Exempt Organization Tax Update

Transcription

1 Susan M. Kirsch July 16, 2009 Exempt Organization Tax Update Schneider Downs Nonprofit Services Industry Group

2 CURRENT ENVIRONMENT 2

3 Current Environment The Economy April 2009: IRS EO Director Promises Help to Tax Exempts During Economic Crisis Mergers and Acquisitions (New IRS Pub 4779) UBIT Governance Prohibited Transactions 3

4 Current Environment Collegiate Sports May 20, 2009: Senator Grassley calls for more disclosure of money in college sports after the Congressional Budget Office ( CBO ) released its report Tax Preferences for Collegiate Sports. CBO used Indianapolis Star database of financial information from164 Division 1 athletic programs. Fact that congressional analysts had to rely on newspaper for source data highlights how little is available about how these programs work. 4

5 Current Environment Collegiate Sports (cont.) Policy options highlighted in the CBO report include: Limiting the deduction of charitable contributions Limiting the use of tax-exempt bonds Limiting the exemption from income taxation Subject the income of athletic programs to UBIT 5

6 Current Environment Payments to Researchers March 2009: Senator Grassley Investigates Payment to Harvard Researchers by Drug Companies. Requested Pfizer to provide details of its payments to at least 149 faculty members at Harvard Medical School. Raised similar concerns (i.e. conflict of interest) about researchers at other universities. August 2007: Sent letters to several universities seeking information about the reporting system applicable to academic researchers regarding outside consulting income. 6

7 Current Environment Compensation February 2009: Senator Grassley issues remarks regarding The Chronicle s Report addressing compensation for private college employees other than presidents. Colleges get big tax breaks to help them achieve their missions. Trustees need to make sure assets are used in the best possible way to fulfill charitable mission. Is $4 million for a single professor or football coach the best use of resources? 7

8 Current Environment Endowments January 2009: Senator Grassley sent letters to the 136 wealthiest colleges and universities. Requested data on student aid, cost of attendance, tuition increases and endowment spending over the last 10 years. September 2008: Senator Grassley held a roundtable discussion on rising tuition costs and how endowments help offset those costs. Participants included cross section of the higher-education community. No commitment on future legislation. Senator Grassley prefers self-regulation. 8

9 Current Environment Alternative Investments Offshore Blocker Corporations May 2007: Senate Finance Committee ( SFC ) held closed-door meeting to review nonprofits using the foreign blocker corporation as a tax planning tool when investing in hedge funds. September 26, 2007: SFC held a hearing to review the issue resulting in proposals to restrict the endowments of educational institutions with respect to the distributions and expenditures. 9

10 Current Environment Alternative Investments Offshore Blocker Corporations (cont.) 2008 Dirty Dozen Tax Scams including hiding income offshore. February March 2009: Senator Levin (D-Mich.) and Representative Doggett (D-Texas) introduced bills S 506 and HR 1265 entitled Stop Tax Haven Abuse Act of These bills are designed to curtail alleged abuses of investments or businesses outside the U.S. 10

11 What s Next May 2009: NAICU Washington Update reported Senator Grassley is expected to step down as ranking member of the Senate Finance Committee in 2011 to become ranking member of the Senate Judiciary Committee. Unclear whether non-profit financing and governance issues will remain a priority for Finance Committee after Grassley s departure. 11

12 CURRENT DEVELOPMENTS 12

13 Current Developments Employer-Provided Cell Phones June 2009 Cell phones are listed property (i.e., cars). Working condition fringe benefit treatment available if substantiation requirements of IRC 274(d) are met (i.e. accountable plan). Notice : IRS seeking comments on proposals to simply cell phone business substantiation, due September 4 th. 13

14 Current Developments Employer-Provided Cell Phones (cont.) Three alternative methods being considered: Minimal personal use method (two proposed) all use qualifies as business if employee establishes that a personal cell phone is available for use or a specified amount of minimal personal use is disregarded. Safe harbor substantiation method employer treats certain percentage as business. Statistical sampling method personal use methodology in Rev. Proc permissible. 14

15 Current Developments 2009 Dirty Dozen Tax Scams April 2009 IRS names abuse of charitable organizations and deductions to list. Attempts by donors to maintain control over donated assets or income from donated property. Valuation of non-cash assets donated to charity. 15

16 IRS State of the Union 16

17 IRS FY 09 EO Work Plan and Annual Report Annual Report new initiative to provide statistical information on the EO division. Highlights that the IRS has almost doubled enforcement contact between FY04 and FY08. Governance. IRS Annual Report Checklist for examining agents to determine whether an organization s governance practices impacted the tax compliance issues identified during examination. Form 990 governance questions to be used in potential compliance initiatives, including compensation and transactions with interested persons. 17

18 June, Assistant Commissioner Ingram Speaks to Georgetown Conference Explosive growth of TE sector Good governance as key IRS steps to manage this growth June, 2009-Independent Contractor vs. Employee New IRS presentation on issue Also see IRS Pub 1779 IRS Annual Report 18

19 Priority Guidance Plan Pilot voluntary compliance program. Revenue procedure to modify Rev. Proc on the publication requirement by a private school of its nondiscriminatory policy. Final regulations on excise taxes on prohibited tax shelter transactions and related disclosure requirements. Proposed regulations on new excise taxes on donor advised funds. Proposed regulations on IRS disclosure to state charity agencies. Guidance regarding contributions of inventory. Final regulations on substantiation and reporting requirements for cash and noncash charitable donations. 19

20 IRS Strategic Plan Continued Oversight of the Tax-Exempt Sector Provide outreach and guidance to ensure widespread adherence to the requirements for tax-exempt status. Proactively address misuse of tax-exempt organizations and/or tax-exempt status. Maintain focus on universities, hospitals and other major segments. 20

21 IRS Executive Compensation Reviews Executive Compensation 200 Compliance Checks 50 Additional Single Issue Exams Focus on Organizations with Loans to Officers/Trustees Continue Hospital Compliance Project Compliance Exams 90 Limited Scope Field Exams Small and Mid-size 501(c)(3) Organizations Review of Colleges/Universities via Questionnaires 21

22 IRS COMPLIANCE INITIATIVES 22

23 Compliance Initiatives College & University Compliance Questionnaire UBI questions dominated (15 of 33 pages) The IRS requested the following for 47 activities: Identify whether activity was reported as a taxable and provide reason why any of the activities was not reported as UBI. Identify those activities that derived a loss for the past 3 out of 5 years and explain using a code the reason for it. 23

24 Compliance Initiatives College & University Compliance Questionnaire For UBI loss activities: Did taxpayer plan to make a profit in the future? (e.g., activity was in start-up phase, costs were significantly greater than anticipated, etc.) For taxable activities, identify the type of expenses incurred (i.e. direct and indirect) and explain the cost allocation method used. IRS questioning accuracy of UBIT reporting and lawmakers to consider taking action. 24

25 Compliance Initiatives Trade/Business vs. Hobby IRS Fact Sheet, FS , discusses appropriate guidelines for determining when an activity is a business or a hobby not engaged in for profit. Fact Sheet lists 8 key factors to assist exempt organizations evaluate if NOL deduction should be. 25

26 Compliance Initiatives Form TDF Foreign Bank Account Report Expanded the required Persons to complete form to include foreign individuals that do business in the U.S. (suspended for 6/30/09 filing). Expansion of financial interests to include direct and indirect investments in foreign corps and partnerships. Voluntary disclosure program expires September 23,

27 Compliance Initiatives Employment Tax Audits IRS National Research Program to improve employment tax compliance to begin November, The program will last for three years, with up to 2000 tax examinations performed each year. Focus of review: Worker classification; Fringe benefits; Officer s compensation; and Reimbursed expenses/accountable plan. 27

28 Compliance Initiatives De Minimis Fringe Benefits IRS letter dated June 13, 2008 in response to an employer policy placing a $50 limit on excludable de minimis fringe benefits. Letter states that the $50 limit was not imposed by the IRC. After providing examples such as occasional theater or sporting event tickets, the letter states: [no] dollar limit is placed on any of these examples. 28

29 Compliance Initiatives No Additional Cost Benefits PLR : Baseball tickets provided to employees of a baseball organization may be excludable as no additional cost fringe benefit. Issue: Tickets to sold out games. Reserved tickets well in advance of the games may prove problematic. 29

30 Compliance Initiatives Community Foundations Questionnaires to 3,000 organizations Whether organizations qualify as community foundations Initiating exams 30

31 Compliance Initiatives Charitable Spending Initiative Long range study Focus on sources and uses of funds, accomplishment of exempt purposes 31

32 Compliance Initiatives Redesigned Form 990 Request for Form 990-T Announcement : covers public disclosure responsibilities Information on procedures for requests to IRS for copies of Form 990-T 32

33 RECENT RULINGS 33

34 Private Letter Rulings Mergers and Acquisitions PLR (Oct. 17, 2008): Two hospitals jointly operated a network of 6 medical clinics. Entering into a formal partnership agreement would not adversely affect the exempt status of the organizations. 34

35 Private Letter Rulings Unrelated Business Income Tax (UBIT) PLRs , , Favorable rulings to colleges and universities that centralized the investment of endowments in a single unitrust in which each endowment and the respect college or university are provided trust units. 35

36 Private Letter Rulings Unrelated Business Income Tax (UBIT) (cont.) PLR (Nov. 14, 2008) Community Foundation s Services Not UBTI fees from grant-making services (e.g. assisting with the establishment of a grant-making program, designing a system of monitoring funded programs, reviewing grant requests, preparing research in specific areas of interest and identifying collaboration opportunities). UBTI fees from clerical and administrative services provided by community foundation to foundations and other grantmaking organizations. 36

37 Private Letter Rulings Private Benefit and Inurement PLR (Sept. 10, 2008) Donor was granted organization an exclusive license to a patent with the right to sublicense to third parties. Donor received compensation from the income from organization s sublicenses in order to continue development of the technology. Held: Private inurement 37

38 OTHER ENFORCEMENT MATTERS 38

39 Redesigned Form 990 It s a collaborative effort, but we really do have a ways to go. - Stephen Clarke IRS Form 990 Redesign Project Manager May, Susan M. Kirsch SD Tax Shareholder 39

40 Schneider Downs Solutions GAP Analysis SD s electronic assessment of client s prior year Form 990 Interactive web-based PBC (Prepared by Client) Request Policy drafting and modification Internal and external Education Audit Committee and Board Participation 40

41 Key Players Interactive PBC Client (Nonprofit Organization) SD Audit Engagement Team SD Tax Engagement Team SD Technology Advisors SD Integrated Service Delivery Model 41

42 Interactive PBC Product Development Team: SD Tax SD Technology Advisors Objectives: Educate Nonprofit Clients Enhance Efficiency Collect Form 990 data Introducing the SD ezform 42

43 SD ezform Online system built to collect data from clients using SD insite. SD insite is a tool developed by Schneider Downs. Completely web based no software necessary. Secure using industry leading 256 bit data encryption (SSL). 43

44 SD insite Other Offerings Time Entry Time Clock Time in by Shift Time in Block Time in by Project Time in for Clients Payroll Entry Single Time Entry Time Export Time Approval By Detail By Summary For Client Time Expense Reporting Expense Entry Expense Approval insite Reports Tickler Employee PTO Request Approval Inventory Requisition Client Database Document Portal insite Reviews insite Administration Work in Progress Calendar 44

45 What is it? SD ezform Internet based electronic form. Allows multiple users at an organization to work concurrently. Designed to ask only the questions appropriate for your organization. Benefits Organizes all of the tax questionnaires and associated spreadsheets into one place. Enables you to ask questions of the tax staff as you prepare your response. Should reduce the time required by you and our staff to collect and organize the information for your tax return. 45

46 Interactive SD ezform Some questions will appear depending on answers to trigger questions. Download & upload associated spreadsheets. Ask for Help and Tips available. The user can start and stop as necessary without losing work. Multi-user Client can assign sections to various staff members to spread the work. Staff gets access to approved sections only, not to the entire form. 46

47 SD ezform Client Responsibilities Assign question sections to the appropriate staff. Complete all questions and related spreadsheets. That s it! 47

48 Login Screen 48

49 Introduction Screen 49

50 Question Sample 50

51 Question Tip 51

52 Download & Upload Files 52

53 Quick Help Request 53

54 Submit to SD Engagement Team 54

55 Rollout Pittsburgh Client Introduction July 16, Webinars scheduled 45 minutes in length Introduction to functionality and how to use July 22: 10 am and 2 pm August 5: 10 am and 2 pm August 19: 10 am and 2 pm To register for a training webinar visit: 55

56 Questions? 56

57 Circular 230 Disclosure This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter. 57