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Stay Exempt! A Guide for Charitable Organizations with Changing Leadership

Presenter, Exempt Organizations

Stay Exempt! | Exempt Organizations, TEGE

You are not alone

• Approximately 1.5 million tax-exempt organizations

•  In 2012; 1,081,891 - 501(c)(3) organizations filed with the IRS

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Stay Exempt! | Exempt Organizations, TEGE

Topics for Today

How to stay exempt

• The cardinal rule – a exempt purpose is essential

• Filing requirements

• Fundraising

• Recordkeeping

•  IRS Resources 3

Stay Exempt! | Exempt Organizations, TEGE

What is an “exempt purpose?”

•  Religious •  Charitable •  Scientific •  Testing for public safety •  Literary •  Educational •  Fostering national or

international amateur sports competition

•  Prevention of cruelty to children or animals

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All 501(c)(3) organizations are organized and operated exclusively for one or more of these purposes:

Stay Exempt! | Exempt Organizations, TEGE

Passing the Operational Test

•  If your organization…

•  operates exclusively for an exempt purpose, and

•  conducts activities furthering its exempt purpose (non-exempt activities are insubstantial)

•  You pass the operational test

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Stay Exempt! | Exempt Organizations, TEGE

Be Careful About the “Big Five”

•  Private benefit

•  Lobbying / legislative activity •  Political activity

•  Failure to file

•  Too much unrelated business income

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Stay Exempt! | Exempt Organizations, TEGE

Private Benefit

A charity’s activities must serve a public interest

Activities must not • Further private interests

• Permit excess benefit to any individual or organization

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Stay Exempt! | Exempt Organizations, TEGE

Inurement & Private Benefit

Private benefit to insiders (i.e., board members, officers, key employees) is inurement – ABSOLUTELY PROHIBITED

Private benefit must be more than incidental; not limited to insiders

All inurement is private benefit, but not all private benefit is inurement

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Stay Exempt! | Exempt Organizations, TEGE

Lobbying / Legislative Activity

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Lobbying – attempting to influence legislation

Measurement methods • “Substantial Part” test • “Expenditure” test

Stay Exempt! | Exempt Organizations, TEGE

Political Activity

Direct and indirect candidate support

• Contributions

• Public statements for/against a particular candidate

• Participation in campaigns

ABSOLUTELY PROHIBITED

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Stay Exempt! | Exempt Organizations, TEGE

Filing Requirement

Pension Protection Act of 2006 • Failure to file required return (Form

990, 990-EZ, 990-PF or 990-N) for three consecutive years results in loss of exemption • Organization must re-apply and pay

appropriate user fees

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12 FORM 990 | EXEMPT ORGANIZATIONS

Form 990-series Filing Requirements Who is Required to File?

•  Exceptions Which Form?

Private Foundations file Form 990-PF

Tax Year 2012 Form All organization may file 990 Gross receipts below $200K; and Total assets below $500K 990-EZ

Gross receipts at or below $50K 990-N

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Information Needed:

•  Legal name and address •  Employer identification number (EIN) • Web address •  Principal officer name/address • Confirmation of gross receipts

990-N (e-Postcard)

Stay Exempt! | Exempt Organizations, TEGE

Unrelated Business Income (UBI)

• Regularly carried on

•  Trade or business activity

• Not substantially related to organization’s exempt purpose

Substantial UBI activities causes operational test failure More – see Publication 598, Tax on Unrelated Business Income of Exempt Organizations 14

Unrelated Business Income (UBI)

Common Activities •  Selling advertising

•  Gaming

•  Selling merchandise or publications

•  Providing services

Exceptions •  Activities conducted by

volunteers • Convenience of

organizations members, students, employees

•  Selling donated articles • Distribution of low cost

articles •  Sponsorship •  Traditional bingo games

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Stay Exempt! | Exempt Organizations, TEGE

UBI Exclusions

•  Interest and dividends • Royalty income • Rental income from real property • Gains and losses from the sale of

property

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Stay Exempt! | Exempt Organizations, TEGE

Fundraising

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Start with these questions: •  Is the activity related to the

organization’s exempt purpose? • Does the activity fall within one of

the exceptions to UBI?

Stay Exempt! | Exempt Organizations, TEGE

Is Gaming “Charitable?”

Gaming is a recreational activity & a business • Gaming itself does not further exempt

purposes •  The sole purpose of a charity cannot be to

conduct gaming

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More – see Publication 3079, Tax-Exempt Organizations and Gaming

Stay Exempt! | Exempt Organizations, TEGE

Why Should I Keep Records?

•  Monitor progress •  Prepare financial statements •  Identify income sources •  Track expenses •  Track volunteers’ work •  Verify items on IRS and state returns •  Assist organization’s future leaders

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Stay Exempt! | Exempt Organizations, TEGE

Recordkeeping Basics •  Use a system that clearly shows income and

expenses •  Keep determination letter forever •  Keep Employer Identification number (EIN)

notification forever

•  Keep IRS returns until the statute of limitations has expired

•  Keep state or local forms and returns as long required by agency

20 More – see Publication 583, Starting a Business and Keeping Records

Stay Exempt! | Exempt Organizations, TEGE

Employer Identification Number (EIN)

•  Have only one (X0-X0XXXXX) •  Use for all accounts – bank and IRS Lost or misplaced EIN •  IRS computer generated notice •  Bank account number •  Call 800-829-4933 (7:00-7:00, Mon.-Fri.)

•  Authorized person, or •  Mailed to address of record

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22 FORM 990 | EXEMPT ORGANIZATIONS

Resources to Assist

HELP!

Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities

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To reach our Charities and Nonprofits page, go to IRS.gov and click “Information for…” then select Charities & Nonprofits.

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Find the latest developments affecting EOs by selecting EO Current Topics & News.

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The A-Z Site Index is one of our most helpful pages.

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Check out EO’s new on-line exempt org search tool. It’s updated monthly!

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Educational activities are

specially designed for

the EO community.

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You can also find the EO Audit page at IRS.gov by searching “Charity and Nonprofit Audits”

EO-Update: Free e-Newsletter

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Register for the EO UPDATE!

It’s FREE and it keeps you up to date with what’s happening in EO.

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StayExempt.irs.gov

This is one of the best ways to learn what’s important to

exempt organizations

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IRS Video Portal www.irsvideos.gov

Available to fit your busy schedule, online 24/7

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For More Information

Charities and Nonprofits page For forms, publications, general information: www.irs.gov/charities

Web-Based Training Program For 501(c)(3) organizations: StayExempt.irs.gov

General Questions Account issues only: 1-877-829-5500 (toll free)