Filed under: Tax Compliance & Planning

By Karen Dunn, JD, LLM

Taking into consideration the government’s budgetary crisis, the Advisory Committee on Tax Exempt and Government Entities (also known as ACT) issued a report suggesting ways that the IRS can leverage its resources in regulating the more than 1.5 million tax exempt organizations, particularly smaller organizations (990-EZ or 990-N filers). The goal is to improve IRS oversight and tax administration with minimal budgetary impact.

The ACT report focuses on three areas:

  1. Form 990-EZ filing threshold;
  2. IRS customer education and outreach; and
  3. IRS information sharing with state charity regulators.

Form 990-EZ filing threshold. The ACT recognizes that the 990 filing requirement places a disproportionately larger burden on small organizations than on medium or large organizations. Currently the easier and less burdensome Form 990-EZ can be filed, with some exceptions, by organizations with less than $200,000 of revenue and less than $500,000 of assets. Proponents of increasing the threshold argue that the burden is too great for small organizations that often are volunteer- run and do not have the resources to pay for a tax preparer. Proponents of reducing the filing threshold point to hidden abuses by organizations and the need to provide meaningful information about the organization to donors, state charity regulators, and the public.

In an attempt to balance the challenges facing small organizations and the need for adequate transparency to the general public and the government, the ACT recommends retaining the existing dollar threshold. However, greater transparency can be gained by requiring more of the Form 990 schedules to be included with the 990-EZ and adding governance questions to the form.

The recommended schedules to be added include:

  • Schedule F, which provides information on activities outside the United States and is particularly relevant to organizations formed to raise money for activities conducted outside the United States
  • Schedule I, which provides information on grants made by the filing organization. This information is currently required to be included on the Form 990-EZ Schedule O.
  • Schedule J for Form 990-EZ filers with officers, directors and key employees earning $150,000 or more
  • Schedule L, Parts III and IV, which provides information on grants made to, and business transactions with, interested persons
  • Schedule M, which provides information on noncash donations
  • Schedule R, which provides information on related organizations

IRS customer education and outreach. While the IRS has made significant progress in this area, it is an ongoing challenge to reach and educate small organizations often overseen by volunteers and plagued by frequent turnover of board members. Thus, the ACT encourages the IRS to continue its endeavors in this area and provides some suggestions to deal with the challenges.

The recently redesigned IRS website is complicated and difficult to use. The ACT recommends that the IRS add helpful links and hypertexts consistently throughout the website to help the reader navigate to related information and educational materials such as “Stay-Exempt”. In particular, the ACT implores the IRS to return to the IRS website main page the link to the Exempt Organization Division’s Charities and Nonprofit page. The recent removal of this link inhibits accessibility of information. IRS communications, forms and instructions, also should include references with links to specific educational material. This will promote greater use of helpful resources.

The ACT recommends that the IRS continue its collaborations with associations, academic institutions and other organizations for training programs, particularly co-creating reusable web-based training and encouraging state regulators and other organizations to create links to the IRS website.

IRS information sharing with state charity regulators. The ACT commended the IRS for educating state charity regulators about information-sharing rules, procedures, and safeguards. Information sharing leverages IRS resources by allowing state charity regulators to pursue cases that the IRS cannot.

In addition, the ACT recommends that the IRS encourage enforcement referrals from state charity regulators by educating them about IRS enforcement priorities and remedies. State charity regulators fear that if the IRS seeks penalties from officers involved in private inurement, the officers may not have the financial ability to pay restitution to the charity. This perception may not always be true. The IRS sometimes requires such restitution. Improved communication and coordination between the IRS and state regulators can help both states and the IRS avoid duplicate effort and waste of resources in investigating the same organizations.

The ACT also recommends that the IRS encourage states to share information about IRS referrals with other states.

While the IRS has been implementing similar strategies, these recommendations hone in on a few key areas that can provide significant results with minimal budgetary impact. Therefore, the ACT believes that the benefits to the IRS, state charity regulators, the public, and the nonprofit sector outweigh any fiscal burdens resulting from implementing these recommendations.

© Clark Nuber PS, 2013.  All Rights Reserved

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