Nonprofit Insider

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March 2013 Vol. 4 No. 3

U H Y LLP C e r t i f i e d P u b l i c A c c o u n t a n t s
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Your story, good or bad

What is Your Form 990 Telling the IRS?

By Jennine Anderson, Partner janderson@uhy-us.com

Charitable Spending Initiative

In FY 2010, the EO began studying the sources and uses of funds in the charitable sector and their relationship to the accomplishment of charitable purposes. The first phase looked at about 170 small organizations with high levels of fundraising expenses, organizations reporting unrelated trade or business activity with relatively low levels of program service expenditures, organizations with high ratios of officer compensation in comparison to program service expenditures, and organizations with low levels of program service expenditures in comparison to total revenue. In about one-third of the completed examinations, the reported high expense ratios turned out to be lower after examiners completed a full review of books and records. So almost 60 organizations had their staff burdened and stressed with an IRS examination unnecessarily simcontinued on page 2

confess. I enjoy reading completed IRS Forms 990. They tell a story. Sometimes the story is one to be admired. Sometimes the story is not a good one. I urge my clients to use their 990s to tell the very best story they can while always, of course, being truthful. I also urge, coach, nag, cajole (and any other words that convey the same theme) them to closely review their 990 before filing to make sure it is error free. Now I have an even more persuasive argument to use: I can tell them about the nonprofits that fell under IRS scrutiny in 2012 because of information on their 990s that turned out to be incorrect. Lets start at the beginning. As all of you know, the IRS released a new version of the Form 990 in 2008. Back then, the IRS said the form was designed to promote transparency, improve compliance and decrease

overall filing burden. Current IRS literature has dropped the part about decreasing filing burden, which is not surprising to anyone who has had to prepare one of these forms! So what is the IRS doing with all the additional information its collecting? Ill tell you: The IRS is using the information in its compliance efforts. The IRS Office of Exempt Organizations (EO) of the Tax Exempt and Government Entities Division released its report on accomplishments and findings of its 2012 fiscal year and revealed its work plan for 2013. This report tells how the IRS is using Form 990 information to develop potential indicators of noncompliance for use in the examination process. Once developed, those potential indicators must be tested. Currently, the IRS is in the early stages of testing. Ill address some compliance projects worked on in FY 2012 that drew on data from the Form 990 and tested the indicators of potential noncompliance.

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UHY LLP brings specialists in nonprofit solutions in accounting and tax.

March 2013 Vol. 4 No. 3

What is Your Form 990 Telling the IRS?

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ply because they did not complete the form correctly. More than 150 examinations have been completed. Four organizations did have their exempt status revoked because of insufficient charitable activity or inurement to an officer. Tax was assessed on the unrelated business income of three organizations. In 2013, the IRS will continue this project by identifying a group of medium to large organization for examination. It will be interesting to see if the larger orgs do a better job of accurately completing the 990.

organizations reported incorrect information on their Forms 990 about this one point. Two hundred and forty IRS examinations might have been avoided by the submission of a correct Form 990. The 2013 plan is to look at organizations reporting substantial gross UBI for three consecutive tax years but reporting no tax due for any of those years. The IRS will be checking to see if organizations are correctly allocating and deducting expenses from taxable streams of income.

ship with one or more related organization. More information was gathered using the internet and internal sources. Examinations will begin in 2013.

Governance Study
The IRS did an analysis of the relationship between governance practices and compliance using checksheets on 1,300 501(c)(3) orgs under examination. It was found that compliance is more likely with those orgs that 1) have a written mission statement, 2) use comparability data when making compensation decisions, 3) have controls in place to ensure the proper use of charitable assets, and 4) provide for Form 990 review by the entire board of directors before filing and do not have control of the organization concentrated in one individual or in a small, select group of individuals. In 2013, the IRS will examine a statistical sample of orgs using a checksheet to gather information on governance practices. The IRS will also be looking at how diversion of assets is influenced by governance. So, what is the message here? Pay attention to the story the IRS wants to see. Consider if your practices need modification. And, for goodness sake, if your real story is a good one, dont attract IRS attention by telling a wrong story in your Form 990.

Political Activity
The IRS has identified potential indicators which are being tested and applied. The IRS is using the indicators as a tool to flag organizations engaging in possible impermissible campaign intervention. At the time of the report over 300 such organizations had been identified. A committee of career civil servants will evaluate if examination is warranted.

Form 990-T and Unrelated Business Income (UBI)

In 2012, the IRS completed compliance checks of 400 organizations that had reported taxable UBI activities on their Forms 990 but had not filed the Form 990-T. Amazingly, examiners determined that almost 100 (nearly one-fourth) had incorrectly completed the 990. These orgs would not have been examined if the Forms 990 had been completed correctly. The IRS also determined that 140 of these organizations should have filed Forms 990-T resulting in $260,000 in tax payments. So in total, 240 out of 400

Compensation Transparency
The IRS is now focusing on organizations reporting high gross receipts with very low total compensation to all officers, directors, trustees and key employees. The concern is whether organizations may be hiding compensation levels. A sample of 200 has been selected, comprised of stand-alone organizations and those reporting a relation-

UHY LLP brings specialists in nonprofit solutions in accounting and tax.

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