HANO: IRS: What it did in 2010 and what it plans for 2011

IRS: What it did in 2010 and what it plans for 2011

From ERI Economic Research Institute

If you feel like the IRS might be watching you a little bit more closely these days, a new report from the Exempt Organizations Division of the Tax Exempt and Government Entities of the IRS provides some basis for that observation. EO Director Lois Lerner outlines accomplishments in fiscal year 2010 and previews plans for FY 2011 in the 29-page report. It is worth reading the entire report to get an understanding of EO's priorities, but below are some highlights.

What Happened in FY 2010? Increased Monitoring – The statistics show that IRS has stepped up its efforts to check on charity compliance. For example:

Audits of tax-exempt organizations increased from 7,861 in FY 2008 to 10,187 in FY 2009 (a 30 percent rise) and to 11,449 in FY 2010 (another 12 percent).
Compliance checks (in which EO asks about a specific item on a Form 990 or for more information on an organization's operations) are also being used extensively—they require fewer resources and, as the report delicately puts it, enable the IRS to "touch more organizations than by using an exclusively exam-based strategy."
Collaborations with the Social Security Administration and the states also allowed EO to identify more effectively nonfilers and noncompliant organizations so that the cases selected for exams were more likely to result in finding significant issues.

Growth in EO Staff. One reason for the increased enforcement is more EO staff—the total has grown from 837 positions in FY 2008 to 910 in FY 2009, with another increase to 942 in FY 2010. Even more telling, 100 of these new positions over the two-year period were in the Examinations area. In contrast, staffing in all other major areas increased by a total of only 5 from FY 2008 to FY 2010.

What's Planned for FY 2011 – Part of the rationale for the revised Form 990 was to collect the data that the IRS needed to ensure compliance. Now the IRS will be using the information to focus its limited resources.

Cross checks of compensation reporting. Now that time frame (calendar year versus organization fiscal year) for Form 990 reporting of compensation conforms with W-2 reporting, the Form 990 information can be compared to what a nonprofit employer reports to the Social Security Administration. The IRS will be looking to see if compensation is reported on Form 990 but not on Form W-2 or 941, or if there are other reporting discrepancies.
Confirmation of charitable purpose. Consumer Credit Counseling and Down Payment Assistance programs will continue to be scrutinized to see if they really have been established for a charitable purpose or if they are primarily self-serving. Supporting organizations, typically set up to benefit one charity, are also targeted for special review.
Reporting of loans. Over the past several years, IRS investigations of loans to officers, directors, trustees, and key employers has resulted in tax assessments of over $5.5 million and over $480,000 in employment taxes. There were also many errors in reporting that needed adjustment. The IRS plans to continue its review of these loans.
Prohibited political activity for charities. The IRS will continue to investigate allegations of prohibited political activity by those exempt under IRC Section 501(c)(3), based on the IRS experience in the past few election cycles and has developed better processes to deal with them.

What Nonprofits Should Do – The IRS will be continuing its efforts to ensure that the nonprofit sector complies with the requirements that come with being a tax-exempt organization. Nonprofits can take some simple steps to lessen the likelihood of receiving an inquiry from the IRS in the coming year. Read more...