New Guidelines for Tax Exempt Organizations A Look at IRS Compliance Readiness for 2012 and Beyond

Transcription

1 New Guidelines for Tax Exempt Organizations A Look at IRS Compliance Readiness for 2012 and Beyond Executive Directors Roundtable Fall Leadership Network Meeting Las Cruces, NM October 4, 2013 Eduardo Martinez New Mexico MainStreet Organization Program Associate

2 Context What s your audit risk? Transferring Info from IRS to you History behind the new guidelines Remembering the R in IRS Form 990 as a tracking mechanism

3 Discussion Topics Five Key Areas 1. Public Benefit qualifier 2. Governance/Compliance 3. Excess Benefits 4. Revenues a) Public Participation b) Diverse Funding Streams c) Fundraising/Unusual Grants d) Unrelated Business Income 5. Form 990 Revisions

4 1. A Public Benefit? 31 types of tax-exempt classifications 501c3 organizations organized exclusively for these purposes: Religious Educational Charitable Scientific Public Safety Testing Amateur Sports Competition Cruelty Prevention NO private inurement (benefit an individual or group of individuals) NO propaganda or attempts to influence legislation

5 The Typical MainStreet Purpose Statement The Corporation is organized is exclusively for charitable purposes as defined by section 501(c)(3) of the Internal Revenue Code, or by the corresponding section of any future federal code, to promote the revitalization of the historic downtown area of the city through education, historic preservation, beautification, promotion of community and civic pride, and combating the underlying reasons for the physical and economic deterioration of the downtown district.

6 Six Tests of Exemption Entity Test Organizational Operational Exempt Purposes Private Inurement Political Activity Are you advancing a tax-exempt purpose?

7 2. Governance Role of the Board The Board of Directors is essentially the owner of the corporation Legal and Fiduciary responsibilities for Board Boards/governance now seen by the IRS as the biggest problem with tax-exempt organizations (lack of policies, oversight, accountability) IRS is placing a renewed focus on transparency for non-profit corporations

8 3. Excess Benefits Do staff/board members receive excess benefits? Salary (and comparative studies) Benefits Perks (vehicles, telephones, etc) Relative to their peers (comparative research?)

9 4. Revenues Discussion Topics Public Participation Benchmark Diversity of Funding Streams Unusual Grants Unrelated Business Income

10 4a. Revenues Public Participation Do you meet the 1/3 rule for public funding? A minimum of 33% of your revenues must come from public sources (gov t, public foundations, donations, etc) Private foundation or corporate funds? Generally, private foundation and corporate grants would not fall under the public source guidelines

11 4b. Revenues Diversity of Funding Is your revenue stream diverse enough Grants Donations Public Resources Sponsorships Non-diverse revenue streams could be subject to closer examination by the IRS

12 4c. Revenues Fundraising and Unusual Grants How are you engaging in fundraising? Fundraising should not be a net zero exercise Report fundraising costs Optional questions on Schedule G should always be answered Do you have any unusual grants? Outside typical/competitive granting process, not relevant to your mission, etc.

13 4d. Revenues Unrelated Business Income Unrelated business income is taxable, even for non-profit corporations You have unrelated business income if your revenue stream is derive from: A trade or business Business that is regularly carried on (including seasonal activities) Not substantially related to your purpose

14 4d. Revenues Unrelated Business Income Exceptions to UBIT (tax-exempt) Business conducted exclusively by volunteers Part of your regular business activities/hours Convenience businesses services for your employees or customers

15 UBIT Special Circumstances Research is required for special cases a) Income from property rental b) Investments, dividends, annuities c) Royalties d) Sale of capital assets e) Joint Ventures Why is the joint venture a furtherance of your organizational purpose?

16 Responding to Unrelated Business Income - Options 1. Pay the taxes on unrelated business income 2. Form a subsidiary, create formal agreements for revenue streams 3. Modify your purpose statement, resubmit Articles of Incorporation and re-qualify for c3 exempt status)

17 Recommendations for Non-Profit Boards Stay up to speed on the legal/fiduciary responsibilities Analyze your revenue streams and business decisions (especially as relates to UBIT and property management) Ensure diverse funding streams Work with your accountants to meet IRS specifications (CPA s that specialize in nonprofit tax code) Always maintain transparency with records and operations

18 Form 990 New and Improved? New section (Part VI) focuses on governance; Many more schedules about 2/3 more time to complete; Optional questions aren t really optional; Monitors policy development (whistleblower, records retention, financial mgmt, conflict of interest); Looks for potential conflicts with board membership; Requires board approval of financial reporting statements

19 Form 990 New and Improved? Section A requires you to declare Board integrity issues

20 Form 990 New and Improved? Section B focuses on your policies (and implementation thereof)...

21 Form 990 New and Improved? Section C focuses on transparency and disclosure issues

22 Avoiding the audit Ensure due diligence with accounting, board operations Establish strong/detailed record keeping Work with trained CPA s/tax Preparers Pathways to the Audit Audit now considered an education tool by the IRS Form 990 Tracking Form 990 is no longer just a reporting tool, but a tracking mechanism. Electronic records management facilitates identification of audit flags. Anonymous Tips The IRS and NMAG have established processes that allows anonymous reporting of potential fiscal improprieties or mismanagement in non-profits. An anonymous tip can start the audit process. If errors are found, penalties may be assessed.

23 Related Topics Fiscal Sponsorships - Fiscal sponsor maintains fiduciary accountability (and tax reporting/liability) for sponsored projects - Establish formal agreements delineating roles and responsibilities Open Meetings and Records Disclosure - State (not federal) laws apply - Generally, open meeting rules are for gov t entities (including appointed commissions) - Form 1023, Articles of Incorporation, Bylaws and 990 s are public domain documents - Contractual obligations may force disclosure of other documents (contracts, budgets, minutes, plans, etc)

24 QUESTIONS? Eduardo X. Martinez New Mexico MainStreet Organization Program Associate