Last year, the House Ways and Means Oversight Subcommittee, under the leadership of Louisiana Rep. Charles Boustany conducted several hearings that touched on nonprofit compliance with federal regulations for tax-exempt status and how the IRS was tracking this compliance.
It was announced this week that Boustany has been re-appointed as chair for the oversight subcommittee. Along with all its other challenges in 2013, what might the oversight subcommittee hold in store for tax-exempt organizations? How can charitable nonprofits ensure they are on the right side of current requirements for maintaining their tax-exempt status?
Boustany and the oversight subcommittee’s concerns last year were focused on larger organizations like associations (specifically the AARP), hospitals and universities, all of whom accrue significant earned income revenues. Boustany announced the goal of the hearings was “to ensure that the tax-exempt sector is operating in an efficient manner and that the laws governing tax-exempt organizations are being applied fairly and evenly.”
One of his questions for the IRS, which was called to report to the subcommittee last May, also asked about the usefulness of information supplied on the relatively new Form 990 — specifically, “how the redesigned Form 990 increased transparency and accountability of tax-exempt organizations.”
Boustany has repeatedly stated his opinion that nonprofits are not being adequately monitored by the IRS for abuses of their tax-exempt status.
While he’s certainly more interested in pursuing abuses by major organizations, the principles under discussion apply to smaller nonprofits as well. At this time, there are a few good ways to be protected from an audit or other scrutiny that may uncover embarrassing — or worse — lapses in compliance.
One is for your staff and board to be familiar with the “long form” 990. This annual federal reporting form for tax-exempt organizations is a key tool for monitoring nonprofits’ activities. Even if your nonprofit has only to fill out the EZ (postcard) form, a look at the Form 990, as the long form is called, will be informative in planning for your organization’s future growth and your processes around that growth.
Nonprofits required to complete the long form should have this done in conjunction with a professional accountant who’s familiar with nonprofit tax compliance. The Form 990 is due on the 15th day of the fifth month following the end of your organization’s tax year. If you are on a calendar year, now is a good time to look at the information on the Form 990 and discuss it with your board as a planning and good practices document, as well as a reporting form.
The second way to maintain high standards as a tax-exempt organization is to simply be familiar with information provided by the IRS about staying compliant. The IRS website provides extensive, easy to comprehend information at www.stayexempt.irs.gov/ExistingOrganizations.aspx.
Five activities can jeopardize your status.
Activities that provide private benefit to individuals associated with the organization should be carefully monitored and range from excessive pay for an executive director to activities that put money in the pockets of one or more of your board members.
Another red flag, more familiar to most nonprofits, is engaging in political activity or substantial activity designed to influence legislation (i.e., lobbying).
Of most concern to young nonprofits I talk to is activity that generates unrelated business income. There’s a great deal of confusion about this requirement that can be resolved by going to the IRS website for clarification and by discussing this with your nonprofit-knowledgeable accountant.
Many nonprofits generate earned income, but the income must be related to the organization’s mission and any net revenue must be reinvested in meeting the mission.
Follow these guidelines and, while the changes nonprofits may face in this rough-and-tumble political year can’t be predicted, you can be protected on those matters where you do have control.
Sarah Todd is founder and principal of Change Pioneers, an information source on effective change leadership. She can be reached at changepioneers@gmail.com or 912-224-2120.