The recently released Internal Revenue Service Data Book for Fiscal Year (FY) 2015 included a few points of interest for those in the nonprofit sector filing Forms 990. This is the first year of the online format for the publication, which provided links to the underlying data, a great step forward in improving accessibility.
In general, FY 2015 was the fifth consecutive year of reductions to the overall IRS budget. Full-time-equivalent staffing is more that 15% lower than 5 years ago. The IRS processed 1.58 million returns filed by tax-exempt organizations in FY 2015, an increase of 7.7% over the 1.47 million in FY 2014. Of the 1.58 million tax-exempt returns, 951,349 were filed electronically – over 60%. The curious situation in the nonprofit sector is that the very smallest organizations filing the Form 990-N are required to e-file (well over 500,000 in FY 2015), and also the very largest nonprofits are required to e-file. E-filing among the rest of the nonprofit world is growing, but Congressional action is needed to require all to e-file. For more information on this strange situation, see this related blog post.
How Many Nonprofit Forms 990 Is the IRS Reviewing?
The table below shows highlights of the IRS Examinations of Tax Exempt Organization Returns in FY 2015.
So the number of examinations looks really low – out of all the returns processed, only about 2,700 were selected for examination. Although this seems to indicate that the IRS is not doing much in the way of enforcement, it should be interpreted in the context of the IRS approach. The IRS is focused on using Form 990 data, as well as data reported by charities or other parts of the IRS, to first identify which organizations are most likely to be out of compliance. While the actual number of formal examinations reported above is small in proportion to the returns filed, a review of all returns is done to check for outliers. The number of related returns examined that reflect “employment” above shows that IRS is also checking to see that the employment and wage reports are consistent with Form 990 reporting.
Use Data to Avoid Being an Outlier
So charities should be aware that the increased focus of the IRS on a “data-driven” approach requires care in reporting – whatever the number of actual examinations and the declining IRS budget. While the number of examinations may not be great, those nonprofits actually examined are likely to be problem organizations. To avoid standing out in that initial IRS data check, nonprofits should do what the IRS requires – use data to set policies and determine salaries that are comparable with their peers, and make sure that other filings to the IRS on wages and employment reflect accurately what is reported on the Form 990.
ERI’s Nonprofit Comparables Assessor (CA) provides 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. CA also generates a list of organizations that meet the various criteria of organization type, size, and geographic location so that a set of comparables can be chosen for more nuanced analysis.
While the IRS examination numbers are not impressive, it is clear that the emphasis on data is making IRS enforcement dollars stretch further. The IRS is watching – perhaps just more efficiently than in the past.