ANNUAL TAX UPDATE & FORM 990 CHANGES

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1 ANNUAL TAX UPDATE & FORM 990 CHANGES May 2, 2017 Aaron Hershberger, CPA Director 1

TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar

2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar AGENDA Form 990 Challenges Form 990 Changes Tax Update Looking to the Future 2

3 Form 990 Challenges CHALLENGES IN FORM 990 COMPLIANCE Biggest challenge: understanding IRS terminology in forms & instructions Hours involved in gathering data from multiple parties Lengthy process from end of fiscal year to actual filing return Overall tax compliance burden is usually higher than comparable for-profit entity 3

4 CHALLENGES IN FORM 990 COMPLIANCE Challenges to 2016 Form 990 Trying to ensure that responses throughout the forms are consistent Good tax preparation software Knowing the connection points Industry norms Hospitals under scrutiny Benchmarking IRS e-file risk modeling 2016 Form 990 Changes 4

5 2016 FORM 990 CHANGES Changes to 2016 Form 990 For returns that cannot be electronically filed, IRS previously considered returns that were delivered via USPS, FedEx & UPS as filed on time if postmarked at least by the due date of the return IRS has added DHL Express to this listing Whenever a return is mailed to IRS, it is best practice to obtain & retain receipt for proof of mailing. If you are later assessed a penalty for late filing, you ll have proof of timely filing 2016 FORM 990 CHANGES Changes to 2016 Form 990 For tax years beginning after December 31, 2015 First extension for Form 990 & 990-EZ will cover a six-month period Second extension is no longer available Previously, two three-month extensions were available The final filing due date with extensions remains unchanged 5

6 2016 FORM 990 CHANGES Changes to 2016 Form 990 The publicly supported charity definition has been updated to include an agricultural research organization under 170(b)(1)(A)(ix) Only pertains to 501(c)(3) organizations that are exempt as a public charity & operate as agricultural research organizations. In other words, it doesn t affect most organizations 2016 FORM 990 CHANGES Changes to 2016 Form 990 Goods or services with insubstantial value have been indexed for inflation. The value of items valued at $10.60 or less that bear the organization s name or logo & are given to donors in exchange for a donation need not be disclosed to the donor 6

7 2016 FORM 990 CHANGES Changes to 2016 Form 990 For hospitals, a few minor changes have been made to Schedule H to more closely align with the final regulations under 501(r) Form 990-T has been updated to include a specific line for tax on hospitals that are not compliant with 501(r) regulations The tax is not new, only the line for reporting the tax is new Tax Update 7

8 IRS PRIORITY GUIDANCE PLAN Department of the Treasury Priority Guidance Plan List of IRS & Treasury projects for 12-month period ending June 30, 2017 IRS is working on these projects, some of which carried over from last year IRS intends to periodically update plan as priorities shift throughout the year IRS PRIORITY GUIDANCE PLAN Projects related to exempt organizations Revenue procedures updating grantor & contributor reliance criteria for relying on type of public charity reported by organization Proposed regulations on political campaign intervention by exempt organization (currently suspended under Department of the Treasury Appropriations Act, 2016) Guidance regarding methods of allocating expenses for unrelated business income (UBI) relating to dual-use facilities 8

9 TE/GE PRIORITIES FOR FY2016 Lays out initiatives TE/GE will specifically concentrate Continuous improvement Knowledge management Risk management Data-driven decision making Employee engagement TE/GE PRIORITIES FOR FY2016 Exempt Organizations (EO) division will focus resources on five strategic issue areas Exemption Protection of assets Tax gap International Emerging issues 9

10 IRS E-FILE RISK MODELING Computer-driven compliance audits Clear ramp up of compliance enforcement activity Strained resources, still effective Looking for inconsistencies in responses or inaccuracies Indicative of simple misreporting, or a broader attempt to mislead Answers that conflict or contradict each other IRS FY2017 WORK PLAN In FY2017, the EO division of IRS focused on five strategic areas Exemption Protection of assets Tax gap International Emerging issues 10

11 IRS FY2017 WORK PLAN As of September 30, 2016, IRS completed 6,440 examinations majority focused on two categories Filing, organization & operational subcategory was largest (2,774 examinations), which was part of exemption strategic area; this focused on verifying exempt activities & delinquent returns Employment tax issue was second largest subcategory (1,717 examinations); it focused on tax gap, including unreported compensation, worker reclassifications & noncompliance regarding withholdings IRS FY2017 WORK PLAN IRS did 968 hospital reviews & referred 363 for field examination based on their 501(r) compliance this will continue in FY2017 In 2016, IRS also used modeling techniques, including datadriven decisions, to select returns for audit closing 203 returns with a change rate of 85 percent. IRS plans to continue using data-driven decisions in FY2017 & further develop them to include modes for Forms 5227, Split-Interest Trust Information Return & 990-T, Exempt Organization Business Income Tax Return 11

12 IRS FY2017 WORK PLAN EO division plans to continue moving forward many initiatives started in last two years. EO research is working on ways to identify organizations at risk for private benefit & inurement issues 400 returns were identified & included in FY2017 work plan for these issues EO division also seeks to identify anomalies on returns filed by private foundations 100 returns were detected for this issue IRS FY2017 WORK PLAN Employee Plans (EP) office intends to use compliance indicators to build project modes & statistical issue-based sampling to select cases for examination It will focus on noncompliance issues with greatest effect on retirement community as a whole EP division will continue to pursue same issues of noncompliance as FY2016 EP also will use data-driven approach to identity issues that may represent aggressive or abusive behavior detrimental to plan participants Compliance checks will focus on Savings Incentive Match Plans for Employees of Small Employers, Form 5310-A, Notice of Plan Merger or Consolidation, Spinoff, or Transfer of Plan Assets or Liabilities; Notice of Qualified Separate Lines of Business, filings, issues surrounding terminated plans, inflated &/or unusual assets, Simplified Employee Pension plan issues & IRC 403(b) plan document requirements 12

13 IRS FY2017 WORK PLAN Federal, State & Local Governments (FSLG) division will focus on these areas in FY2017 Data to identify cases Large entity examinations Increasing use of limited scope examinations Projects based on refund claims, compliance checks & small, focused examinations Focused outreach education Enhancing technical knowledge IRS FY2017 WORK PLAN Tax-Exempt Bonds (TEB) group will focus on identifying new issues & fact patterns with higher risk of noncompliance. Its priority is shifting to returns with past information indicating noncompliance. Data analytics will be used to identify returns as well as market segments Government Entities Compliance Services (GECS) division closely works with FSLG & TEB to identify focus areas & cases for compliance checks. For FY2017, GECS will focus on refund claim examinations & datadriven projects. GECS & TEB will focus on returns that show noncompliance for bonds on face of the return 13

14 IRS FY2017 WORK PLAN IRS has effort to increase EO Knowledge Management (KM) employees technical understanding IRS plans to present three to four educational sessions each quarter. IRS also plans to update virtual presentations by removing old ones & adding new presentations. All divisions plan to focus on KM in FY2017 In addition, IRS plans new fillable Short Form 990-EZ, Return of Organization Exempt From Income Tax, with helpful instructions. Currently, there s a 50 percent correction rate on paper-filed 990-Ezs; IRS hopes to reduce this percentage. IRS is doing an overhaul to combine Revenue Procedures; this is planned to be released January 2017 IRS ACTIVITY ON THE RISE Proper substantiation of charitable donations has become focus area for IRS Donor s responsibility to obtain proper documentation from charity, charities that receive donations should understand rules to ensure they provide proper documentation to donors Archived Charitable Gifts Improving Financial & Tax Reporting webinar available here 14

15 UBI UPDATES IRS holds LLC does not qualify under 501(c)(3) Available here IRS rules activities not UBI & will not attribute activities of wholly-owned subsidiary to exempt parent In PLR , the IRS issued several rulings related to proposed activities of a section 501(c)(3) educational organization, specifically, that a one-time sale of assets to partnership will not be treated as regularly carried on for UBI purposes; payments by partnership to organization will be treated as exempt royalties under section 512(b)(2); lease payments made by partnership to organization will be excludable rent payments under section 512(b)(3); and activities of organization s wholly-owned, for-profit corporate subsidiary will not be attributed to organization. Copy of ruling found here UBI UPDATES IRS rules income derived from real estate properties not UBI PLR involves foundation that received portfolio of real estate properties, primarily consisting of office rental properties. No part of rent paid by office tenants depends in whole or in part on income or profits derived by any person from property leases. IRS ruled income received from commercial real estate properties, & any income derived from sale of these properties, will be excluded from foundation s unrelated business taxable income Copy of ruling found here 15

16 UBI UPDATES IRS holds catalog & online retail sales are taxable In heavily redacted technical advice memorandum (TAM ), the IRS concludes income from various merchandise sales made through a 501(c)(3) organization s printed catalog, online store & various retail outlets were taxable as UBI because sales did not contribute significantly to organization s exempt purpose. Interestingly, the IRS seems to have abandoned its normal product-by-product UBI analysis in this ruling & instead made a blanket conclusion all sales are taxable Copy of technical advice memorandum found here UBI UPDATES Advertising or qualified sponsorship payments? IRS Tax-Exempt & Government Entities Divisions issued detailed analysis of difference between taxable advertising income & qualified sponsorship payments that are not subject to UBIT See more information here 16

17 POLITICAL ACTIVITIES Tax impact of student newspaper endorsing political candidate Rev. Rul deals with student newspaper that is part of a 501(c)(3), university & endorses a political candidate. IRS ruled endorsement will be treated as educational, not political, activity conducted by university because (i) students were supervised by faculty, (ii) paper was narrowly distributed primarily to student body & (iii) endorsing candidates is something newspapers do in ordinary course of activities Does answer change if student newspaper is standalone 501(c)(3) organization? In Yale Daily News, a 501(c)(3) organization, this case presented various arguments on the issue here STUDENT LOAN FORGIVENESS The Congressional Research Service issued report describing federal student loan & repayment programs & explaining tax treatment of benefits provided by these programs This Federal Student Loan Forgiveness & Loan Repayment Programs report, with reference number R43571, can be found here 17

18 NONRESIDENT ALIENS-ITIN RENEWAL Nonresident aliens required to file federal income tax return in 2017 & want to avoid long wait for refund, should have ideally renewed their Individual Taxpayer Identification Number (ITIN) before January 1 ITIN is used by anyone who has tax-filing or payment obligations under U.S. law, but is not eligible for Social Security number. Under recent statute, any ITIN not used on a tax return at least once in past three years expired on January 1, In addition, any ITIN with middle digits of either 78 or 79 (9NN-78-NNNN or 9NN-79-NNNN) expired on same date In IR , IRS said ITIN renewal application filed prior to January 1 will be processed before one submitted in January or February &, while current processing time is as little as seven weeks, it will likely lengthen as tax season progresses NONRESIDENT ALIENS-ITIN RENEWAL IRS noted several errors currently slowing down & holding up some ITIN renewal applications, most commonly missing information &/or insufficient supporting documentation. Also, IRS said to avoid processing delays, ITIN renewal applicants should use latest version of Form W-7, revised September 2016, which can be found here Instructions are available here 18

19 NONRESIDENT ALIENS-ITIN RENEWAL To ensure prompt processing, ITIN renewal applicants should At top of form, check box Renew an existing ITIN Under Reason you re submitting Form W-7, check one of eight boxes. If more than one applies, check option best describes tax purpose for filing application. Do not write ITIN renewal in this section of the form, that is not a valid reason For applicants living outside U.S., enter their foreign address, if different from mailing address on Line 2. If now living in U.S., enter foreign country of last residence Include original supporting & required identification documentation, or certified copies from the issuing agency to prove foreign status & identity Additional ITIN renewal information contained in IR , found here INVESTMENTS BY CRT IN ORGANIZATION ENDOWMENTS Many organizations are both trustees & charitable beneficiaries of charitable remainder trusts (CRTs) CRTs typically invest assets to maximize investment return on such assets. Many donors & organizations invest CRT assets in the organization s endowment. Many endowments though earn UBI, & if CRT earns any UBI, it must pay penalty excise tax equal to 100 percent of the amount of UBI 19

20 INVESTMENTS BY CRT IN ORGANIZATION ENDOWMENTS Organizations have worked to structure a transaction so that a CRT, in return for funds invested in endowment, receives endowment units that represent independent investment so the UBI does not pass through to CRT. IRS has approved such structures in private letter rulings issues since early 2000s Many rulings also addressed tax treatment of redemptions of these endowment units & held that such redemptions would be treated as long-term or short-term capital gains depending on how long endowment units were held INVESTMENTS BY CRT IN ORGANIZATION ENDOWMENTS IRS has now issued a ruling (PLR ) that indicates IRS is rethinking this position. While granting normal non-ubi rulings, the IRS says In particular, no opinion is expressed or implied concerning whether income or loss from a surrender or redemption of units is treated as ordinary income or loss or as gain or loss from the sale or exchange of a capital asset A copy of this ruling is found here 20

21 2017 FILING SEASON DUE DATES Due date changes for years beginning after December 31, 2015 Tax Type (Form) Form No. Current Due Date New Due Date Current Extended Due Date New Extended Due Date Partnership /15 3/15 9/15 9/15 S Corp 1120S 3/15 3/15 9/15 9/15 C Corp /15 4/15 9/15 9/15 (Until 2025) 10/15 (After 2025) Trust /15 4/15 9/15 9/30 Note: due dates listed above are for entities with calendar yearends Employee Benefit Plans /31 7/31 10/15 11/15 Tax-Exempt Organizations 990/990-T 5/15 5/15 8/15 (First) 11/15 (Second) 11/15 FinCEN 114 6/30 4/15 None 10/15 Looking to the Future 21

bipartisan support Unclear if any tax legislation would be retroactive to January 1,

22 TAX OUTLOOK IS UNCERTAIN Numerous individual & business extenders expired on December 31, 2016 Impossible to predict possibility of tax reform in 2017 Likely to require bipartisan support Unclear if any tax legislation would be retroactive to January 1, 2017 Fate of recent controversial treasury regulations also uncertain following election QUESTIONS? 22

23 BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only and is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 23

24 THANK YOU! FOR MORE INFORMATION Aaron Hershberger, CPA

ANNUAL TAX UPDATE & 2014 FORM 990 CHANGES

THURSDAY MARCH 5, 2015 10 11 AM CENTRAL TIME ANNUAL TAX UPDATE & 2014 FORM 990 CHANGES Jessica Freeman Manager BKD, LLP jfreeman@bkd.com Wendy Budde Manager BKD, LLP wbudde@bkd.com TO RECEIVE CPE CREDIT