The latest report on the activities and plans for the Exempt Organizations (EO) division of the Tax Exempt and Government Entities section of the IRS makes it clear that what’s reported on the Form 990 matters:
“The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”
EO Director Lois Lerner outlines accomplishments in Fiscal Year (FY) 2012 and provides a work plan for FY 2013 in the 24-page report. A complete summary is available in ERI’s White Paper, “2012 Annual Nonprofit Report.” Some highlights include the following:
- The level of monitoring returns in FY 2012 decreased slightly, and the number of the EO staff continued to decrease in FY 2012.
- Form 990 responses on governance issues will be reviewed. Initial research by the EO found that compliance was associated with organizations that reported (1) a written mission statement; (2) use of comparability data for compensation decisions; (3) controls in place to protect charitable assets; and (4) review of Form 990 by entire board before filing. The characteristic associated with noncompliance was the concentration of control of an organization in one or a small number of individuals.
Nonprofits should be aware that the EO will focus on certain areas in FY 2013, and taking the following actions will help them avoid examinations or compliance checks:
- Once you file, keep filing. Following up on organizations that file in one year and then fail to file the next is now a part of the ongoing efforts of the EO.
- Pay employment taxes. The EO now checks employment and compensation data reported on Form 990 with employment taxes paid by the organization, as reported to other divisions of the IRS.
- Prepare for scrutiny if your organization has foreign activities. The EO is particularly looking at those with limited charitable activity and excessive compensation.
- Know what to file if you are part of a group. The EO is researching the relationship between the central organizations and their affiliates to ensure EO has the right information and that affiliates are not dropped. Questionnaires have been sent to 2,000 central organizations, and the data will inform the approach to reporting correctly.
- File the right form and only one – 990, 990-EZ, 990-PF, or 990-N. The EO will be looking to see that organizations filed the correct form and only the correct form each year.
- Report expenses correctly. The EO will look closely at organizations with one or more of the following:
- Relatively high fundraising costs and low charitable activity.
- High fundraising costs with little income from fundraising.
- High annual gross receipts and very low total compensation.
- Taxable unrelated business income reported, but no Form 990-T.
The message from the EO is that organizations must be careful in completing their returns because the data are used to select returns for examinations, now more than ever before.