Archive for Form 990

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As a non-profit organization, you face different types of risks than for-profit companies. Board members and financial executives are often surprised at the extent of the tax exposures actually faced by tax-exempt organizations.

Non-profit organizations are open to many tax and reputational risks, as Form 990 tax filing is open for the world to see. Tax matters that may affect your organization include unrelated business activities, intermediate sanctions, donor and fundraising issues. Other topics such as fringe benefits, nonqualified deferred compensation arrangements, and joint ventures take on new significance from the perspective of your non-profit organization’s tax function.

To make matters even more challenging, the IRS has also announced it is increasing the use of data queries of tax filings for selection of tax-exempt organizations for examination.

Watch our webinar to learn more about:

  • The top 10 U.S. Federal issues facing non-profit organizations
  • Our predictions for IRS audit selection queries
  • Best practices for your tax risk function
  • Identifying red flags and minimizing tax/reputational risks with a diagnostic check-up

Who Should Watch: Board Members, Executive Management, Chief Financial Officers, Finance Department Members

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The Tax Exempt and Government Entities Group (“TE/GE”) Releases 2017 Work Plan

The Tax Exempt and Government Entities Group (TE/GE) of the Internal Revenue Service (IRS) recently released its Fiscal Year 2017 (FY2017) Work Plan. The work plan summarizes the IRS’s accomplishments for FY2016 and outlines its focus for FY2017.

TE/GE explains that it is focusing on improving processes and doing more with less. The work plan states that the department’s gold standard for any new program or process change will be that it is transparent, efficient and effective.

The use of “data-driven decision making” for audit selection is one iStock_000010827673_Smallof the IRS’s more important and effective process changes. The IRS previously indicated that there are over 190 queries in its data-driven case selection technique for Form 990, Return of Organization Exempt From Income Tax. The filters used in its return selection modeling process for examination of Forms 990 have not been made public, though tax-exempt organizations and their tax advisors are certainly aware of many of the exposure areas. Please see our blog published in February 2016 that highlights some common audit selection indicators.

The five strategic issue areas for FY2017 are a continuation of the FY2016 IRS work-plan focuses, and include the following:

Exemption – issues such as non-exempt purpose activity and private inurement.

Protection of assets – issues including self-dealing, excess benefit transactions and loans to disqualified persons.

Tax gap – tax liabilities arising from employment tax and from unrelated business income tax – audit adjustments for items such as excessive expense allocations, net operating loss deductions, rental activity, advertising, debt-financed rental and investment income.

International – issues such as funds spent outside the U.S., exempt organizations operating as foreign conduits and Report of Foreign Bank and Financial Accounts (FBAR) filing requirements.

Emerging issues – such issues as non-exempt charitable trusts and the new compliance requirements for tax-exempt hospitals.

The Exempt Organizations Rulings and Agreements group is expecting to continue to improve processing and timeliness of applications for tax-exemption. To increase its efficiency, last year the IRS began to reject incomplete applications, which they return with an explanation of the reason for the rejection. This ensures that only completed applications are assigned to review agents for review, thereby allowing for a more efficient and speedy process.

The IRS’s examination group is expecting to review private foundation returns that have irregularities. They are also planning on developing an “ongoing rolling statistical sample” review of tax-exempt organizations to assess the overall level of compliance of the exempt organization community. The IRS’s Exempt Organizations Examinations plans are expected to identify and address high-risk areas of noncompliance with the federal tax laws applicable to tax-exempt organizations.

Please contact us if you would like to discuss how the FY17 IRS work plan may affect your organization

For more information please contact Laura J. Kenney at lkenney@blumshapiro.com or at 617.221.1944.

BlumShapiro offers the accounting, tax and business consulting expertise non-profits need today. We are one of the largest non-profit accounting service providers in New England, our blend of accounting expertise and knowledge of non-profit organizations means we can offer you tremendous added value. We can assist you in complying with state and federal grant requirements, charitable giving rules, capital campaigns, endowment fund responsibilities and other specialized needs. Learn more >>

Laura J. Kenney, CPA
Tax Director

View Laura’s Bio Here >>

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

IRS Audits on the Rise for Tax Exempt Organizations

shutterstock_228440362Whether you are a board member, executive director, accounting manager or CFO of a non-profit organization, you should be aware that the Internal Revenue Service (IRS) is increasing their audits of the Form 990.

Effective for tax years beginning in 2008, the IRS extensively revised Federal Form 990to include a new summary page, a new governance section, enhanced reporting of executive compensation and an organization’s relationships with insiders and other organizations and new reporting for non-cash contributions, foreign activities, tax-exempt bonds and hospitals.

Now that several years have passed since the 990 revisions, the IRS has commenced auditing Form 990s based on “data-driven” criterion. This means organizations will be automatically selected for audit if certain data is detected by this automated process. The shift to “data-driven” assessments of an organization’s compliance with the federal tax laws, means that Form 990 preparation is more critical than ever. A properly prepared and executed information return will ensure that an organization’s chances for random audit selection are minimized and that exposure to income taxes, both on unrelated business income tax as well as other income by virtue of loss of exempt status, are kept at the lowest level possible.

Continue reading the article here >>

State Registration Requirements for Fundraising

iStock_000012012741_ExtraSmallMost states require registration with the state agency before soliciting contributions. Solicitation of contributions generally includes any requests of the state’s residents by mail, phone, email, advertisement, etc., and is not dependent on whether contributions are actually collected. In the past, this requirement has not been enforced, mostly because the states lacked the resources. However, in recent years there were changes in the Form 990 that now require non-profits to provide information about their state registrations, bringing more attention to this requirement. Each state’s requirements and filings are different and vary greatly. Prior to the solicitation of contributions in other states, management of non-profits should reach out to the different state agencies to understand their requirements and how to register. The National Association of Sate Charity Officials (NASCO) website has a listing of all the state offices and contact information here.

Shannon Crowley Massachusetts CPAShannon Crowley is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Shannon oversees audit engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects. Shannon has worked with clients in a variety of industries, including healthcare, higher education, non-profit, manufacturing and distribution.

What is Considered Unrelated Business Income?

shutterstock_130231046Non-profit organizations that have gross income of $1,000 or more from an unrelated trade or business are required to file Form 990-T with the IRS. But what is considered unrelated business income (UBI)? According to the IRS, for most organizations, an activity is an unrelated business, and therefore subject to unrelated business income tax (UBIT), if it meets the following three requirements.

  1. It is a trade or business;
  2. It is regularly carried on; and
  3. It is not substantially related to furthering the exempt purpose of the organization.

An example of possible UBI is a non-profit organization that regularly holds weddings or other events not related to the organization’s exempt purpose on their facilities. Another is a non-profit university that regularly charges the public for usage of a parking garage for unrelated activities. Note that there are a number of exclusions and exceptions to the general definition of UBI. Determining whether a certain activity is UBI is not usually black and white and requires some judgment and analysis. Annually, management should consider their current year operations to determine if there could possibly be any UBI. Management should seek help from their tax preparer for guidance. All management decisions should be supported and documented in writing. For more information and detail on UBI and examples and exceptions, please click on the following link to the IRS Publication 598.

 

Shannon Crowley Massachusetts CPAShannon Crowley is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Shannon oversees audit engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects. Shannon has worked with clients in a variety of industries, including healthcare, higher education, non-profit, manufacturing and distribution.

990 Policy Compliance Series – Compensation Policies

Compensation is one of the hottest topics facing non-profit organizations in recent years. The IRS has developed questions for non-profits to answer in order to shine a light on the compensation practices for the top earners of the entity. Again, these are not legally mandated policies, however, there are very specific requirements relating to the entity’s process in order to favorably answer the questions surrounding compensation practices.

The process for determining compensation for the individuals listed in Part VI, questions #15a and 15b must include following three elements:

1. Review and approval by a governing body or compensation committee. The members of the governing body or committee must be free of conflicts of interest surrounding the compensation arrangement under review. A conflict of interest by a member of the committee is deemed to be present if:

a. The member or his or her family member is participating in or economically benefitting from the compensation arrangement.
b. The member is in an employment arrangement subject to the direction or control of any person participating or economically benefitting from the compensation arrangement.
c. The member receives compensation or other payments subject to approval by any person participating or benefitting from the compensation arrangement.
d. The member has a material financial interest affected by the compensation arrangement.
e. The member approves a transaction benefitting the person participating in the compensation arrangement, who then, in turn, has approved or will approve a transaction providing economic benefit to the member.

2. Use of comparability data regarding the compensation arrangement being determined. The data being used must be for similarly qualified persons in functionally comparable positions at similarly situated organizations. Typically, non-profits will review the compensation for officers and key employees, which is disclosed in the 990s of other similar organizations. Form 990s of other organizations can be downloaded from websites such as Guidestar, or in Massachusetts, the Attorney General’s website for public charities.

3. Finally, all of the processes above should be documented in a timely manner with proper records kept as to what data were used, who participated in the process (and if they were free of conflicts of interest), when the discussion occurred, what deliberations transpired and what decisions were made.

If you follow the above process and you answer yes to either #15a or #15b, you must include a description in Schedule O. In that description you are required to identify the positions that were covered in the process to determine compensation above, and the year the process was last performed. If the organization did not compensate its officers, directors, top management official or other key employees, or if any of the above elements were not met, the answer should be “no”. A disclosure of why the answer is no is not required, but is allowed and could be helpful to explain the reason for answering “no”.

Read other articles in our “990 Policy Compliance” series:

Jeanne Pagnozzi Boston Accountant

Jeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

990 Policy Compliance Series – Conflict of Interest Policy

Continuing with our 990 policy compliance series is a discussion about what is required for a sound conflict of interest policy. Everyone can agree that an entity that uses public, government or donated funds should have a policy to address potential conflicts of interest with those that are controlling the organization. On Part VI of the 990, there is a three-part question regarding the existence of a conflict of interest policy and its components.

First, what is a conflict of interest (COI)? The IRS defines COIs as a circumstance that arises “when a person in a position of authority over an organization, such as an officer, director, manager or key employee (as defined by the IRS), can benefit financially from a decision he or she could make in such a capacity, including indirect benefits, such as to family members or businesses with which the individual is closely associated.”

The following criteria must be met in order to answer “yes” to the three-part question on Part VI of the 990 regarding your COI policy:

  • #12a: Is there a written policy? Answer yes only if a written policy is in place, as of the last day of the tax year, that defines conflicts of interest, identifies the class of individuals to which the policy applies, facilitates disclosure of information that can help identify potential conflicts of interest, and specifies procedures to be followed in managing conflicts of interest.
  • #12b: Are covered individuals required to disclose potential conflicts? Answer yes only if officers, directors, trustees and key employees (as defined by the IRS) are required to disclose or update annually (or more frequently) information regarding their interests and those of their families that could give rise to conflicts of interest.
  • #12c: Did the Organization regularly and consistently monitor and enforce compliance with the policy? The IRS does not define how this is to occur, but, if the answer is yes, then a narrative disclosure describing the process of how the policy is monitored and how conflicts are dealt with is required on Schedule O. Schedule O is the supplementary schedule that is used to provide any narrative or other information to answer required questions throughout the 990 or to provide any information that would be useful to the IRS or reader of the 990. In describing the process on Schedule O, include the following:
    • Explanation of which persons are covered by the COI policy.
    • The level at which determinations of whether a conflict exists are made and at what level they are reviewed.
    • Explanation of what restrictions, if any, are imposed on individuals with a conflict, such as prohibiting them from participating in the deliberations and decisions regarding the transaction under review.

In our next post we’ll cover the process for determining compensation for top earners at organizations.

Read other articles in our “990 Policy Compliance” series:

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

990 Policy Compliance Series – What is an Independent Board Member?

On the 990, the first questions regarding the governing body are how many voting members are on the board and how many of those members are independent. A member of the governing body is considered “independent” only if ALL of the following four circumstances were applicable at ALL times during the organization’s tax year (fiscal year):

1. The member was not compensated as an officer or other employee of the organization or a related organization (simply put, any entity that is a parent, subsidiary, brother/sister, supporting/supported organization to the filing entity at any point during the year – see Schedule R instructions for more complete definitions). The member also was not compensated by any unrelated organizations for services provided to the filing entity or to a related organization. There is an exception for receiving compensation as an agent of a religious order (there are specific conditions that must be met).
2. The member did not receive total compensation exceeding $10,000 during the tax year from the filing entity and/or a related organization as an independent contractor (not including reasonable compensation for services provided in the capacity as a board member).
3. Neither the member nor any of his or her family members was involved in any transaction with the filing entity which is reportable on Schedule L (Transactions with Interested Persons – see IRS Schedule L filing tips for more detailed reporting requirements).
4. Neither the member nor any of his or her family members was involved in any transaction with a related organization that is reportable on Schedule L.

The IRS specifically states that the following circumstances do not indicate a lack of independence as a board member:

1. The member is a donor to the organization.
2. Religious exception (as discussed above).
3. The member receives benefit from the organization by being a member of the charitable or other class that is served by the organization.

Further, the IRS expects the organization to engage in all reasonable efforts to obtain the necessary information in order to determine whether members are independent. A good conflict of interest policy can help with this effort. Stay tuned for a future blog post on effective conflict of interest policies.

Read other articles in our “990 Policy Compliance” series:

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

 

990 Policy Compliance Series – Ensuring Transparent Governance and Operational Policies

As a tax-exempt organization, you are subject to a greater level of scrutiny from various sources than many other types of entities. Within the annual Form 990 filing, the IRS inquires about certain compliance, governance and management practices, which allows the government, donors and the general public to gain detailed knowledge about your organization. In Part VI of the 990, there are several policy and governance questions asked of filing entities, and, as laid out in the detailed instructions, there are some very specific requirements with which you must comply in order to answer affirmatively. Many of these policies are not legally mandated, and the non-profit faces no fines or penalties for not adopting the policies. However, all 990 filers are required to answer these questions, and certainly it is in the non-profit’s best interest to consider and adopt policies that help to ensure transparent and sound operational processes.

In the coming weeks, we will publish a series of posts on how to stay in compliance with certain 990 governance and operational policies as well as some further information to help you answer the questions appropriately.

Read other articles in our “990 Policy Compliance” series:

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

Using Form 990 for Organizational Improvements

While many non-profit organizations may be exempt from income taxes, they are not exempt from the federal government’s recordkeeping requirements. Among those requirements are tracking revenues and expenses and reporting those items to the Internal Revenue Service (IRS) by way of Form 990. The requirement applies to organizations as small as the local Little League affiliate or as large as a major hospital.

While organizations file Form 990 because it is a requirement to maintain their exempt status, many may not realize that there are many other ways the Form 990 can be used to benefit your non-profit organization.

The Form 990 not only serves public purposes, it can serve organizational purposes as well, allowing board members, donors and others access to information about an organization’s financial management, operations and governance. It is a tool—a research document—for understanding your organization, its strengths and its weaknesses.

Read the full article to learn more >>