IRS and Legislative Update for Nonprofit Organizations. Presented by Ira Nevelow, CPA, JD, AEP

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1 IRS and Legislative Update for Nonprofit Organizations Presented by Ira Nevelow, CPA, JD, AEP

2 Exempt Organizations Examination Work Plan 2017

3 EO EXAM Five Strategic Issue Areas Exemption Protection of Assets Tax Gap Emerging Issues International Concerns 3

4 EO EXAM 1. Five strategic issue areas: a. Exemption: i. Non-exempt purpose activity ii. Private inurement b. Protection of Assets: i. Self-dealing ii. Excess benefit transactions/loans to disqualified persons 4

5 EO EXAM c. Tax Gap: i. Employment tax ii. Unrelated business income tax d. International: i. Funds spent outside the U.S. ii. Operating as foreign conduit iii. Foreign Bank and Financial Accounts (FBAR) e. Emerging issues: i. Non-exempt charitable trusts ii. Charitable hospitals (IRC 501(r)) 5

6 EO EXAM 2. EO Exam in FYE September 2016 completed 6,440 examinations. The primary issues examined were related to: EXEMPTIONS TAX GAP 6

7 EO EXAM 7

EO EXAM Exemption Issues a. Filing, Organizational and Operational: i. Verifying the organization s exempt activities or its filing requirements ii. b.

8 EO EXAM Exemption Issues a. Filing, Organizational and Operational: i. Verifying the organization s exempt activities or its filing requirements ii. b. Revocation: Many instances involve the securing of delinquent returns i. Actual revocation ii. iii. iv. Discontinued operations Foundation status changes Modifications of subsection 8

9 EO EXAM Exemption Issues c. Inurement/Private Benefit: i. Potential for activities to inure or provide private benefit to a disqualified person or other key individual associated with the organization ii. Adjustments in this category may include excise taxes 9

10 EO EXAM Tax Gap d. Unrelated Business Income: NOL Adjustments Rental Activity Expense Allocation Advertising Gaming Unrelated Business Income Debt Financed Income 10

11 EO EXAM Tax Gap e. Employment Tax Unreported compensation Tips Accountable plans Worker reclassifications Noncompliance with FICA, FUTA, and backup withholding requirements 11

12 EO EXAM 3. Modeling Techniques a. During FYE 9/30/16 IRS EO implemented selection of exempt organization returns for audit based on modeling techniques using certain filters b. As of 9/30/16 they had closed 203 returns selected using this process with an 85% examination change rate c. Field employees are providing feedback to improve case selection models. Expectations: i. Better focused audits ii. Agents more knowledgeable about your organization d. Expect 2/3 increase in exams with high risk for inurement and private benefit issues 12

13 EO EXAM 4. Other EO Exam notes a. New Information Document Request (IDR) processes began in April i. Agents will discuss IDR with the taxpayer ii. iii. iv. Agents can tailor IDRs to the specific examination Both sides work together to determine proper response time Provides examiners with protocols for handling delinquent IDR responses, including when to use a summons to gather information 13

before organizations are notified and before the revocations are posted to EO Select Check a.

14 DETERMINATIONS 1. On May 3, 2016 EO formalized procedures to identify and prevent erroneous automatic revocation before organizations are notified and before the revocations are posted to EO Select Check a. Between March 2015 and September 2016 EO reviewed 24,359 potential auto-revocations and prevented 4,454 erroneous revocations (18.3%) AUTO REVOCATIONS Errors Prevented 14

15 DETERMINATIONS 2. On November 18, 2015 EO began rejecting incomplete applications for exempt status a. EO returns to the applicant the application and any user fees along with a letter explaining why they rejected the application b. EO rejected 9% of all non-form 1023-EZ applications as incomplete 15

16 DETERMINATIONS 3. The average age of open applications continues to drop a. In FY 2017 it was 69 days When to Check on your Application 90 days after filing a Form 1023-EZ 180 days after filing a Form 1023 or

17 DETERMINATIONS 4. The first EO return filed will designate the organization as a Form 990 filer in the IRS database a. If the organization does not file an EO application or it does not timely file its returns, its filing status reverts to Form 1120 for C Corporations b. A Form 990 filed after this time will be rejected 17

18 LEGISLATION UPDATE AS OF JUNE 2017

19 LEGISLATION UPDATE 1. There is a long to do list and not much time to get it all accomplished a. Raise the debt ceiling by September 29 b. Set the FY 2018 spending budget c. Maybe then they get to tax code changes 19

20 LEGISLATION UPDATE 2. Currently the most senior levels of Congress are negotiating with the White House on the framework of the tax code changes a. CGP s lobbyist sees the tax bill moving with the FY 2018 budget reconciliation bill b. Paul Ryan hopes to pass a bill by Thanksgiving 20

21 LEGISLATION UPDATE 3. Ideas that might be included in the tax bill: a. The Legacy IRA Act extends the charitable rollover law to include gifts of up to $400,000 to charitable remainder trusts and charitable gift annuities. This amount is reduced by any other qualifying gifts made from an IRA that is limited to $100,000 b. Restrictions on large university endowments c. Caps to the charitable deduction that coincides with the increase in the standard deduction d. Universal above-the-line charitable deduction for all taxpayers 21

22 LEGISLATION UPDATE e. The CHARITY act, which includes: i. i. Mandatory electronic filing of exempt organization annual returns. IRS could delay the application for two years for small organizations ii. Extend the charitable rollover law to include gifts to donor advised funds (DAFs). In return, DAFs would have to disclose the average percentage distributed from all of their DAFs over the most recent one and three year periods iii. 1% excise tax on private foundation net investment income iv. A limited exception to the excess business holdings rule for certain philanthropic business holdings; think Newman s Own. 22

23 LEGISLATION UPDATE f. f. Repeal of the Johnson Amendment, which states that tax-exempt organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of [or in opposition to] any candidate for elective public office. 23

24 OTHER ITEMS

25 OTHER ITEMS 1. In the near future, tax form updates will only reflect legislative changes. EO will address other issues, such as the effect of changes in accounting standards on the 990, through changes in the instructions 2. EO will reject incomplete paper filed 990s starting in a. Previously IRS accepted paper filings and would work with the exempt organization to correct any filing errors b. This is consistent with the way IRS handles e-filed returns, which is to reject them up front if any filing errors are noted 25

OTHER ITEMS 3. IRS has sent to exempt organizations some erroneous letters telling them that IRS did not accept their extensions when in fact they did a.

26 OTHER ITEMS 3. IRS has sent to exempt organizations some erroneous letters telling them that IRS did not accept their extensions when in fact they did a. Since we e-file our extension requests, we can respond by sending IRS a copy of the electronic record showing that IRS accepted our request b. For this reason, we recommend not mailing your extension request to IRS 26

27 OTHER ITEMS 4. For 990-PF filers in Texas, the Attorney General s Office now wants their executed copy of the Form 990-PF sent to them by . Both the PDF and the subject line of the should have the foundation s name 27

28 OTHER ITEMS 5. IRS released the 2016 Form 990-EZ in an interactive format. You click on the question mark icons to display help windows which contain links to IRS publications and instructions. They hope the new format will reduce the error rate on this return. 28

BDO Annual Nonprofit Tax Update

BDO Annual Nonprofit Tax Update October 24, 2017 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company BDO KNOWLEDGE limited by guarantee,