IRS 2012 Annual Report & 2013 Workplan

John Christopher, Manley Burke, john.christopher@manleyburke.com

Last month, the Exempt Organizations (EO) division of the the Tax Exempt and Government Entities section of the IRS issued its latest annual report and work­plan (the “Report”). The Report contains some bits of infor­mation that we believe are of interest to fraternal organiza­tions.

Annual Report Highlights 

State Agency Cooperation

As we have previously written, the Internal Revenue Code allows the IRS to disclose certain information about ex­empt organizations to state charity regulators that meet speci­fied disclosure eligibility requirements. The Report describes the current breadth of this disclosure.

So far, eight state tax and charity agencies in seven different states have met the disclosure eligibility requirements for IRS information sharing. In FY 2011, EO made approxi­mately 27,000 disclosures to these eight agencies. The state agency disclosure eligibility requirements include the submis­sion of acceptable Safeguard Procedures Reports and a disclo­sure agreement with the IRS. So, despite only eight agencies having fulfilled these requirements, the IRS made 27,000 dis­closures. We have begun to see the impact of some of these IRS disclosures to state charity agencies.

Governance

The Report discloses that the EO has produced pre­liminary findings from its review of the governance disclo­sures of 1,300 public charities. The Report characterizes its findings as an “interesting starting point” in that it offers some insight into which governance practices might be useful indi­cators of tax compliance.

As expected, the presence of the following factors was associated with compliance:

• Have a written mission statement

• Always use comparability data when making com­pensation decisions

• Have controls in place to ensure the proper use of charitable assets

• Provide for Form 990 review by the entire board of directors before filing

On the other hand, the factor of having control of the organization concentrated in one individual, or in a small, se­lect group of individuals, was associated with noncompliance.

Automatic Revocation and Reinstatement

One of the challenges faced by fraternal organizations over the last couple of years is the automatic revocation of exempt status of undergraduate and alumni and alumnae chapters and house corporations. One of the challenging aspects of the automatic revocation process is the time lag between the effective date of the revocation and the date on which the revo­cation is published on the IRS’ on-line list of revocations. The Report acknowledges this challenge and states that the EO will begin providing more current information about automatic revocations by including organizations on the Automatic Rev­ocation List within a month of their effective date of revoca­tion. Previously, organizations did not appear on the List until six months after revocation.

Interestingly, the Report states that more than 450,000 formerly exempt organizations have lost their exempt status, but only a few more than 30,000 have sought reinstate­ment so far.

Work Plan Highlights 

Group Rulings

As many fraternal organizations know, the IRS mailed a comprehensive questionnaire to over 2,000 randomly selected organizations having group exemption rulings in place. According to the Report, the impetus for the question­naire was the 2011 report on group exemptions by the Adviso­ry Committee to TE/GE (ACT), together with the large num­ber of subordinates whose exemption was automatically re­voked for failing to file a Form 990-series return for three con­secutive years. The report states that the EO hopes to learn about the relationship between central organizations and their subordinates and the ways in which central organizations and their subordinates satisfy their filing requirements. While the Report does not specifically state what is in store for group rulings, we believe it is clear that the IRS looks upon the cur­rent structure with some disfavor. The inclusion of Group Rulings in the Work Plan section of the Report indicates that the IRS is willing to dedicate its resources to the issue and perhaps restructure the Group Ruling structure in a substantial way.

Form 990 Misfilers

The IRS has been monitoring the 990-N filing system to help make sure that only eligible organizations are using it. The IRS has determined that:

• Several hundred organizations submitted Form 990-N for tax years where other available information indi­cates they did not meet the Form 990-N filing criteria because they were too large.

• Several hundred apparent supporting organizations filed Form 990-N even though Pension Protection Act required most such entities to file a Form 990 or 990- EZ.

• Over 1,000 organizations “dual-filed” both Form 990-N and another Form 990-series return for the same tax year.

The Report states that during the IRS’ fiscal year 2013, several hundred organizations that have misfiled Form 990-N will be “contacted” or examined with respect to their filings.

Colleges and Universities

During Fiscal Year 2012, the IRS completed a signifi­cant number of examinations of Colleges and Universities, and has begun to draft a final report. It is expected that the IRS will complete the report, which will include results from the exami­nations as well as additional analysis of the data from ques­tionnaire responses previously received from almost 400 insti­tutions.

Using Form 990 Information in Compliance Efforts

As we know, the IRS released a new version of the Form 990 in 2008 and stated that its goals in doing so included promoting transparency and improving compliance. As we also know, the “new” Form 990 requires filing organizations to supply more in-depth information than previous versions. The IRS is using the more in-depth information to develop potential indicators of noncompliance for use in its examination process. As stated in the Report, “[t]he bottom-line mes­sage to organizations and practitioners alike: The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.” The Re­port goes on to say that as a result of the new ways the IRS is analyzing return data and selecting cases, it is more important than ever that filing organizations follow instructions, compute properly and report accurately on their Forms 990.

One long-range study the IRS is undertaking is an analysis of the sources and uses of funds in the charitable sec­tor and their relationship to charitable accomplishments. The IRS is interested in organizations having high expenses in cer­tain categories on their Forms 990. The example given in the Report of organizations being examined are those with rela­tively large fund-raising expenses when compared with the expenditures for the organization’s charitable programs.

It is clear from the Report that the IRS is taking full advantage of the additional information required by the revised Form 990. Of particular interest appears to be the responses to governance questions, descriptions of charitable activities and the expenses associated with those activities and the improper filing of information returns. Careful compliance with IRS reporting requirements continues to be of paramount im­portance.