with their Forms 990. The IRS will not contact the hospitals when their reports are reviewed, but the data will be used for research and compliance purposes and to target areas where further education is needed. Also, a new category for Qualified Nonprofit Health Insurance Issuers (Section 501 c 29) was created in 2011 and filing requirements and procedures will be developed during 2012.
  • Self-Declared Tax-Exempt Organizations: Social welfare organizations (501 c 4s), labor, agricultural, and horticultural groups (501 c 5s), and business leagues (501 c 6s) can declare themselves tax exempt without a determination from the IRS. To ensure that these groups are in compliance with the rules, the IRS will send out a questionnaire this year to a sample selected based on their Form 990 filing information.
  • Form 990-T Issues: If unrelated business activities are reported and no Form 990-T is filed, the IRS will be looking for an explanation. Also, the IRS will refine its risk modeling to better identify the organizations that report significant gross receipts from such activities but declare no tax due.
  • Employment Tax Check: The employment tax returns of 500 organizations will be examined to ensure compliance with reporting and payment of employment taxes. This is the third year of this IRS-wide study aimed at improving auditing and resolution procedures.
What Should a Nonprofit Do?
All nonprofits can take some simple steps to lessen the likelihood of receiving an inquiry from the IRS in the coming year.
  • Make sure that what’s reported in compensation on Form 990 is consistent with what is reported to other federal agencies (Social Security, unemployment compensation, etc.)
  • Set executive compensation levels using comparable data – see ERI's Nonprofit Comparables Assessor™ & Tax-Exempt Survey to access what you need.
  • File Form 990 completely, accurately, and on time. Make sure the correct form is filed since threshold levels have changed over the past few years. Check "Which Forms do Exempt Organizations File?"
  • E-file. It is easy and typically inexpensive. But, even more important, it eliminates the possibility of the most common mistakes – the software won’t let you make math errors, forget to attach or complete required schedules, or fail to sign the return. Check out Form 990 Online for easy access to software developed by the National Center for Charitable Statistics at the Urban Institute.