Apparently, in the midst of IRS struggles to keep up with paperwork, and a huge backlog of 1023 applications, the IRS Advisory Committee on Tax Exempt and Government Entities (“ACT”) has determined that more aggressive oversight on the backend is the key to achieving greater compliance. According to the IRS committee’s recently published recommendations, small tax-exempt organizations could face heavier annual reporting burdens.
The ACT recently published its 2013 Report. In that report, the ACT proposed several ways in which the IRS might engage its responsibilities in an era of increasing budgetary constraints. The proposals focused on three areas: (1) increased reporting requirements for small exempt organizations that file Form 990-EZ; (2) improved Education and Training for Exempt Orgs; and (3) information sharing between the IRS and state charity regulators.
(A) Increased Reporting Requirements for Small Exempt Organizations
Form 990-EZ is the annual report form typically used by organizations with gross annual receipts of $50,000 to $200,000 and total assets of less than $500,000. The Report recommended retaining the current filing thresholds, but it proposed increasing the amount of information required from Form 990-EZ filers. Specifically the Report suggested possibly requiring the following additional schedules from Form 990-EX filers:
(1) F (activities outside the U.S.),
(2) I (grants),
(3) J (compensation),
(4) L (transactions with interested persons),
(5) M (noncash contributions), and
(6) R (related organizations).
In addition to these recommendations, the ACT also proposed the possibility of adding questions pertaining to the organization’s governance to Form 990-EZ. These additional reporting obligations could be quite significant.
This perspective is at odds with recent Congressional testimony from IRS Commissioner Danny Werfel, who indicated that small tax-exempt organizations should operate under reduced IRS accountability. It is further notable in light of the IRS’s long-developing indications that the front-end Form 1023 application should be simplified. The ACT’s recommendations could therefore effectively wallop small tax-exempt organizations on the back-end, through more onerous ongoing reporting requirements. It also would bode poorly for legal compliance, since many nonprofits have already automatically lost their public charity status for missed Form 990 filings.
(B) Improved Education and Training for Exempt Organizations
The ACT Report also contains some good news. The Report proposes various improvements in the areas of communication, education and training for individual who manage exempt organizations, including the following:
(1) Upgrades to the IRS website with additional links for easier navigation.
(2) The Report also proposed improved accessibility to IRS resources.
(3) Continued support of collaborative efforts to train alongside academic institutions (Academic Institutions Initiative).
(C) Information sharing between the IRS and state charity regulators.
The Report also proposes improved sharing of information with state charity regulators. State participation in the Pension Protection Act of 2006 was one area in which the IRS and state regulators would share information. Of greater concern, however, were the Report’s proposals for increased enforcement referrals from state charity regulators. According to the Report, the IRS would now educate state enforcement officials about IRS enforcement priorities, a development that seems a clear and disturbing blurring of federal and state responsibilities. Apparently, give the IRS’s recent resource shortages, the federal agency now seeks to commandeer state resources.
Although some of the report’s contents are troubling, please note that the proposals are, as of now, only recommendations, and do not yet create additional obligations for exempt organizations. Should the IRS eventually implement these proposals, however, small exempt organizations could face substantially increased annual reporting requirements.
For the full ACT Report, please click here.