The latest report on the activities and plans for the Exempt Organizations (EO) Division of the Tax Exempt and Government Entities section of the IRS sends a clear message to nonprofits, summarized succinctly on page 22:
The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.
EO Director Lois Lerner outlines accomplishments in Fiscal Year (FY) 2012 and provides a work plan for FY 2013 in the 24-page report. The report is expanding—twice as long as LINKlast year's—but the focus throughout is on EO's efforts to develop and use indicators of noncompliance gleaned from analyzing Form 990 data. Below are some highlights.
The report emphasizes that data from the redesigned Form 990 are being used to identify patterns of noncompliance so that the IRS can better target potential offenders. Again, there is a warning that inaccurate or incomplete reporting may look like noncompliance and thus lead to unnecessary examinations.
The total number of organizations reviewed again dropped in FY 2012, continuing its trend over the last three years (15,342 in FY 2010, 14,893 in FY 2011, and 14,020 in FY 2012). Roughly three-quarters of these reviews are audits (full examinations, usually on-site, where IRS staff determine if an organization should retain its tax-exempt status) and one-quarter are compliance checks (EO asks in a letter about a specific item on a Form 990 that appears to be reported in error or sends a questionnaire as part of a research study on a specific type of tax-exempt organization).
A breakout by type of review reveals:
When the IRS first developed the concept of these two types of enforcement reviews, the idea was to emphasize the compliance checks more than the full audits, as they were less resource intensive. In fact, over the past four years, the number of organizations examined has declined somewhat, and the proportion of compliance checks compared to audits has not changed much.
Total staff levels continue to shrink, from 910 in FY 2009 to 900 in FY 2010, 889 in FY 2011, and 876 in FY 2012, with almost 60 percent of the staff working in the Examinations area. Most of the drop in staff, however, was in Examinations—from 538 in FY 2010 to 531 in FY 2011 and 516 in FY 2012. The other functional areas (Rulings and Agreements, Customer Education and Outreach, and Director's Office/Program Management) remained at about the same levels of staffing.
EO added a series of governance questions to the Form 990 when the 2008 revisions were completed and in FY 2012 completed some research on which practices reported on the 990 were associated with compliance and which were associated with noncompliance. The sample of organizations used included only those that already had been selected for review (that is, something already looked wrong on their returns), but the IRS found that compliance was associated with:
The characteristic associated with noncompliance was the concentration of control of an organization in one or a small number of individuals.
EO will be repeating this research using a statistically representative sample of charities to confirm these findings and see if other factors are also predictive.
EO is working to reduce the amount of time required to obtain tax-exempt status. The 60,000 new applications for tax-exempt status each year are now sorted into four categories, with different times for EO action:
About 70 percent of new applications are in the first three categories and dealt within 120 days. Obviously, it is best to stay out of the last category.
The point of most IRS EO projects discussed in the report is to develop processes and procedures to use EO resources more effectively. Below are some areas of focus for EO that nonprofits should note.
Report expenses correctly. EO is using Form 990 information to develop indicators of noncompliance and is now in the process of testing them. Of particular interest are organizations with:
The message from EO is that organizations must be careful in completing their returns because the data are used to select returns for examinations, now more than ever before.
Here are some ideas to lessen the likelihood of receiving an inquiry from the IRS in the coming year:
Linda M. Lampkin, ERI Economic Research Institute© 2013, ERI Economic Research Institute
Linda M. Lampkin is research director of ERI Economic Research Institute, a company that provides Form 990 compensation data for use by nonprofits, and former director of the National Center for Charitable Statistics at the Urban Institute. She can be reached at email@example.com or (877) 799-3428.
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