Is Your Form 990 at Risk for an IRS Audit this Year?

Posted on Jul 18, 2013 in Form 990

By Karen Dunn, JD, LLM

Although the IRS is currently under fire for its practices around screening applications for exemptions, we should assume they are still “open for business,” collecting taxes, and enforcing tax law. Each year the IRS issues its Annual Report and Priority Guidance Plan. This plan outlines what the IRS accomplished in the past year as well as what their focus will be for the upcoming year. For the most part, the 2013 work plan continues efforts begun in 2011 or earlier. The information gathered from these efforts will ultimately lead to more IRS audits.

The current year work plan targets many areas for audit. (A copy of the work plan can be found on the IRS website.)

Areas for Audit

Form 990

The IRS uses the Form 990 responses to select returns for audit. For 2013, based on information gathered in 2012, the IRS is identifying medium to large organizations to audit. The main focus is on organizations that report substantial income from fundraising but little fundraising expenses. The IRS also is continuing its focus on organizations with high gross receipts but low total compensation to officers, directors, trustees and key employees.

Governance

In light of preliminary results of the IRS governance analysis, the IRS plans to audit a statistical sample of 501(c)(3) and (c)(4) organizations to gather more information on their governance practices, presumably to determine what factors are relevant to tax compliance. They also plan to look at the tax filings and publicly available information of 285 organizations that reported a significant diversion of assets on their 2009 Form 990. Such audits will include review of governance practices both before and after the diversion event. The hope is to identify ways organizations can avoid such events and to identify indicators that will help the IRS target future audits.

International Activities

In 2012 audits in this area identified four problem areas: failure to file proper reports, inadequate recordkeeping, lack of discretion and control over funds sent abroad, and failure to file correct employment tax returns. As a result of these findings, the IRS will shift the focus to audit organizations with high amounts of foreign grants. Audits of private foundations with foreign investments and organizations with gifts-in-kind programs will continue.

Section 501(c)(4), (5), and (6) Self Declarers

Section 501(c)(4), (5), and (6) organizations do not have to file a Form 1024 to notify the IRS that they are exempt under one of these sections. They can self- declare by filing their Form 990 accordingly. The IRS wants to learn more about whether such organizations have classified themselves correctly and are complying with applicable rules. Thus they plan to send a questionnaire to such self-declared organizations and will determine next steps based on the findings from the analysis of the information received.

Unrelated Business Income

The IRS plans to audit a statistical sample of organizations reporting substantial gross UBI for three consecutive years, but reporting no income tax due. This issue came to light in the recent College & University Compliance Project that wrapped up earlier this year. Many schools were reporting UBI but had substantial expenses or prior year losses that were offsetting current year income. The IRS plans to focus on whether these organizations are accurately reporting their income from unrelated activities as well as focusing on the expense side, verifying expense allocations are proper.

Upcoming Work Plan

The IRS is currently accepting suggestions for the fiscal year 2013-2014 work plan. In the exempt organization arena, the AICPA submitted suggestions for this upcoming fiscal year that look very much like suggestions from prior years. They include:

Reducing the burden on organizations by eliminating the two 90-day extensions for the Forms 990, 990-EZ and 990-PF and replacing them with a single 6-month extension (similar to what is in place for the Form 990-T).
Providing guidance for organizations whose exempt status has been revoked due to failing to file the Form 990 for three consecutive years. This would include guidance allowing for current reinstatement while a retroactive request for reinstatement is pending, thereby allowing organizations to continue to operate and serve constituents while waiting on IRS backlogs in this area to clear.
Adding a section to the Form 990 for supporting organizations to substantiate that they have met the requirements for the type of supporting organization they claim to be.
Allowing the central organization to a group exemption to be included in the consolidated Form 990 filing.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.