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Form 990: How is the IRS Using your Information?

February 22, 2013

Your Form 900 could contain noncompliance indicators.

Last week I discussed some of the items in the IRS Exempt Organization Division’s 2012 report and their 2013 agenda. This week I am focusing on how the IRS is using the Form 990. Understanding how the IRS uses this form will help you file a better Form 990 this year and in the future.

One of the items on the 2013 IRS Exempt Organization (EO) Division’s agenda is the continued development and testing of potential “indicators of noncompliance” exhibited in the Form 990. They will use this information in their examination division for follow-up with organizations. Although the IRS revised the Form 990 way back in 2008 they are only now accumulating sufficient data to use in their quest to increase compliance with laws and regulations.

Very early in this process the IRS found that many organizations do not always accurately reflect their activities. If those organizations had been more careful in completing their returns, they might not have been identified by the IRS “indicators” or selected for examination. Thus, it is more important than ever that all organizations follow instructions, compute properly and report all information requested on their Forms 990 accurately. The bottom-line is that the IRS uses the Form 990 responses to select returns for examination, so it is in your best interest to file a complete and accurate return.

One of the studies now being conducted by the IRS is something they term as the “charitable spending initiative.” In this long-range study, EO is using data from filed Forms 990 to focus on the sources and uses of funds in the charitable sector and their relationship to charitable accomplishments. For example, some organizations report relatively large fund-raising expenditures when compared with expenditures for the organization’s charitable programs. The examinations that resulted from this indicator disclosed that in approximately 33% of the cases that reported high expense ratios turned out to be lower after examiners completed a full review of the books and records. Thus, it is apparent that organizations are not accurately allocating their expenses between program and administrative and fund-raising functions.

Of course, some organizations that the IRS audited were found to be devoting too little of their resources to their charitable mission. The EO revoked the exempt status of four organizations due to either very little or no charitable activity or for inurement to an officer or director. Close to 100 organizations that received field audits had employment tax return issues resulting in additional tax assessments and financial penalties.

Compensation levels continue to be a concern for the IRS. The EO is not only focusing on high reported compensation levels but it is also reviewing organizations that report high annual gross receipts with low total compensation to officers, directors, trustees and key employees. The IRS is concerned with whether some organizations may be circumventing the goal of transparency by hiding compensation levels in other expenditure line items. During 2013 the EO Division will gather information from a random sample of organizations to further examine the reporting of compensation levels.

As you might imagine, political activity was a key concern in 2012. The IRS identified over 300 cases of potential impermissible campaign intervention. In addition to developing a list of organizations with potential impermissible campaign activity from the Form 990, the IRS receives referrals from outside sources alleging political campaign intervention which it also evaluates and tests for compliance with the law. Follow-up on these leads will continue into 2013.

Many organizations reported taxable unrelated business activities on their Form 990 but then did not file a Form 990-T. As hard as it is to believe that this could occur, the IRS reported receiving over $260,000 in delinquent tax payments from this activity. Once again, the IRS found that in 25% of the cases the organization had completed the Form 990 incorrectly and there was not unrelated business activity although it had been reported as so in the 990.

It appears that the message coming out of the IRS is that in a high percentage of cases, insufficient care is being taken in the preparation of the Form 990. Due to the IRS’s increased ability to identify “indicators of noncompliance” incorrectly prepared returns are more likely to trigger IRS questions or audits. The not-for-profit community is probably going to be surprised by this increase in activity related to the Form 990 because historically the filing of this Form, seldom if ever, caused a response from the IRS. Times are changing!

Related Posts:
Highlights of the 2013 Exempt Organization Work Plan posted 2/6/13
Making the Most of Your IRS Form 990 posted 9/17/12
Using Form 990 & Cost Allocation to Calculate Your Non-for-Profit Success posted 3/15/12

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.

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