The Service has posted on a special page on its website (IRS.gov) the names and last known addresses of these at-risk organizations, along with guidance about how to get back into compliance. The organizations on the list have return due dates between May 17 and October 15, 2010, but the Service has no record that they filed the required returns for any of the past three years. The Service has organized this list by state. Users may download the state lists in either Adobe pdf format, or Microsoft Excel format. There are almost 24,000 such organizations in Texas, many of which are in North Texas. By downloading the Excel version of the list, users are able to sort the list by name or city to facilitate determining if a particular organization is at risk.

Two types of relief are available for small exempt organizations — filing an extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard), and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ (Short Form Return of Organization Exempt From Income Tax). Small organizations required to file Form 990-N may simply go to the IRS website, supply the eight information items called for on the form, and electronically file it by October 15. That will bring them back into compliance. Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by October 15 and pay a compliance fee.

The compliance fee is required for participation in the VCP. The compliance fee is in lieu of taxes, penalties, and interest that otherwise would be incurred because of not filing the annual information. Paying the compliance fee does not affect liability for any taxes that would be imposed even if the organization had filed the returns, including unrelated business income tax and employment taxes. The compliance fee ranges from $100 for organizations with gross receipts of $100,000 or less, to $500 for organizations with gross receipts over $200,000 but less than $500,000. Other details about the VCP are on the IRS website, along with frequently asked questions.

This relief is not available to larger organizations required to file Form 990 (Return of Organization Exempt from Income Tax) or to private foundations that file Form 990-PF (Return of a Private Foundation).

In early 2011, the IRS will publish a list of the organizations that had their exemption revoked. Donors who contribute to at-risk organizations are protected until the Service publishes the final revocation list. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.

In these taxing times, it is important to preserve the favorable status of our tax-exempt organizations. If you need help with your tax-exempt organization, contact me at 214.957.3366 or at response@phdcpa.com.

Ronnie

Copyright 2010

Ronnie

“Tens of thousands of charitable groups large and small and the foundations and corporate programs that help support them represent the finest American traditions of giving and volunteering… traditions that help define who we are as people and a nation. Today, 89 percent of households give and almost 84 million American adults volunteer.

“. . . . ., your advocacy of the highest ethical standards and principles are essential to maintaining the public’s trust during these times of economic duress when so many more people will come to depend on your services. Integrity and trust are two sides of the same coin and we cannot allow this valuable currency to be debased. That is already one of my priorities as IRS Commissioner.
. . . . .

“. . . . ., as you know, we work very closely with the non-profit community — whether it’s processing over 70,000 determination applications per year or applying oversight or audits when we detect a problem.
. . . . .

“. . . . .  in case you don’t know it, the non-profit territory is familiar stomping grounds for me. I started my career in consulting, but then became what I refer to as a social entrepreneur. I was privileged to be one of the handful of people who co-founded Teach for America, which helps place teachers in urban and rural schools across the country.

“I have also been a private equity investor, a securities industry regulator and now IRS Commissioner. In one of those odd twists and turns in life, I’m back to leading a big organization without a profit mission — and thrilled about it — as I am also working closely again with the tax-exempt sector.

“I admire the tax-exempt sector: its diversity, its creativity and its risk-taking. Americans create more than 100 new exempt organizations each day — 365 days a year. This diversity means many points of view are expressed, many problems are attacked in many ways, many solutions are found, and many benefits are created for the nation.

“I firmly believe that the IRS must recognize and allow for this diversity — and not become a barrier to it. We shouldn’t supplant the business judgment of organizational leaders, and certainly shouldn’t determine how a nonprofit fulfills its individual mission. That’s not our role.

“Like the frontier of the 19th century, I think the tax-exempt sector has become a space into which American ingenuity and spirit can expand in the 21st century. Like all frontiers, the tax-exempt sector is attracting the attention and idealism of young people in our society. For many, creating or working for a non-profit, a charity, or an NGO is a mark of special distinction. The sense of mission and purpose that characterizes the tax-exempt sector inspires and motivates the best and the brightest of our times. This is a self-renewing treasure of our society, and one we all want to foster.

“Before coming to the IRS I believed, and now have witnessed, that the tax-exempt sector tends to be guided by a high-minded, rule-abiding culture. This culture manifests itself in a determination to understand and respect the parameters of tax-exemption that Congress has laid down, to comply with the Internal Revenue Code and work with the IRS, and to do the right thing. At a time when the consequences of abandoned and debilitated standards lie in disarray all around, I respect the tax-exempt sector’s adherence to fundamental principles.

“Of course, I know that this sector has had its encounters with abuse and misuse. The combination of tax-exemption and the over $3 trillion of assets held by nonprofits seems too compelling a prize to resist for some. The IRS has fought hard to protect the sector against corruption, and the diversion of tax-exemption’s public purposes to mere private benefit. We will continue to insist that the sector be squeaky-clean, and that the high ideal of public benefit that underlies tax-exemption is honored.

“I clearly see our role as working with you and others to promote good governance, beginning with the proposition that an active, engaged and independent board of directors helps assure that an organization is carrying out a tax-exempt purpose and acts as its best defense against abuse. And even though you don’t make a profit, that’s just good business.

“Indeed, as a fellow leader, I believe all of us must follow best practices in organizational leadership and management. There must be clearly articulated values, mission, goals and accountability.
. . . . .

“Let me give you one example. After the collapse of Enron and World Com, Congress passed Sarbanes-Oxley — also known by the shorthand SOX — which fundamentally altered the governance landscape and brought a new, strong, vibrant meaning to the word ‘fiduciary.’ And while legally the law only applied to public companies, I would submit to you that the world of governance for all organizations changed.

“At NASD and later the Financial Industry Regulatory Authority, where I was a leader before I came to the IRS, even though we were a not-for-profit organization we adhered to the rigorous SOX 404 standards which requires management and the external auditor to report on the adequacy of the company’s internal controls. We did so at the request of our audit committee, who felt that while not legally required for a non-public company, this was the gold standard in financial controls. And even very small non-profit boards had a wake-up call from SOX, and began to focus much more on finances, management accountability and governance. And lest we forget, tax compliance is a big part of the accountability formula.

“So what is the IRS doing that’s new to keep individual taxpayers, businesses and non-profit organizations compliant? That’s where innovation and getting ahead of potential problems comes in.

“For example, we’re experimenting with what we call the automated soft notice. These are sent to taxpayers and allow them to correct underreporting issues without having to correspond extensively with the IRS, or place them in a formal audit.

“We’re also taking other proactive action like starting to check up on young exempt organizations to ensure that after a few years in operation they are in fact fulfilling an exempt purpose.

“We will be on the lookout for innovative methods to ensure compliance… and for collaboration with all taxpayer groups, including the tax-exempt sector. And I can think of no better recent example of collaboration than the Form 990 redesign. Working with Independent Sector and other organizations, the redesign is a marked improvement over the old form in terms of organization, information collected and its usefulness to the public, the tax exempt sector and the IRS. I hope you will agree with me that this was a win-win for all involved.

“We’ve also begun conducting studies of several of the largest taxpayer segments within the tax-exempt community by sending out comprehensive questionnaires that focus on an area of interest and then analyzing the responses. If necessary, we can follow up with an examination.

“In fact, we’re about to release the hospital study report. Stay tuned, but I can say this much. I’m confident that the new hospital schedule for the Form 990 — the Schedule H — is the right tool to allow nonprofit hospitals, of all types and sizes, to report how they promote the health of their communities and to justify their tax exemption. And the Schedule H will give the IRS and the public better transparency into these important institutions.

“We also recently launched a study of colleges and universities. In the spirit of collaboration and the recognition that we must be in dialogue with sectors with whom we engage, we did advance work with colleges and universities on the questionnaire. We wanted to understand how they talk about themselves, what kind of measures they use, and so forth. When we have agreement about what data means, we eliminate a lot of friction. I want to apply this lesson throughout the IRS, not just in Exempt Organizations.

“Now that I’ve touched on some of our philosophy regarding tax administration and tax exempt organizations, let me shift to the future. What lies ahead for the sector? What risks await? And how will the IRS respond?

“Let me begin with the current economy that creates uncertainty for everyone. How will a nervous economy affect the tax-exempt sector? I’m concerned it will lead to declining contributions and revenue. But will that prompt some entities to inch across permissible lines to make up budget shortfalls? Will these organizations be tempted by invitations to engage in improper transactions that might generate a fee, or to engage in questionable fundraising practices?

“I don’t know. I certainly hope not. But I do know that now is the time for both of us to be vigilant and to make sure the tax-exempt sector keeps walking away from deals that just don’t feel and smell right.

“We also face a tax code that grows more complex — even for tax exempt-organizations. We’ve seen the rise of new giving techniques and legislation intended to reign in abuses. This creeping complexity affects both of our organizations as we struggle to understand and administer the law.

“Given these challenges, what should the IRS do? I count myself lucky because I think we’re already on the right path. The promotion of transparency — the introduction of sunshine into the tax-exempt sector — is an essential first step to any progress in this area. And we’re also looking to the future.

“We’re in the process of putting the final touches on a new IRS strategic plan. Continued focused oversight of the tax-exempt sector is a key part of it. First, we are committed to providing outreach and guidance to ensure widespread adherence to the requirements for tax-exempt status. Second, we will proactively address misuse of tax-exempt organizations and tax-exempt status. And third, we will maintain a focus on universities, hospitals and other major segments of the tax-exempt community.

“We want to arm you with information and guidance you need to help you comply. We want to pay especially close attention to the largest segments of the exempt sector. And lastly, we want to protect the tax-exempt sector and the public by identifying and stopping those bad actors who misuse tax-exempt organizations or the privilege of tax-exempt status.  

“Let me end by saying that the contributions that the tax-exempt sector makes to the spirit, well-being and advancement of our society cannot be overstated. I will be there with you, step-by-step, as you work toward your goals. But, I will also be committed to root out misuse or abuse of tax exempt status by any bad actors who potentially tarnish the reputation of this wonderful sector.”

I trust that this information is useful to you. If you have questions concerning your organization’s continued tax-exempt status and compliance, please contact me at 214.957.3366.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD, CPA

Let’s briefly review the Short Form changes before moving on to Form 990 itself. The good news is that organizations with gross receipts of less than $1 million and total assets are less than $2.5 million in 2008 may file the Short Form. This is only a phase-in for small organizations, however, because these numbers drop to $500,000 in gross receipts and $1.25 million in total assets in 2009, and $200,000 gross receipts and $500,000 total assets in 2010. For tax year 2007, the Form 990-EZ was simple return with a required Schedule A for public charities totaling 10 pages. Schedule B was used to report donor names for gifts in excess of $5,000. The number of pages required depended on the number and type of gifts required to be reported. For tax year 2008, I estimate that the simple return will now require 15 pages, plus the detail of contributions greater than $5,000. One more thing; the instructions specifically related to the 2007 Short Form required 12 of 68 pages in the instruction booklet for the Form 990. The 2008 Short Form instructions require 93 pages in a book of their own, plus 68 pages of instructions for the separate schedules likely to be required. That makes the total instructions pages jump to 141. These are indeed taxing times for small charitable organizations.

Now let’s turn to the Form 990. For tax year 2007, the basic Form 990 and the required Schedule A for public charities totaled 16 pages. Schedule B was used to report donor names for gifts in excess of $5,000 as with the Short Form. The number of pages required depended on the number and type of gifts. Many question on the basic Form 990 required statements to be attached to the return. A relatively simple return, therefore, may have totaled 20 – 25 pages. I estimate that for tax year 2008 the minimum return will require approximately 38 pages. I also estimate that the number of pages of instructions to complete a simple return has increased to approximately 225. Quite an increase! Plan accordingly.

The new forms are not yet available from the “Forms and Publications” section on the IRS website. The instructions for both the regular Form 990 and the Short Form 990-EZ have been released in final form. The forms themselves are still in draft form. You may download the instructions and draft forms from the main IRS website, www.irs.gov and clicking on the “Charities and Non-Profits” tab and follow the link to the forms themselves. I recommend that you do that to become familiar with the information you will be required to provide.

Whether you prepare your own return or have it prepared by a tax return preparer, someone signs the return under penalties of perjury, and declare that they have examined the return, including accompanying schedules and statements, and to the best of their knowledge and belief, it is true, correct, and complete. That means that the signer is required to know what is in the return. To that end, you may want to register for a free webcast to be broadcast by the IRS on November 4, 2008 from 2 until 3pm EST entitled “Preparing the New Form 990.” To attend, simply go to www.taxtalktoday.tv and register for the program. I recommend that you register now so that on the day of the program you simply logon and watch. I’ll see you there!

Ronnie

© Ronnie C. McClure, PhD, CPA

Neither candidate specifically addressed transfer taxes (estate, gift, and generation-skipping) in their acceptance speeches. With the need for increased revenue, Congress will not repeal them. Something must be put in place before 2010 estate tax holiday. I believe we are most likely to see continuation of the transfer tax programs in much the same fashion as currently exists, with an individual transfer tax exemption ranging from $3.5 million to $5 million. Carryover of a deceased spouses’ exemption amount to a surviving spouse may be appropriate, but will likely add additional complexity to the Internal Revenue Code, rather than reduce it. Use of a testamentary trust at the first spouses’ death will continue to be appropriate for non-tax reasons, even if not necessary to utilize that spouse’s transfer tax credit. The gift and estate transfer tax exemptions should be re-integrated to a single lifetime exemption as they were before the 2001 tax law changes.

Both candidates will monkey with corporate taxation. Obama will close “loopholes” and likely try to raise the rates. McCain espouses lowering them in order for U.S. corporations to be more competitive worldwide. Obama must realize that a “loophole” is tax “incentive” enacted by Congress to encourage economic behavior. Those incentives become loopholes only when a given taxpayer is unable to take advantage of them. Closing loopholes simply ends economic behavior incentives previously thought to be desirable.

With regard to corporate taxes, both candidates must realize that corporations do not pay taxes; people pay taxes. Which people pay corporate taxes depends on the corporation’s ability to shift the burden of the levy. Very simplistically, a corporation has four alternatives for shifting its tax burden. If a corporation completely absorbs the tax, the burden is shifted to shareholders in the form of lower current or future dividends. The corporation may shift the burden to its customers or clients in the form of higher prices. Employees bear the corporate tax burden if the corporation maintains its revenue, dividends, and investments and cuts (or defers increases) in wages or employee benefits, or cuts jobs. A corporation’s only other alternative to shift the burden is to cut expenses (which are income to someone) and reduce investment in plant, equipment, research, and technology. In these taxing times the public should not be lulled into believing that a corporate tax increase will have no impact on an individual’s economic wellbeing.

The debate is on. It will certainly intensify after November 2 when a new administration is being formed. The year 2009 will be a year of tax law change. The only remaining question is, “Whose ox will get gored?”

Ronnie

© 2008 Ronnie C. McClure