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Public Comments from the IRS Director of Exempt Organizations

November 21, 2012

IRS Director Lois Lerner reports on findings from Form 990 data.

Each year the IRS Director of the Exempt Organization Division speaks at the Georgetown University Law School. The Director’s remarks are usually indicative of what is of most interest to the IRS in the exempt organization area. This year was no exception.

The first topic addressed by Director Lois Lerner was governance. When the IRS first published the new Form 990 in 2007 they indicated that the reason they were asking so many governance related questions is because they believed that tax compliance and efficient operations were directly related to a more robust governance structure. Now, after some data gathered in the field, the IRS has specific findings to report. Here are some of their findings:

  1. Organizations that have a written mission statement that articulates its current 501(c)(3) purposes are more likely to operate in a manner consistent with that mission.
  2. Organizations that always use comparability date when making compensation decisions are more likely to be compliant with compensation regulations.
  3. Procedures that are in place and designed to ensure the proper use of charitable assets increase an organizations compliance with the restrictions that accompany many charitable assets.
  4. Organizations where the 990 is reviewed by the entire board of directors are generally more compliant with all regulations.
  5. Conversely, those organizations where control was concentrated in one individual or in a small select group of individuals, were less likely to be compliant with regulations.

Interestingly, the IRS found no statistically significant correlation with tax compliance, one way or the other, with whether an organization had an effective conflict of interest policy or where voting board members had family or outside business relationships with other board members or key employees. The results are preliminary and came from only those organizations selected for examination for some specific reason. Thus this is not a statistically representative sample or an analysis of the overall population of tax-exempt entities. However, it does seem to be generally consistent with the IRS premise that good governance and tax compliance go hand in hand. We can only conclude from this preliminary information that the IRS will be using the governance section of the Form 990 as an initial screening mechanism for targeting organizations for a closer examination.

A surprising topic in Director Lerner’s comments was on the subject of significant diversions of assets. This is where people get their hands on exempt organization assets and divert them from their intended charitable purpose. I guess I find this surprising as I have not over the years encountered this situation with my clients. I would like to think I have had something to do with this track record.

In 2009 approximately $170 million in significant diversions of assets was identified via the Form 990 reporting. Many of these diversions were the result of theft or embezzlement. Although an explanation on the Form is required of such instances, a significant number were left blank. A handful of diversions involved Ponzi schemes. Eighty-two cases resulted in civil or criminal charges against the responsible party by authorities other than the IRS. 47 individuals were incarcerated or served probation. In 9 cases restitution was paid in full – that would be 9 of the 82 cases where charges were brought – not a significant recovery rate. In 11 cases there was partial restitution, however.

The IRS is sufficiently concerned about the diversion of charitable assets that it is planning on conducting an examination program in this area. I have heard of one organization in this area that has been selected for such an examination and have asked the executive director to keep me informed of the process. The IRS hopes to use this examination process to be able to identify common indicators or serious cases and common indicators of cases where the organization was able to self-correct. The IRS believes the benefits from this examination program will allow them to advise organizations on how to avoid these events and to refine their risk models to better target their examination resources.

These were just two of the subjects covered in the session. In a future blog, I will report more on Director Lerner’s comments. Happy Thanksgiving!

For more information on not-for-profit IRS related matters visit the NFP Services page or contact us.

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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