Advising Tax Exempt Entities. 67 th Annual Federal Tax Clinic University of Alabama Tuscaloosa, Alabama November 21-22, 2013

Transcription

1 Advising Tax Exempt Entities 67 th Annual Federal Tax Clinic University of Alabama Tuscaloosa, Alabama November 21-22, 2013

2 Topics to Cover Who are we talking about? Update on the Exempt Application Process Solicitation of Charitable Contributions Governance and Management Public Disclosure Requirements Compensation and Benefits Unrelated Business Income (UBI) IRS s Roadmap to Audit Selection (2013) Recent Developments IRS Form 990 What s New?

3 Quick Reminder... coffee?

4 Who are we talking about? Generally, organization s exempt from taxation under IRC 501 (a) for example: 501(c)(3) - Public charities 501(c)(4) Civic leagues and Social Welfare Orgs 501(c)(5) Labor unions 501(c)(6) Business leagues, trade associations 501(c)(10) Fraternal organizations 501(e) Cooperative hospital service organizations 501(f) Cooperative service organizations of educational organizations 501(k) Child care organizations 501(n) Charitable risk pools 4947(a)(1) Nonexempt charitable trusts Political Organizations (PACs)

5 Update on Exempt Application Process Refresher on Exempt Applications Form 1023 for 501(c)(3) Organizations Form 1024 for everyone else When Gross Receipts are > or = to $5,000 annually For Form 1023, need to file within 27 months of the end of the month in which you were legally formed to obtain status to formation date For Form 1024, varies with activity need to consider self-declarers

6 Update on Exempt Application Process Self-Declarers Organizations are not technically required to file for recognition of tax exempt status with the IRS Typically seen in other tax exempts those not seeking exempt status under 501(c)(3) Regulations require that they are organized and operated consistent with law and regulation Organizations must weigh the benefits vs. costs of making an application for exempt status Most often, the application process is worth it Corporate donors, political activities, public disclosure

7 Update on Exempt Application Process The New Automated Form 1023 Process Interactive Form 1023 / Online App Process Intuitive FAQ s and Help Information Designed to qualify application prior to filing The Tea Party Delays (mostly 501(c)(4) > 120 days) IRS Letter 5228 Offers an Expedited Process Safe Harbor option to expedite: Certify 60% social welfare / 40% political campaign intervention

8 Update on Exempt Application Process EO Auto Revocations & Reinstatement Applications Approximately 435,000 organizations have lost their exempt status for failure to file required annual returns (990, 990EZ, 990N) Approximately 16,000 have requested reinstatement Large number of reinstatements have significantly delayed tax exempt approval process Reinstatement guidance provided in IRS Notice IRS FAQ: Profits/Automatic-Revocation-of-Exemption-for-Non-Filing- Frequently-Asked-Questions:-You-Think-Your-Organization- Was-Erroneously-Listed-as-Revoked

9 Solicitation of Charitable Contributions IRS Substantiation Requirements Refresher Cash Contributions / Payroll Deduction / Out of Pocket Expenses: Less than $250 Non-profit is not required to provide written acknowledgement to donor $250 threshold applied to each gift separately Over $250, generally Contemporaneous written acknowledgement (CWA) Responsibility lies with the donor Quid Pro Quo (goods received in exchange) Provide written disclosure when > $75 Deduction is limited to FMV over goods received Good faith estimate of FMV, exceptions apply

10 Solicitation of Charitable Contributions IRS Substantiation Requirements Quid Pro Quo Inflation adjusted Insubstantial Benefits for 2014 FMV of benefits received is not more than the lesser of $104 or 2% of the contribution amount Contribution is at least $52 and the cost of the benefits is not more than low cost article value of $10.40 In connection with fundraising, benefits are distributed free to potential donors without request or consent and the value was not more than low cost article value of $10.40

11 Solicitation of Charitable Contributions IRS Substantiation Requirements Refresher - Non cash Contributions: Less than $250 Non-profit is not required to provide written acknowledgement to donor $250 threshold applied to each gift separately $250 - $500, generally Contemporaneous written acknowledgement Provide a description of the property, but not required to provide FMV Over $500 Generally, the same as $250 - $500 Additional requirements when it is vehicle, boat, airplane, or donor is claiming deduction of $5,000 or more

12 Solicitation of Charitable Contributions IRS - Earmarked Donations Not New Thompson, TC 441 (1943) charity begins where certainty in beneficiaries ends, for it is the uncertainty of the objects and not the mode of relieving them which forms the essential element of charity Rev. Rul , PLR , A donor cannot use a charity to funnel money to an individual, even it the individual is a member of the class the charity normally benefits

13 Solicitation of Charitable Contributions IRS - Earmarked Donations - Acceptance Caution should be used: Tripp, 14 AFTR 2d 5810 (7 th Cir. 1964) and Rev. Rul , does the charity have full control of the donated funds, and discretion as to their use, so as to ensure that they will be used to carry out its functions and purposes Peace, 43 TC , there can be no commitment or understanding between a donor and charity that a contribution will be used to benefit a specific person

14 Solicitation of Charitable Contributions IRS - Earmarked Donations Rev. Rul , putting an intended beneficiary s name on a check to the charity or on the envelope in which the check is remitted indicates an intent to benefit the individual Davis, 65 AFTR 2d (S. Ct. 1990) addresses payments by parents to support sons while serving as full-time unpaid missionaries for their church, church administered court denied charitable deduction.

15 Solicitation of Charitable Contributions IRS - Substantiation Rules Donors are allowed deduction for gifts > $250 when contemporaneous written acknowledgement (CWA)is received: Amount of cash and description (but not value) of property other than cash contributed Whether donee organization provided any goods or services in exchange for contribution Description and good faith estimate of value of goods provided to donor, if only intangible religious benefits, a statement to that effect.

16 Solicitation of Charitable Contributions IRS - Substantiation Rules Cohan, TC Memo (2012) court rejected donor s CWA because it failed to state fair value of goods received by the donor from charity Durden, TC Memo (2012) CWA did not provide statement that no goods or services were provided in exchange for contribution Absence not sufficient, affirmative statement required

17 Governance and Management (990) Organizational Documents (correct on 990?) Existence? / Review / Update / Activities / Minutes / Subordinates or Local Chapters / Exempt Determination Governing Body (correct on 990?) Makeup / Size / Independent Voting Members / Key Employee Members / Business Relationships / Compensation Audit Committee or Equivalent (correct on 990?) Functionality / Interaction with Auditor Policies and Procedures (correct on 990?) Compensation / Conflicts of Interest / Whistleblower / Ethics / Accounting / Records Retention / Investment / Travel and Entertainment

18 Governance and Management IRS Internal Governance Checklist for Form 990, Part VI (available at Mission Organizational Documents Governing Body Governance and Management Policies Financial Statements and Form 990 Reporting Transparency and Accountability

19 Governance and Management IRS Examination Results Important Correlations to operations = Yes Focus on written mission statement? Comparability data used in compensation decisions Procedures for proper use of charitable assets Form 990 reviewed by entire Board of Directors IRS Examination Results Important Correlations to operations = Not so much Conflicts of Interest Policies Relationships among voting board members

20 Dress code.this tax season..?

21 Public Disclosure Requirements Documents subject to requirements: Application for recognition of exemption (Form 1023 or Form 1024) filed after July 15, 1987 Form 990 Form 990-EZ Schedule B (all parts of the schedule for Section 527 organizations and private foundations, some parts of the schedule for others) Form 990-T filed by a 501(c)(3) organization when filed after August 17, 2006

22 Public Disclosure Requirements Through the IRS (free of charge) Use Form 4506-A to request a copy or to inspect a copy at an IRS office Can also be obtained on a CD (for a charge) Complete set filed for a year Partial set by state or by month TEGE Customer Service

23 Public Disclosure Requirements Through the Organization At the Organization s principal, regional or district offices during regular business hours: Application for exempt recognition Most recent three year s informational returns Provide a copy by mail to anyone making a request in writing within 30 days of request Reasonable fee for reproduction and postage is acceptable

24 Public Disclosure Requirements Through the Organization Compliance with previous two requirements (on site, by mail) not required if organization makes it widely available by internet posting in accordance with IRS regulations on internet postings Internet Sources, for example:

25 Compensation and Benefits Compensation Policy? Process? IRS Rebuttable Presumption Test Was the arrangement approved in advance? Approved by an authorized body with review by independent persons without a conflict of interest? Did we use appropriate comparability data? Can we provide contemporaneous substantiation of the deliberation and decision? Are fringe benefits and expense reimbursement arrangements considered? Is 990 disclosure appropriate and accurate? Related entity issues?

26 Unrelated Business Income (UBI) Oversimplified: Income from activity not related to your primary exempt purpose Activity is regularly carried on Activity is trade or business (IRS commercial doctrine ) Facts and circumstance of each case are evaluated For example: Advertising income (magazine, newsletter, web) Management or administrative fees income - likely UBI Rental income - may be UBI if debt financed Commission income - may be UBI if active participation exists Controlled Group transactions Expense allocations are allowed to offset taxable income in most cases

27 Unrelated Business Income (UBI) Safe Harbors: Conducted with substantial volunteer labor (IRS indicates 85%) Sale of substantially donated merchandise (85%) Conducted for members convenience in a 501 (c)(3) Sponsorship payments with no substantial return benefit Games of chance (for example, raffles, bingo, video games) Low cost items distributed in fundraising Inflation adjusted amount for 2014 = $10.40

28 Unrelated Business Income (UBI) IRC provides for specific exclusions from UBI: Certain contractual royalty agreements (written royalty agreement very important) Active vs. passive participation Non-debt financed rental income Interest and dividend income Realized gains and losses on sale of investments Royalty - Affinity programs and others Qualified convention and trade show activity Written agreements can be very important to establish the Organization s role

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30 IRS IRS Roadmap to Audit Selection (2013) From the IRS s Exempt Organization s 2013 Work Plan: Audit Triggers Public Allegations or Referrals Including Congress and Government Agencies Foreign Activities (990 Schedule F) 990 Indicators a data driven approach had organizations been more careful in completing their returns, they might not have been identified by indicators or selected for examination

31 IRS IRS Roadmap to Audit Selection (2013) From the IRS s Exempt Organization s 2013 Work Plan: Audit Triggers Charitable Spending Program expenditures as related to charitable accomplishments Substantial fundraising income, but little or no fundraising expense Compensation Disparity High annual gross receipts with low total compensation to trustees, directors, officers and key employees Circumvention of Form 990 transparency

32 IRS IRS Roadmap to Audit Selection (2013) From the IRS s Exempt Organization s 2013 Work Plan: Audit Triggers Unrelated Business Income (UBI) Will examine a statistically valid sample of organizations reporting substantial gross UBI for three years, but no income tax due for those years Over-allocation of expenses to UBI Political Activity (990 questions and Schedule C) Reponses in Form 990 to identify impermissible campaign intervention

33 Diversionary Tactics In 2009, 285 Not-for-Profits reported about $170 million in significant diversions (many from theft or embezzlement) Did the Organization become aware during the year of a significant diversion of the organization s assets (Form 990, Section A, Part VI) 5% of gross receipts for the year 5% of total assets at year end $250,000

34 Diversionary Tactics The acknowledgement of a significant diversion will likely trigger an examination Focus on excess benefit transaction rules Focus on common indicators and self-correction Focus on changes in internal controls or good governance practices subsequent to diversion

35 Group Exemption Holders IRS sending Compliance Questionnaires Many organization have lost exempt status Many request for reinstatement involve subordinate organizations IRS sees need for education and training for subordinate organization s responsibilities Failure to respond to questionnaire may result in examination

36 Recent Developments Updated 10/30/2013 (Evangelical Council for Financial Accountability) Capitol Hill Senate s (Baucus/Hatch) blank slate approach to tax reform raises concerns for charitable deductions Senate Finance Committee Tax Exempt Organizations and Charitable Giving paper provides numerous reform options Charitable Giving Coalition voices strong support Secular advocacy groups call for end to religious privileging in the tax code Proposed legislation (Petri) would raise charitable mileage rate from 14 cents to 56.5 cents House Ways and Means held hearings on charitable contributions focus of limits?

37 Recent Developments Updated 10/30/2013 (Evangelical Council for Financial Accountability) Commission on Accountability and Policy for Religious Organizations 60 page report to congress related to political speech of clergy and other religious leaders 91 page report to Senator Grassley addressing a variety of issues related to enhancing accountability Exec Comp Clergy Housing Exclusion Accountability to Donors Love Offerings Public Disclosure of Sensitive Information

38 Recent Developments Updated 10/30/2013 (Evangelical Council for Financial Accountability) Court Issues Freedom from Religion Foundation files lawsuit to challenge church exemption from various IRS filing requirements 1023 dismissed, 990 continues Freedom from Religion Foundation files lawsuit to force IRS to enforce campaign prohibition against Churches New Jersey affirms importance of honoring giver expectations and intent Longino v. Commissioner, $25,000 deduction denied due to substantiation rules * -did not include value of goods or services received in return

39 Recent Developments Updated 10/30/2013 (Evangelical Council for Financial Accountability) Other Missteps with compensation setting and related party transactions cost prominent New York charity $5.5 million Transactions with businesses owned by charity s leaders Compensation setting with lack of board oversight IRS release final report on Colleges and Universities Compliance Project (April, 2013) Lerner significant compliance issues at the colleges and universities examined Unrelated business income and executive compensation White House requesting congress to require nonprofits to file informational returns electronically in order to make data more easily available to the public

40 IRS Form 990 What s New?

41 IRS Form 990 What s New: Refresher Form 990: Part I - Summary Information / Key Data Elements Part III Program Service Accomplishments Part IV Checklist of Required Schedules (38 questions that drive schedule preparation) Part V Other IRS Filings and Compliance (14 questions that drive demonstration of compliance) Part VI Governance, Management & Disclosure (disclosure of structure, function, policy, compliance) Part VII Compensation / Governing Body (disclosure) Part VIII (Revenue), Part IX (Expenses), Part X (Balance Sheets) Part XII Financial Statements and Reporting Questions Schedules A through R as applicable to organization

42 IRS Form 990 What s New? Form 990, Part IX, Statement of Functional Expenses, Fees Detail Now requires that the other fees be detailed in Schedule O if amount exceeds 10% of total functional expenses Form 990, Part XI, Asset Reconciliation Includes unrealized gains / losses now Includes donated services now Includes use of facilities now Includes investment expenses now Includes prior period adjustments now

43 IRS Form 990 Instructions Foreign Grants Clarifies that it includes assistance provided to a U.S. organization or individual, but earmarked for a foreign organization or individual IRS Filings and Tax Compliance For Forms 1099, et al and Form W-3, et al, enter a 0 when no forms were transmitted

44 IRS Form 990 Instructions Independent Board Members Clarifies that transactions with a related organization can be either direct or indirect through an affiliation with another organization Delegation of Management Duties Clarifies that when answer is yes, Sch O info is required: Name of company or individual Description of services EO s TDOKE s compensated by Mgt. Co. List of amounts of compensation received

45 IRS Form 990 Schedules Schedule A Public Charity Status/Public Support Clarifications related to payments to or for the benefit of supported organizations Schedule B - Contributors Clarifications related to requirements. For example, pledged contribution of noncash property in an accrual basis taxpayer must be included

46 IRS Form 990 Schedules Schedule D Supplemental Financial Statements Form 990 to audited financial statements reconciliation is moved to Form 990 Donor advised fund grants must be reported from both outside as well as within the organization Clarification with regard to uncertain tax positions footnote to be included on Sch. D

47 IRS Form 990 Schedules Schedule F Activities Outside the U.S. Program-related investments now included in activities conducted outside the U.S. and excluded from grants and other assistance Assistance directly to foreign organizations is now directly or indirectly Now includes assistance to a U.S. organization for benefit of a foreign organization

48 IRS Form 990 Schedules Schedule H Hospitals Instructions explain how to code each facility reporting group with regard to Part V Section A and Part V Section B (Policy and Procedure Reporting) Schedule H, Part V, Line 8 asks whether Form 4720 has been filed to report the excise tax ($50,000) associated with a failure to conduct a community health needs assessment

49 IRS Form 990 Schedules Schedule I Grants.in the U.S. Part II check box for no one recipient received more than $5,000 has been removed Clarifications for the proper completion of Part II, Line 1 with regard to grant recipients Schedule J Compensation Expand the discussion of reporting retirement and other deferred compensation Clarifications on defined contribution and defined benefit plans

50 IRS Form 990 Schedules Schedule K - Tax-Exempt Bonds New questions concerning the use of bond proceeds for private business purposes Clarifications on how to calculate the average percentage during the year of the property financed by the bond issue that was used in a private business use Schedule L Interested Parties Expanded information required to complete three of four parts

51 IRS Form 990 Schedules Schedule M Noncash Contributions Details on qualified organization in a qualified conservation easement: Governmental unit Publicly supported charitable organization Supporting organization controlled by one of first two

52 IRS Form 990 Schedules Schedule N Liquidation, Termination, et al Clarifies that if still in existence at year end, do not complete Part I Do not report asset sales or grants made in the normal course of the organization s exempt activities in Part II Schedule R Related Organizations Clarifies VEBA requirements for complete Sch. R.

53 QUESTIONS? M. Chad Singletary, CPA 7550 Halcyon Summit Drive Montgomery, Alabama