Tax Time: IRS to Keep a Close Eye on Nonprofits

By: Chris Vest

The IRS 2013 work plan shows what the agency will be watching as tax-exempt groups file their Form 990s this year. [Titled "Under Scrutiny" in the print edition.]

The Internal Revenue Service exempt organizations office (EO) releases a work plan each year that associations can use to stay informed about what issues are top-of-mind for the agency that has oversight of the tax-exempt community.

The Fiscal Year 2013 work plan [PDF] reveals that the EO continues to have a strong interest in the governance and compensation practices of nonprofit organizations, their political activities, and reporting of unrelated business income.

Executive compensation. This year the agency announced it will begin examinations of organizations reporting high annual gross receipts with very low total compensation to officers, directors, and key employees. The agency's concern is whether some organizations may be avoiding transparency by hiding compensation levels.

Political activities. Based on Form 990 reporting, the IRS has identified 300 cases of possible impermissible campaign intervention in the first quarter of FY13. The agency's standard practice is to refer those cases to a committee of career civil servants for evaluation. Based on that review, the agency will determine which organizations to examine more thoroughly.

Unrelated business income. Last year, the EO completed compliance checks on 400 organizations that had reported taxable unrelated business activities on their Form 990s but had not filed Form 990-T. That work resulted in the IRS securing about 140 delinquent returns and more than $260,000 in tax payments. In about a quarter of the cases, inaccurate reporting on the returns resulted in organizations being examined for UBIT issues.

In FY13, the IRS will examine a sample of organizations reporting substantial gross unrelated business income for three consecutive tax years but reporting no income tax due for any of those years. The EO said it remains concerned about whether organizations are accurately reporting their sources of unrelated business income and correctly allocating and deducting any expenses associated with that activity.

Chris Vest is director of public policy at ASAE. Email: [email protected]