Just in time for the new fiscal year for the federal government, the division of the IRS responsible for charities (Tax Exempt/Government Entities or TE/GE) has issued a list of its priorities for 2016. See the entire document at www.irs.gov/pub/irs-tege/TEGE_Priorities_for_FY2016.pdf.
Here are some highlights of projects that may be of particular interest:
- Making Forms 990 available in electronic format, with automated redaction and restriction process for e-Filed Forms 990;
- Simplifying the forms and enhancing digital functionality; and
- Refining information document requests to reduce examination process time and encourage engagement with customers.
The word “data” appears often throughout the document. With limited and even shrinking resources, the IRS has concluded that data must be used to improve the allocation of those resources, for example, focusing examination plans on areas or issues where there is a greater risk of non-compliance.
So, exactly what are these “significant compliance issues,” from the IRS perspective? The list includes these issues:
- Exemption – non-exempt purpose activity, private inurement;
- Protection of Assets – self-dealing, excess benefit transactions, loans to disqualified persons;
- Tax Gap – employment tax, Unrelated Business Income Tax liability;
- International Issues – oversight on funds spent outside the U.S. (including funds spent on potential terrorist activities), exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements; and
- Emerging Issues – non-exempt charitable trusts and IRC 501(r), with additions as needed throughout the year.
So, the IRS projects more educational efforts, compliance reviews, compliance checks, and correspondence and field examinations, but is attempting to make them cost effective by using data from Forms 990 to identify which charities are most likely to be out of compliance. The IRS is calling this “balancing coverage across subsections and asset classes while optimizing resources on the highest risk returns.”
Charities can prepare for this increased focus on a “data-driven” approach from the IRS by making sure that they are also using data to set policies and salaries that shows comparability with their peers – organizations similar in mission, size, geographic location, etc. These, of course, are the same data points that the IRS has been considering for a long time. What is different is the increased reliance by the IRS on computerized data to find the outliers.
So, is your charity an outlier? An easy way to check is to find comparable organizations using ERI’s Nonprofit Comparables Assessor (CA). CA can provide very detailed salary information for executives listed on the Form 990 and analysis of average salaries and ranges, so it is quickly evident if salaries are out of line. However, CA also generates a list of actual organizations, so that specific comparables can be selected for more nuanced analysis of factors other than direct compensation. Choose the type of charity, its size (based on revenues or assets, whichever is more appropriate), and geographic location, and a list of relevant organizations is immediately available and can be fine-tuned as necessary.
The IRS is emphasizing data – and you should, too, unless you want to spend time responding to IRS inquiries next year.