When the IRS issued its work plan for fiscal year (FY) 2018 in September, the nonprofit sector gained some insight into future enforcement and compliance activities. Yes, the IRS cites reduced resources and staff, but intends to step up the use of data analytics and computer analysis to increase the effectiveness of its efforts. The 16-page report, entitled “Tax Exempt and Government Entities FY 2018 Work Plan,” indicates that there will continue to be focused attention on data, and the data used will be from the Form 990 filed annually by-tax exempt organizations. It is clear that what is reported on the Form 990 needs to be consistent and accurate.
All Forms 990 are run through a system of hundreds of queries, designed to identify potential compliance risks. Based on the answers, the IRS will identify the organizations that are more at risk for noncompliance and investigate them further.
The IRS even created a new unit in May – the Compliance, Planning & Classification (CP&C) unit – specifically to identify, research, and monitor compliance risks, using data analytics. In FY 2018, an Internal Submission Portal will be added to collect or “crowdsource” any outside input on compliance – a place to submit names of organizations that warrant IRS investigation.
Focus for FY 2018
Some areas noted in the report as focus areas of compliance may be of particular interest to those setting compensation for nonprofits:
- Supporting organizations – examine those that state they are supporting organizations and yet filed the Form 990-N (the IRS postcard version of Form 990 required of very small organizations)
- Previous for-profit entities – review organizations that operated as for-profit entities prior to their conversion to IRC section 501(c)(3) organizations
- Private benefit and inurement – scrutinize organizations that show indicators of potential private benefit or inurement to individuals or private entities
- Private foundations – continue to examine private foundations based on potential anomalies found on their Form 990-PF filings
- Referrals – continue to pursue referrals received from sources within and outside the IRS that allege non-compliance by an exempt organization
Checks for IRS-Required Filings on Wages and Benefits
When the IRS looks at compliance, organizations should be aware that certain checks are now standard procedure:
- Combined Annual Wage Reporting (CAWR) employment tax – Do tax-exempt employers have discrepancies between the Form W-2 and Form 941/944 and what is reported on the Form 990?
- Form W-2/1099 matches – Are there payments reported on Forms 1099 that should have been treated as wages subject to Federal Insurance Contribution Act (FICA) tax and income tax withholding? Has the organization properly categorized staff as employees or contractors?
- Models – Do the Form 990 answers show the characteristics that the IRS models identify as leading to the highest risk of non-compliance (such as substantial credit balances with no returns, for example, or zero to minimal Medicare and/or Social Security wages paid compared to Form 1099 distributions)?
The Bottom Line
So the IRS is still looking at Forms 990 and is continuing its increasing reliance on technology and cross checks with forms related to wages and benefits forms filed with parts of the IRS not related to tax-exempt requirements. The bottom line for nonprofits is clear – be very careful when answering questions on the Form 990 and make the answers accurate and consistent. Be sure to complete any other required parts or schedules if there is a question that then requires a schedule or another part of the form to be filled out. There are no changes to current laws and regulations, just a much higher level of scrutiny of the Forms 990, as the IRS continues the shift to data-driven analyses to guide its compliance efforts.
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