Your 990: What You Need to Report and What Potential Donors Want to See

Megan Randolph, CPA

Agenda

Introduction

IRS Initiatives

Reporting for Potential Donors

Legislative Focus

Questions and Answers

Triple Crown of Government Tax Subsidies

The cost to taxpayers of just hospital tax exemptions on the state, local and federal levels was approximately $12.6 billion in 2002 and this almost doubled to $24.6 billion in 2011. Government Tax Subsidies:

1. Charitable deductions for contributors 2. Tax exemptions for related income, sales and property taxes 3. Ability to issue tax exempt bonds and the related exclusion of income

by the bondholders TAX EXEMPTION IS A PRIVILEGE AND NOT A RIGHT

Applications for Exemption—First Bite

Form 1023

– IRS will now return your application package and user fee (Rev. Proc. 2016-5) if do not have everything required

– Must provide additional information within 28 days or case closed

– Sample questions on IRS website

Form 1023 Interactive

Form 1023-EZ

Form 1024—1998 Form being revised

Form 1023-EZ

Taxpayer Advocate—37% failed organizational test

The 1023-EZ only asks organizations to assert they meet

organizational and operational tests of c3 status– no

documentation required

Most are small organizations without websites, so hard to check

Evaluating the Form 1023-EZ process to determine potential

improvements to the application and review process.

Filing Requirements • Returns due 4 ½ months after year end

– Allowed two 3-month extensions of time to file – first is automatic, second by filing form 8868

• Less than $50,000 in gross receipts – average for a 3 year period

– Form 990N – file on IRS website

• Between $50,000 and $200,000 in gross receipts and under $500,000 in total assets

– Form 990-EZ

• More than $200,000 in gross receipts or $500,000 in total assets

– Form 990

– Greater than $10,000,000 in total assets and files more than 250 returns, must e-file

Other Filing Requirements

• 990T

– If unrelated business taxable income of greater than $1,000 must file

– Consider state filing requirements – follow C Corporation rules

• Attorney General reporting requirments

Revocations-Failure to File for 3 years

Reinstatement of revoked organizations: Rev. Proc. 2014–11

Streamlined retroactive reinstatement process for small organizations

– Some can even file Form 1023-EZ

Retroactive reinstatement process (within 15 months of revocation)

Retroactive reinstatement process (application more than 15 months from revocation)

We are still seeing these cases.

Many cases involve organizations affiliated with churches that thought they did not have a filing requirement.

TE/GE Priorities for FY 2016

Working smarter—Data Analytics

Developing a program to make Forms 990 available in e- File format

Refining information document requests to reduce the length of the

examination processes

Targeted examinations

Targeted Examinations-Five Strategic Issue Areas

Exemption

Protection of Assets

Tax Gap

International

Emerging issues

Exemption: Non-exempt Purpose Activity and Private Inurement

What does application for exemption say they were

going to do?

What are they doing now?

Are unrelated activities substantial?

Are activities (c)(3) activities or (c)(6) activities?

IRS will revoke organizations and not let them just be

reclassified

Private inurement—Schedule L transactions

Protection of Assets

Self-dealing

Excess benefit transactions

Loans to disqualified persons

International

Oversight on funds spent outside the U.S.

Expenditure responsibility

Terrorist activities—OFAC

Foreign conduits—Does the board have control?

FBAR

Tax Gap: Employment Taxes

Treasury Inspector General for Tax Administration (TIGTA) reviewed 25 exempt

organizations and found failure to remit payroll and other taxes, including

penalties and interest, totaling more than $25 million

Overall, approximately $875 million of payroll and related tax debt from EOs

Takeaways and Review

– Worker Classification Review

At stake—back pay, overtime, back taxes

Varying definitions among common, federal, state law

– Payroll Tax will be a focus if audited by IRS

Be sure 1099s are filed for all applicable payees

Keep W-9 files for all vendors– without an EIN or SSN, IRS will assess backup withholding at 28%

Tax Gap: UBIT

Results of IRS College and University Compliance Project (CUCP)

Disallowance of more than $170M in losses and NOLs due to:

Errors in computation or substantiation of NOLs

Lack of profit motive

Improper expense allocations (a Priority Guidance item)

Unrelated activities classified as exempt or excluded

Tax Gap: UBIT Issues

• Related party transactions—512(b)(13)—Schedule R is roadmap

• Rental--Personal property, services, net income rent

• Debt-financed income

• Laboratory and pharmacy to non-patients

• Particular services for members

• Alternative Investments

• Joint ventures

• Sponsorships

• Publishing and advertising

UBIT Issues: Net Operating Losses

• Net operating losses (NOLs) can be carried back 2 years and forward for 20 years. The IRS can question the validity of the NOL even if it occurred in a year that is not “open” for assessment.

• Page 1 of Form 990 gives a snapshot that shows whether expenses are wiping out income

– Activities with continual losses may lack a profit motive that is needed for a trade or business and may be disallowed

UBIT Issues: Allocation of Expenses

Page 9 asks an organization to characterize income as related or unrelated. If there is no net unrelated business income, the IRS may question whether there has been a reasonable allocation of expenses.

Improper Expense Allocation

Three baskets of expenses: Directly connected to UBI activity--deduct in full Exempt/ related expenses—do not deduct at all (e.g., development officer, CHNA) Dual use– allocate on a reasonable basis

Other Issues: Tax Exempt Bonds

Identifying private business use: where bond-financed property is (1) sold or leased, (2) subject to a management or service contract, (3) involved in commercial research activities, or (4) used in an unrelated business activity

Make sure your 990-T and Schedule K reporting is consistent—have you over-allocated use of bond financed property to unrelated uses to minimize income?

May want to have bond counsel assist with Schedule K since can be red flag

Emerging Issue: Hospitals and IRC 501(r) In order for a hospital to keep its 501(c)(3) status it must meet the Section 501(r) requirements:

Conduct a community health needs assessment (CHNA) at least once every three

years and adopt an implementation strategy;

Establish a written financial assistance policy (FAP) and a written policy relating to emergency medical care;

Limit amounts charged to a FAP eligible person to not more than amounts generally billed for emergency or medically necessary care. Do not charge a FAP eligible person gross charges for any care;

Do not engage in any extraordinary collection actions before making reasonable efforts to determine whether the individual is eligible for assistance under the FAP.

These requirements are in addition to the general 501(c)(3) requirements and the Community Benefit Standard

IRS Review of Hospitals

The Patient Protection Act provides that the IRS shall review at least once every 3 years the community benefit activities of each hospital to which section 501(r) applies.

Approximately 1000 hospitals are reviewed every year without contact from the IRS.

Public information such as Forms 990 (with attached financial statements), 990-T and websites are reviewed.

These “stealth” reviews have been happening!

IRS Pursuit

The IRS issued Final Regulations that are effective for tax years beginning after December 29, 2015.

The IRS is training 30 agents to examine hospitals to see if they are in compliance with the Final Regulations starting with the 2014 Forms 990

Where a compliance review shows that there may be noncompliance, a full-blown examination of the 501(r) issues may be opened. If there are other apparent tax issues, these may come under examination as well.

What do potential donors want to see?

In terms of the type of information, all donors want to understand the full story of an organization, including:

• The financial picture, including how an organization spends its money

• That a nonprofit is legitimate

• The basics of the organization—its mission, approach, and make up

• The breadth and depth of the cause

• The nonprofit's impact

The Financial Picture

• Page 1:

The Financial Picture

• Revenue Allocation:

The Financial Picture

• Expense Allocation:

Mission and Purpose

How effectively nonprofits achieve their missions—is the true "unmet need" of donors.

Trusted Sources and Location

• Donors have preferences on the source of information on nonprofits and where they want to find this information

– Third Party Sites

– Rating Agencies

– Organization

• Studies have shown that donors prefer to receive the financial information directly from the organization

Legislative Focus

Protecting Americans from Tax Hikes Act of 2015 “PATH” Act

Tax Free Distributions from IRA’s for charitable purposes

Exception from UBIT for Payments from Controlled entities

Qualified conservation contributions

Contributions of Food Inventory

Charitable contributions to Agricultural Research Organizations and Public Charity Status

No Gift Tax on Gifts to Certain Exempt Organizations

Section 501(c)(4) Social Welfare Organization Notice of Formation and New Exemption Application

Charities Helping Americans Regularly Throughout the Year (CHARITY) Act

• Make donor-advised funds eligible charity the IRA rollover

• Reduce excise tax imposed on investment income to 1% uniformly

• Standard mileage deduction for charity volunteers, medical and moving

• Promote transparency by requiring nonprofits to file electronically

• Create a limited exception to the excess business holding tax rules

• Express the sense of the Senate that the promotion of charitable giving be one of the goals of comprehensive tax reform

Contact Information

Megan E. Randolph, CPA – Senior Manager, Tax – megan.randolph@warrenaverett.com

– 205-769-3468

Questions &

Answers