Tag: Nonprofit salaries

Nonprofit Oversight – More Scrutiny from IRS Ahead for Churches?

Posted on | by ERI

Tax-exemption for churches and religious organizations is an area Congress hasn’t looked at in decades, but Senator Chuck Grassley (R-IA), ranking member of the Senate Finance Committee, is interested in changing that. His staff conducted an investigation of media-based ministries that constituents brought to his attention, with the stated goal of coming up with recommendations to encourage good governance that would preserve confidence without inhibiting religious freedom.

The report released in January 2011 includes some ideas for consideration by Congress that would impact how religious organizations report compensation and participate in elections.  Currently, churches are not required to file an annual Form 990, and IRS has limited rights to investigate them. See http://www.irs.gov/pub/irs-pdf/p1828.pdf for more details. However, church employees do have to report their incomes on income tax returns.

 Some key issues and recommendations:

  • Parsonage allowances. Ministers can now exempt housing costs from their taxable income and the report raises some questions about how the exemption is used. For example, what exactly is a “minister”? On how many homes can the exemption be taken? Congress is urged to decide if the parsonage allowance should be limited to one primary residence or a specific dollar amount and consider other possible limits and definitions.
  • Revising the tax code to allow church inquiries. Presently, the IRS is restricted in investigating churches. The report suggests enforcement could improve if IRS were allowed to investigate disqualified persons or organization managers that may have received an excess benefit.
  • Scrutiny of gifts to churches and charitable organizations. Some churches say that, because their ministers do not receive salaries, they are not employees, and therefore gifts should not be treated as taxable income. Court decisions on this issue have varied. The report suggests implementing regulations that these should be treated as taxable income if the organization “facilitated” the donations (for example, by asking members to make contributions to the minister).
  • Changes in electioneering prohibition. The current lobbying rules and regulations fornonprofits are imprecise.  With no ‘bright line’” between issue advocacy and partisan politics, the IRS and the courts have been challenged to consistently determine what is permitted and what is not. The report recommends that current electioneering prohibitions be replaced with a limitation similar to lobbying restrictions for other nonprofit organizations or that the federal election law be used for expenditure limits and electioneering communications.

Whether or not Congress will act on the suggestions in this report is not yet known. However, this report is a significant effort to start the discussion of allowing the IRS to improve and clarify its efforts to ensure that churches are complying with the requirement for a public benefit purpose.

Nonprofits Can Avoid IRS Scrutiny – Pay and Report Correctly

Posted on | by ERI

The IRS wants nonprofits to comply with rules and regulations for tax exempt organizations, particularly on executive compensation and employment-related payments. Enforcement efforts, as reported in the December 2010 Exempt Organizations Division (EO) annual report have been stepped up.

  • Audits of exempt organizations increased from 7,861 in FY 2008 to 10,187 in FY 2009 (a 30 percent rise) and to 11,449 in FY 2010 (up another 12 percent).
  • Compliance checks (i.e., EO asks about a specific item on a Form 990 or for more information on an organization’s operations) are also being used extensively. They require fewer resources and, as the report delicately puts it, enable the IRS to “touch more organizations than by using an exclusively exam-based strategy.”
  • Collaborations with the Social Security Administration and the states allowed EO to identify nonfilers and noncompliant organizations more effectively.

Increased enforcement is possible because of more EO staff – from 837 positions in FY 2008 to 910 in FY 2009, with another increase to 942 in FY 2010. Notably, 95% of these new positions were in Examinations. Want to steer clear of the IRS? No guarantees, but here are some suggestions:

  • Set your executive compensation according to IRS requirements.
  • Make sure that what’s reported in compensation on Form 990 matches what is reported to other federal agencies.
  • Correctly report and transmit income taxes and other payments related to employees, such as Social Security and unemployment compensation (if required).
  • If loans have been made to executives, trustees, and other key employees, be aware that IRS will be reviewing them and be sure to report accurately.
  • 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 the free or low cost software at http://efile.form9