By Joyce Underwood, CPA
The IRS has recently added new issue-specific guidance regarding charities and nonprofits in the form of “Snapshots.”
The guidance is a result of internal collaboration and provides fresh insight and perspective to agents on compliance areas to help them effectively and efficiently perform their work. These IRS employee job aids are public documents and provide insight to nonprofits and other outsiders on how the IRS is thinking and responding to issues.
For each issue, the guidance provides lists of relevant law and resources, analysis and background on the issue, and tips to help the agent recognize if an organization has an issue in the area. The concise format allows the reader to focus on the definitions, law and facts, and hopefully to efficiently and effectively form a conclusion.
The following is a summary of topics for charities and nonprofits included in the Snapshots issued to date:
If an organization is determined to be Lessening the Burdens of Government it can qualify as an Internal Revenue Code (IRC) Section 501(c)(3) charitable organization. The guidance, with the application of facts and circumstances criteria, helps clarify if the activities represent a burden of government and if the organization by its activities lessens that burden.
Electronic Health Records (EHRs) or Regional Health Information Organizations (RHIOs) have been formed to facilitate the electronic use and exchange of health-related information in response to incentives and appropriations for health information technology provided by the American Recovery and Reinvestment Act of 2009 (ARRA). The IRS’ concern is to ensure organizations are organized for an exempt purpose, lessen the burden of government, and act in a manner consistent with Health and Human Services (HHS) standards.
Taxable unrelated trade or business activity does not include sponsorships, so determining if an activity is Advertising or Qualified Sponsorship Payments is important to many nonprofits. Review of sponsorship arrangements includes an assessment of any substantial return benefit, payments contingent on attendance, use or acknowledgment of a name or logo, and connections to a qualified convention or trade show or exclusive provider arrangements. Certain language is provided which, if used in an acknowledgment, is an indication of a taxable advertisement.
Definition of a Disqualified Person: The term “disqualified person” is critical to private foundations to analyze whether various Chapter 42 excise taxes apply, and in determining whether an organization qualifies for public charity status as a supporting organization or meets the public support test for IRC Section 509(a)(2). It is important to identify relationships and transactions between the organization and private individuals, corporations, partnerships and other potential disqualified persons.
Taxes on Failure to Distribute Income —Carryover: Private foundations with mandatory distribution requirements that carry over excess distributions from earlier years can correct their distributable amounts and the amounts of qualifying distributions in order to determine the correct excess or deficient distribution carryovers. They are not barred by the statute of limitations on changing the carryover, however, they can only correct Section 4942 excise tax for years open by the period of limitations on assessment.
Penalty Abatement due to Reasonable Cause is permitted for private foundation first-tier taxes under Chapter 42 of the Internal Revenue Code, except for penalties assessed for self-dealing. Since there is no definition of “reasonable cause,” the determination of whether a taxpayer’s actions were due to reasonable cause under Section 4962 and in good faith is made on a case-by-case basis. Examples of court cases and legislative history provide perspective on how to assess the facts and circumstances.
For private foundations with distribution requirements, Administrative Expenses Treated as Qualifying Distributions are allowed. Qualifying distributions include that portion of reasonable and necessary expenses, direct and indirect, that a foundation incurs in implementing exempt purposes. Direct expenses are those which can be specifically identified with a particular activity. Indirect (overhead) expenses are not specifically identifiable with a particular activity. Neither the Internal Revenue Code nor the Treasury regulations set any limits on the amount of administrative expenses that may be used as qualifying distributions as long as they are reasonable and necessary for the accomplishment of the private foundation’s exempt purposes.
Private Operating Foundation under IRC 4942(j)(3) discusses the advantages to having private operating foundation status as opposed to that of a private non-operating foundation, and reviews the annual tests (Income, Assets, Endowment and Support) for qualification based on an organization’s qualifying distributions, income and assets. An organization that fails to qualify as an operating foundation in a given year may have to distribute additional amounts to other charities in order to avoid excise taxes on failure to make sufficient qualifying distributions.
The release of the Snapshots is a welcome educational resource. Knowing the guidance and resources recommended by the IRS when evaluating a tax position, and the steps they take in their analysis can be helpful in responding to inquiries or avoiding potential compliance and exemption issues. The full list of Snapshots, which also includes topics for retirement plans, federal, state and local governments, and tax-exempt bonds, can be found at https://www.irs.gov/government-entities/tax-exempt-and-government-entities-issue-snapshots. The IRS plans to add and update Snapshots periodically in the future.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com