Tag Archives: IRS

New IRS Form 990 Audit Selection Methodology

The IRS has recently improved its audit selection process shifting from a subjective selection to a data-driven selection. Previously, subjective audit selection indicated that audits were driven by issue-specific determination. For example, following an IRS study on hospitals, more hospitals were selected to be audited compared to previous years. Similarly, following an IRS study on colleges and universities more audits of colleges and universities were performed.

The IRS has developed a data-driven approach that incorporates nearly 150 analytics based on nonprofit organizations’ Form 990 data in an effort to eliminate subjectivity. In doing so, the IRS intends to expand the number of organizations that could potentially be audited. If an organization “fails” too many analytical evaluations, it is more likely to be audited by the IRS. While no specific analytics have been published, industry experts anticipate the IRS to focus on the following sections of Form 990:

  • Inconsistent information
  • Reporting amounts in column (C) of Part VIII, but not reporting that a Form 990-T was filed on Part V, Line 3.
  • Preparing Schedule L to report an insider transaction, but reporting on Part VI, Line 12 that the organization did not implement a conflict of interest policy.
  • Responding affirmatively to a Part IV inquiry, but not completing the applicable Form 990 schedule.

Although the IRS’s method of audit selection was updated, its budget has not increased for nonprofit organizations. Despite the budget stagnation, the new data-driven audit selection method has increased return change rates to over 90%, which represents a substantial increase in change rates compared to the 70% seen with subjective audit selection. Furthermore, there has been a 20 -day reduction in average audit completion since the implementation of data-driven audit selections – from 233 days in 2015,when subjective audit selections occurred to 213 days in 2016.

For more information on this new approach, click here.

IRS Expands Automatic Extension for Form 990

calendarFor as long as I can remember, nonprofits have been able to obtain a 3-month automatic extension for Form 990 filings simply by filing IRS Form 8868 before the initial due date.  The Form 990 filing due date is four months and fifteen days after the organization’s fiscal year-end (e.g., May 15 for calendar fiscal years, and November 15 for fiscal years ending June 30).  For an additional three-month extension, nonprofits have had to make a second filing – this time to ask permission for such additional extension and to demonstrate “reasonable cause”.  Further, since the penalties for late Form 990 filings can be quite onerous (measured on a per-day late basis), it was generally best to get the Form 990 filed by the initial due date or no later than the available automatic 3-month extension.

Under new rules to take effect starting with tax years that begin after December 31, 2015, the original extension will now be for 6 months automatically. Calendar year filers for 2016 who file a timely extension will automatically have until November 15 , 2016 to complete their 990.

This will be a welcome relief to many groups – and probably to the IRS as well.

Corporation May Not Deduct Matching Contributions to Its PAC

IRS logoIn a recent private letter ruling LTR 201616002, the IRS responded to a request for ruling as to whether contributions made by the Taxpayer pursuant to a political action committee charity match program were deductible as ordinary and necessary business expenses.

The taxpayer was a Corporation that would be prohibited by the Federal Election Campaign Act (FECA) from contributing to federal election campaigns. Therefore, the Corporation established a Political Action Committee (PAC) which is funded by the employees of the Corporation and its subsidiaries. The PAC was a political organization exempt from taxation under Section 527 of the Code. To incentivize employee contributions, the Corporation would match each of these contributions and they requested a ruling on whether these matching amounts were deductible as ordinary and necessary business expenses.

The IRS stated that under current section 162 (e)(1)(B), amounts paid or incurred in connection with participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office are not deductible under Section 162. They determined that, in this case, the contributions to the PAC and the matching contributions were inextricably linked. The contributions to the PAC were a prerequisite for the Corporations matching contributions and these matches were intended to incentivize contributions to the PAC. Applying the applicable section noted above and case law, the service concluded that the Corporation’s matching contributions are “in connection with”  a political campaign for public office and are not deductible under Section 162. As with any Private Letter Ruling, the ruling is  only directed to the Taxpayer, however they are often used as a guideline for the IRS view on a situation.

IRS Weighing New Options for Documenting Donations

W2There may be a new rule change for the verification of donations.  According to Bloomsberg BNA, in September the Internal Revenue Service proposed a rule change for the reporting of donations of $250 or more. With the old rule many taxpayers were able to make donations and then claim them on the Form 990 without having to have a “traditional contribution receipt.”  The new rule change is planning to stop taxpayers from being able to claim donations without a “traditional contribution receipt” and make sure they have a “contemporaneous written acknowledgement” of any donations over $250.  If this new rule does occur the Internal Revenue Service would create a new form that details “information on gifts… or a ‘donee report.’”  The purpose of this new form is to help simplify and have more organized audits. For more information please visit https://philanthropy.com/article/IRS-Weighing-New-Option-for/234151.

The First Church of… Cannabis?

In one of the more interesting nonprofit stories in the news recently, the First Church of Cannabis in Indianapolis has received its tax exempt status from the IRS. The IRS determination letter, which has been published online, dates from March 27, 2015 and grants 501(c)(3) status to the organization as a church.  According to Wikipedia, the First Church of Cannabis was formed in March 2015 by Bill Levin, who titles himself “Grand Poobah” of the church. The church has a list of twelve commandments called the “Deity Dozen”, which includes abstention from Internet trolling.

We make no editorial comments on this development other than that it is a changing world!

View Archives

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 12 other subscribers

Latest Webinar Videos