IRS INITIATIVES
What’s Going on in Washington
Mike Sorrells, BDO USA
United Way Financial and HR Forum
Atlanta 2013
Your Presenter
2013
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The BDO Institute for Nonprofit Excellence
• Check out our new nonprofit blog at
www.nonprofitblog.bdo.com
• And . . . we tweet!
2013
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Agenda
• IRS EO Annual Report and Workplan—released January 25,
2013-www.irs.gov/pub/irstege/FY2012_EO_AnnualRpt_2013_Work_Plan.pdf
• Final Report—Colleges and Universities Compliance
Program—What this Means for Everyone Else—released April
25, 2013-- http://www.irs.gov/pub/irstege/CUCP_FinalRpt_042513.pdf
• Congressional Focus
2013
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IRS 2013 EO Workplan
Highlights
• EO is developing an interactive version of the Form 1023 Exemption Application
featuring pop-up explanations—this product should be available in 2013
• 200 examinations of executive compensation based upon information gathered
in 2012
• Completion of about 2,500 payroll examinations from 3rd and last year of
national project
2013
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IRS Payroll Examination Focus:
Employee versus Independent Contractor
FY 2013 is the third and final year of the National Research Program (NRP)
IRS looks to three main factors in determining employment status:
• Behavioral Control
• Financial Control
• Relationship of the Parties
• Just because the individual works part-time does not make him or her an
independent contractor.
• If the person is doing the same job as an individual who is classified as an
employee the person is most likely an employee.
• The new healthcare law is focused on employee health coverage and this issue
becomes even more important.
• How many hours per week does a person work? Example of Adjunct professors
• For more information see: http://www.irs.gov/pub/irs-pdf/p1779.pdf
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2013 IRS EO Workplan--Group Rulings
• Questionnaire developed in 2012 for central organizations with group
rulings (http://www.irs.gov/pub/irs-tege/L4953.pdf)
• Distributed to some 2,000 such organizations early in 2013
• Data to be analyzed to learn about relationships between central and
subordinate organizations and ways that filing requirements can be
satisfied
• Central and subordinate organizations should understand their
responsibilities under the group ruling to be sure they are in
compliance
• Rev. Proc. 80-27 Requirements
2013
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IRS 2013 EO Workplan--International
• Continue to examine organizations who operate overseas to ensure activities
are consistent with exempt purpose
• Examinations include number of large private foundations with international
activities and assets/revenue greater than $500M
• Continue to look at organizations who report foreign bank accounts
• Focus primarily on use of charitable assets internationally (private
foundations and public charities)
• Concerns over tax shelters, adequate books and records, discretion and
control over funds that have left the US
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2013 IRS EO Workplan—Self-Declarers
• Unlike 501(c)(3) organizations, there is no determination letter
requirement for 501(c)(4), 501(c)(5), and 501(c)(6) organizations,
although most apply for exemption for assurance
• IRS will review them to ensure they are classified properly and
complying with rules
• Recent focus on 501(c)(4) political activities appears to be one cause
for heightened IRS scrutiny
• IRS also issued Rev. Proc. 2013-9 that indicates these organizations
must apply within 27 months of formation to get retroactive
recognition of 501(c) status.
• Questionnaire developed in 2012 has been distributed to 501(c)(4), (5)
and (6) organizations who self declared on 2010 or 2011 Form 990
(http://www.irs.gov/pub/irs-tege/Letter4953.pdf)
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2013 IRS EO Workplan-Political Activities
Political activities are allowed, but:
• Cannot be primary purpose
• Subject to income taxes on lesser of political activities or investment income
(IRS Form 1120-POL)
• Look at $$ and activity (time sheets are very important records)
• Be careful to avoid substantial private benefit
• The current 501(c)(4) Political Organization debacle—my take on it!
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IRS 2013 IRS EO Workplan
Governance
Form 990 Questions--Checklist results (only audited charities)--IRS to do
larger survey with all types of nonprofits—Findings:
• Organizations with a written mission statement are more likely to be
compliant,
• Organizations that always use comparability data when making
compensation decisions are more likely to be compliant,
• Organizations with procedures in place for the proper use of charitable
assets are more likely to be compliant, and
• Organizations where the 990 was reviewed by the entire board of
directors are more likely to be compliant.
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IRS 2013 IRS EO Workplan
UBIT
• EO will continue on its Unrelated Business Income Project begun in 2012
• Statistics of Income
- 2006 tax year, less than 50% of returns filed showed positive amounts of UBTI
• This year IRS will be examining a “statistically valid” sample of nonprofits that
have reported “substantial” UBI for 3 consecutive years but have reported no
income tax due
• We see a lot of organizations in exactly this situation
- May be legitimate (e.g., LLC/LP investments and/or business activities that
will eventually turn around)
- May be result of aggressive expense allocations
- May be caused by netting a perennial loss activity (that does not qualify as
a trade or business) with other activities which do produce UBI
- Sometimes, all of the above
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IRS 2013 Exempt Organization Workplan
College and University Compliance Program(CUCP)
• The Project was begun over 4 years ago in 2008 when the IRS sent a 33page questionnaire to 400 colleges and universities that included
public, private, small, large and medium sized institutions. An interim
report was issued in 2010.
• As a result of the answers to the questionnaire, IRS decided to examine
34 of the schools and waited until those examinations were completed
to come out with the final report
• April 25, 2013—IRS issued the CUCP Final Report
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CUCP Final Report—UBIT
Underreporting of UBTI resulted in an increase in UBTI for the schools totaling
approximately $90 million in the aggregate and disallowance of more than $170
million in losses and net operating losses (NOLs)
• Disallowance of losses due to lack of profit motive;
• Improper expense allocations, such as where expenses for related activities
were used to offset unrelated income or where an allocation of overhead to
unrelated activities was unreasonable;
• Errors in computations or substantiation of NOLs; and
• Misclassification of an activity as exempt when it was really unrelated.
Main areas of focus:
Fitness and recreation centers and sports camps, arenas and golf courses; and
advertising and facility rentals
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CUCP Final Report--Compensation
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Compensation of the most highly paid was also under the microscope,
especially, coaches, investment managers, highly paid faculty and
administrators.
Employment Taxes--The IRS also reviewed employment taxes of the colleges
and universities. As a result of the project there were wage adjustments
totaling about $36 million and resulting taxes and penalties of $7 million.
Retirement Plans--Also, with regard to retirement plan adjustments there were
increases in wages of more than $1 million and the assessment of more than
$200,000 in taxes and penalties.
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CUCP Final Report--Compensation
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In the compensation area, organizations such as colleges and universities
cannot pay more than reasonable compensation to individuals who can
substantially influence the organization or the Intermediate Sanctions
provisions could apply (IRC 4958).
Organizations can establish the “rebuttable presumption of reasonableness”
that shifts the burden of proof to the IRS to prove that compensation is
unreasonable.
20% of the colleges and universities that attempted to establish the rebuttable
presumption of reasonableness failed to do so because of problems with
comparability data.
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The Rebuttable Presumption for 501(c)(3) and
501(c)(4) Organizations (and a recommended
process for others)
Three requirements:
1. Advance approval by an independent Authorized Body
2. Reliance on Comparable Data
3. Concurrent Documentation of Terms and date approved:
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Members of body present for discussion and who voted
Comparability data relied on and how obtained
Reasons for any variance from comparability data
Actions by any member with a conflict
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Executive Compensation Comparables– Similarly
Situated Organizations
• For-profit comparables
• How many organizations were used?
• Is the position functionally comparable?
• If an organization reviews the Form 990 of other organizations, the
Forms relied upon should be in the files and the answers to the
questions posed above documented as well.
• IRS is looking for a process and even though the rebuttable presumption
will not apply to a 501(c)(6) organization, for example, the process
should be conducted as well. IRS is also looking for transparency.
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CUCP Comparability Data Shortfalls
The Final Report indicates that although most of the private institutions
attempted to establish the rebuttable presumption, the comparability data fell
short of what was required because:
• Schools were not similarly situated based on factors such as location, size of
endowment, revenue, total net assets or number of students;
• Compensation studies did not document the selection criteria for the schools
compared or why the schools were deemed comparable;
• The compensation studies relied upon did not specify whether the
compensation amounts included benefits other than salaries, which must be
taken into account for purposes of IRC 4958.
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Congressional Focus on Nonprofits
• Sector has seen tremendous growth—One in ten
persons works for a nonprofit
• Congress may look at sector as a source of revenue
• Congress is concerned about abuses in the tax
exempt arena and is reviewing IRS enforcement of
the current tax laws
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Tax Reform: Revenue Loss from 501(c)(3) Organizations
Federal
• Income Tax Exemption
• Charitable Deduction
• Tax Exempt Bonds
State
• Sales and Use Tax Exemptions
• Property Tax Exemptions
• Income Tax Exemptions (some states do not even tax UBI)
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Hearings
Three hearings by the House Ways and Means IRS Oversight Subcommittee (so far)
• Form 990, UBIT, Categories of exemption, Complex organizations and
Exemption process
• Charitable Deduction
• Colleges and Universities
Senate Finance Committee
• Complex structures
• Education tax benefits
• The Grassley Factor
11 Working groups have been formed to provide input on various areas of the IRC
Of course, the 501(c)(4) political organizations have gone to the front with a
number of hearings!
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Legislative Outlook—The Issues
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Tax exemption
UBIT
Postage rates
Mileage rates
Internet sales tax
The charitable deduction
Options regarding Charitable Contributions
Cap the value of itemized deductions at 28%
Other Options (CBO report May 2011):
• Retaining the current deduction for itemizers but adding a floor.
• Allowing all taxpayers to claim the deduction, with or without a floor.
• Replacing the deduction with a nonrefundable credit for all taxpayers,
equal to 25 percent of a taxpayer's charitable donations, with or
without a floor.
• Replacing the deduction with a nonrefundable credit for all taxpayers,
equal to 15 percent of a taxpayer's charitable donations, with or
without a floor.
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Summary
• Although IRS EO resources have diminished, they are more focused in
areas of perceived abuse and potential revenue.
• Congress is concerned about the abuses and potential revenue loss and
could increase the IRS EO budget and enact bright line tests to make
enforcement easier and collect more revenue.
• EO will be greatly constrained after the political organization issue is
addressed completely
• Documentation is key!
• Stay tuned
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Questions & Answers
To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may
be contained in this presentation (including any attachments) is not intended or written to be used, and
cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or
applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party
any tax-related matters addressed herein.
Material discussed in this tax presentation is meant to provide general information and should not be acted on
without professional advice tailored to your organization’s individual needs.
2013
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