In 2008, the Form 990 was re-designed to include, among other things, significant governance disclosures.  The IRS justified the disclosures in part on the belief that organizations with good governance are more likely to comply with the law.  Since 2008, the IRS has been studying the connection between governance and compliance.  Among other things, the IRS developed a governance checklist that was used in exams to probe governance practices.   In a recent speech, Lois Lerner, the IRS Director of Exempt Organizations, provided that the initial results of the IRS study confirm that good governance and compliance go hand and hand.  Ms. Lerner stated that exempt organizations with a written mission statement, those that follow the procedures of the rebuttable presumption to establish compensation, and those whose Form 990s were reviewed by the entire board of directors, are more likely to be tax compliant than those that do not follow those practices.   Ms. Lerner’s full comments may be viewed by clicking here.

Although these comments are certainly no surprise, I strongly recommend all charities use the IRS governance checklist to perform their own self-assessment.  A copy of the checklist may be found by clicking here.   A copy of the checklist guide sheet may be found by clicking here.   The charity may also review its responses to Part VI of the Form 990 regarding governance.  I also recommend a review of our article, Having Good Policies is Good Policy.   Merely because a charity does not check “yes” to a particular question on the checklist or Part VI of the Form 990 does not mean the charity lacks good governance or that a change is necessary to ensure compliance.  However, it likely raises an issue for review and consideration by the board to determine whether a change may make sense.

As a consumer and parent, I love garage sale-ing–you never knew what you will find. Garage sales are especially helpful for Christmas shopping for young children. In my opinion, there is no reason to buy a new present for anyone under the age of 5. And for anyone under the age of 18 months, there is no reason to get any presents at all. (In my experience, no matter what you wrap up, (more…)

 In 2006, Congress amended Section 6033 to revoke the tax-exempt status of organizations required to file an annual Form 990, Form 990-PF, or Form 990-EZ, that fail to file for three consecutive years. The amended law also requires many organizations with less than $25,000 ($50,000 for tax years starting after January 1, 2010) in annual receipts to file annual informational reports (Form 990-N) —organizations that had never been required to file before.

 The IRS recently began to formally revoke exempt status for those organizations that failed to comply.  The IRS also issued guidance for organizations that have had their tax-exempt status revoked under the amended law in Notices 2011-43 and 2011-44.  An organization whose exemption has been revoked should apply for reinstatement the same way it would apply for an exemption (by filing Form 1023 or Form 1024), even if it did not have to apply for its original exemption. The filing date will generally be the effective date of the reinstatement; retroactive reinstatement may be possible if the organization can show “reasonable cause” for its failure to file.

 An organization that was not required to file before 2007 and that took in less than $25,000 a year in 2007, 2008, and 2009 can gain retroactive reinstatement simply by filing for reinstatement before December 31, 2012, and attesting to those facts in its application.

The IRS has released Form 8940, Request for Miscellaneous Determination, that tax-exempt organizations will use to request certain determinations about their tax-exempt status.  In addition to foundation status issues, organizations will use Form 8940 to obtain advance approval of certain activities and exemption from Form 990 filing requirements.

Although Form 8940 is a step in the right direction, it does not go far enough.  As I indicated in my prior post, there currenly is no process for a tax-exempt organization to seek IRS approval of expanded or changed activities.  Form 8940 should be revised to include a new Type of Request, “Notice of Material Change in Activities,” that will allow tax-exempt organizations, in their sole discretion, to file a notice of such changes and request an updated determination letter that such activities do not jeopardize the charity’s exempt status.  We will continue to promote this concept and keep you posted of new developments.

In IRS Announcement 2011-20, the IRS granted tax-exempt organizations that operate one or more hospital facilities (hospital organizations), and that would otherwise be required to file Form 990, Return of Organization Exempt From Income Tax, including Schedule H, Hospitals, for the 2010 tax year before August 15, 2011, an automatic three-month extension of time to file the Form 990 for 2010. In addition, this announcement directs these hospital organizations not to file the 2010 Form 990 before July 1, 2011.

As you recall, a Form 990, Form 990-EZ, or Form 990-N is due for every 501(c)(3) charity, regardless of size, on the 15th day of the 5th month following the close of the taxable year end.  The IRS has changed the filing thresholds for 2010, which is good news for some, and bad news for others.  The good news first - the threshold for Form 990-N (e-Postcard), the least burdensome of the Form 990s, was doubled to now apply to organizations with gross receipts normally less than or equal to $50,000.  This is really good news for small charities.   The bad news is that the threshold for filing the full Form 990 was significantly reduced, requiring organizations with gross receipts ≥ $200,000, or total assets ≥ $500,000 to file for the 2010 tax year.  Organizations in between must file the Form 990-EZ.  Numerous “medium-sized” charities are now going to be subject to the substantially more burdensome Form 990 filing requirements.  It is worth noting, however, that much of the learning curve for the new Form 990 has already been achieved as the larger charities have completed the new Form 990 since 2008.

PLR 201047033 involved an organization that had qualified under 501(c)(3) to provide computer materials and computer training to the poor. Upon examination of the organization’s 990 and its principal’s 1040, the IRS learned that the principal had been running a commercial business and asking his clients to make their checks payable to the organization.  The principal commingled his personal funds with the organization’s funds in one bank account.  And most of the checks written from the account were for personal expenses.  So, the organization effectively became a ”tax shelter…to conceal his personal income.” The principal claimed that there was no impropriety; rather, he received bad advice and was confused on how to properly file his and the organization’s returns.  (more…)

The IRS recently announced that Form 990 filing due dates are postponed for organizations located in declared disaster areas, including victims of recent storms in North Carolina, Wisconsin, Illinois, Iowa, Texas, Kentucky and West Virginia.  For additional information, click here.

Just ask your friends at a larger charity, preparation of the new Form 990 for the first time is no picnic.  As we discussed in our blog post on July 5, medium-sized charities with gross receipts ≥ $200,000, or total assets ≥ $500,000 must complete the substantially re-designed Form 990 for the 2010 tax year.  In light of the fact the new Form 990 requires substantially greater information than ever before, we strongly recommend that medium-sized charities that will be filing the re-designed Form 990 for the first time become familiar with the new Form 990 now and ensure that it will be able to gather the required information.  Larger charities spent most of the summer and fall of 2008 leading up to the calendar year end to ensure they understood the new Form 990 and could gather the necessary information.  Medium-sized charities should follow this lead.

As we discussed in a prior post, a charity must notify the IRS of material changes in activities on its next Form 990.  This process is beneficial to the IRS and the public.  As I also discussed, in addition to the Form 990, a charity may (in its discretion) notify the IRS of material changes in activities through the Correspondence Unit (also referred to as the Adjustments Unit). 

In the past, when it seemed appropriate (e.g., where the activities were in a gray area or the charity was very conservative), we would submit a letter explaining the changes in activities to the Correspondence Unit and request an updated determination letter from the IRS that the charity was still exempt taking into consideration the new activities. On several occasions, the Correspondence Unit issued such an updated determination letter, which was of great benefit to the charity, providing assurance and comfort that the charity’s new activities were exempt. 

Recently, we have made similar filings and requests to the Correspondence Unit, which has declined to issue an updated determination letter – instead, the requesting charity merely received a confirmation letter from the Correspondence Unit acknowledging receipt of the filing and reminding the charity to disclose the changes on its next Form 990.  Obviously, this mere confirmation letter is of significantly less benefit to the charity compared to an updated determination letter, making it difficult to recommend the additional filing with the Correspondence Unit in light of the additional time and legal cost to do so.

We propose that the IRS should introduce a formal process that allows a charity, in its sole discretion, to file a “Notice of Material Changes in Activities” with the Correspondence Unit and request an updated determination letter that such activities do not jeopardize the charity’s exempt status. (more…)