IRS Exempt Organizations Division Recaps Accomplishments – Hints at Future Areas of Interest

John Christopher & Sean Callan, Manley Burke, john.christopher@manleyburke.com & sean.callan@manleyburke.com

In February, 2012, the IRS Exempt Organizations Division released its FY 2011 Annual Report and its 2012 Work Plan.  The reports contain valuable hints as to the issues concerning the Division.  For instance, as the authors reported previously reported (http://fraternallaw.com/wp-content/uploads/2012/01/whether-and-where-to-register-your-foundation.pdf), the IRS hinted in its first Annual Report in 2008 that it would share information and work with the states to enforce the states’ charitable solicitation registration rules.  While the latest Annual Report is not the blockbuster news that the first Annual Report was, it still hints at the areas of focus for the Exempt Organization Division.

Examinations

Examinations continue to be a major part of the work of the Exempt Organizations Division.  In 2004, the Division conducted 7,275 examinations, including both compliance checks and full-blown audit examinations.  In 2011, the Division conducted 14,893 examinations.  Of that total, 11,699 or 79% were full blown examinations.  As staffing levels in the examinations office have remained static (531 in 2011), these numbers will probably not increase significantly in 2012.  However, exempt organizations are much more likely to face examination now than they were just a few years ago.

Old Business

The Annual Report recaps some of the important activities and accomplishments of the Exempt Organization Division.  Some of the highlighted points in the Annual Report are:

A) Prop. Reg. 301.6104(c)-1 – Disclosures to States

The IRS has been saying for years that it intended to actively engage with the states to share information and assist the states in registration compliance efforts.  We have seen this occur in practice as many states ramped up registration enforcement efforts over the last few years.  This culminated in the issuance of Prop. Reg. 301.6104(c)-1 which significantly enhances the information sharing ability between the states and Federal government.   Daily Tax Report: News Archive > 2011 > July > 07/05/2011 > BNA Insights > Exempt Organizations: States Ramp Up Regulation of Nonprofits—With Help From the Feds, http://fraternallaw.com/wp-content/uploads/2012/02/daily_tax_report0711.pdf.

B) Auto-revocation for Non-filers

The Pension Protection Act of 2006 required that nearly all exempt organizations file a return of some kind.  The PPA further provided that organizations failing to file a return for three (3) consecutive years would automatically lose their exemption.  Once the exemption is lost through the automatic revocation process, the organization must completely re-apply to get the exemption back.  You can read more about this issue here:  http://fraternallaw.com/wp-content/uploads/2012/01/irs-posts-automatic-revocation-list.pdf.

In the 2012 Work Plan, the IRS detailed a new tool for reviewing the list of revoked organizations called Select Check.   The Select Check tool may be found at http://apps.irs.gov/app/eos/.  The new tool allows for easier searching and sorting of revoked organizations and is updated once a month for more consistent, timely information.  Greek organizations should be aware of the list primarily to look for chapters, alumni associations and local house corporations that fall into revoked status.  This is particularly true for those organizations filing group returns because once the exemption is revoked, the revoked organization cannot be reinstated simply by filing under a group return.  So organizations operating under a group ruling should be vigilant to ensure that all of the organizations contained in its group filing have current exemptions from the IRS, and are not on the revoked list.

C) National Research Program

For the past two years, the IRS as a whole has engaged in the National Research Program aimed at employment tax matters.  The NRP involves examination of both non-

exempt and exempt employers.  The Exempt Organizations Division confirmed in the 2012 Work Plan that it will continue its work with the NRP, meaning that an employment tax examination is slightly more likely than it would be otherwise.

New Business

A) Using the Form 990

Many readers have struggled implementing the new Form 990 since its arrival in Tax Year 2008.  From the outset of the re-design process, the IRS consistently identified three guiding principles underlying the re-design: (1) enhancing transparency, (2) promoting tax compliance, and (3) minimizing the burden on the filing organization.  Later, the IRS jettisoned the third guiding principle, apparently conceding that nothing about the new Form 990 alleviated any burden on exempt organizations.  Further, while principles (1) and (2) may be laudable, the exempt organization sector reacted with grave concern over, among other things, (i) what the IRS might do with all of this new information it was collecting and (ii) how delving into corporate governance and operations related to tax compliance.

The 2012 Work Plan sheds some light on these concerns.  First, the IRS acknowledges that the revised Form 990 “has provided EO with a wealth of information on exempt organizations.  EO has used this information to develop risk models to assess the likelihood of noncompliance by organizations . . .”  (2012 Work Plan, p.8) Beyond this sort of generalized assertion, there is sparse guidance as to where the Exempt Organizations Division is going with this “wealth” of information.  However, the Work Plan identifies two areas of potential concern to the Greek industry.

First, the EO Division plans to devote resources to unrelated business income.  Specifically, if an organization reports unrelated business activities, but does not file a Form 990-T, the return will be flagged for further examination.  In addition, the EO Division plans to review Form 990-T data going forward as it seems convinced there are organizations generating significant amounts of UBTI, but paying no tax.  All fraternal organizations and their foundations should closely review any unrelated business income and ensure it is properly reflected on a Form 990-T.

Second, the IRS will use corporate governance data to look for connections between good corporate governance practices and tax compliance.  The authors have talked about this possibility for many years.  But now it is in black and white – corporate governance practices matter to the IRS, meaning poor corporate governance practices will raise the flag for an examination.

B) Group Rulings

In June 2011, the Advisory Committee on Tax Exempt and Government Entities issued a report on group exemptions.  The ACT recommended the elimination of group returns by eliminating the regulatory authority of the parent to file group returns on behalf of its subordinates.  This could have a significant impact on the Greek industry as chapters and local house corporations that have taken advantage of the simplified reporting mechanism to deal with tax returns would now be required to file their own returns.

In the 2012 Work Plan, the IRS outlines a process to evaluate the ACT recommendations by sending questionnaires to group filers.  It is unknown whether any Greek organization will be targeted to receive the questionnaire.  The questionnaires will be aimed at identifying how central organizations exercise on-going general supervision or control over their subordinate organizations sufficient to justify a group exemption.  This inquiry will be of significant concern to the Greek industry, both in doing what may be possible to save the group exemption while being cognizant of the control issue raised by the IRS inquiry.