form 1023 for return preparers -...

Form 1023 for Return Preparers Anticipating Compliance Challenges When 501(c)(3) Organizations Apply for a Tax Exemption

TUESDAY, DECEMBER 11, 2012, 1:00-2:50 pm Eastern

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Form 1023 for Return Preparers Seminar

James Skyles, Skyles Law Group

[email protected]

Dec. 11, 2012

Jim Ritts, RubinBrown

[email protected]

Today’s Program

Overview Of Form 1023 And Its Individual Parts

[Jim Ritts]

Review Of The Form 1023 Schedules

[Jim Ritts]

Form 1023 Compliance Issues Confronting Preparers

[James Skyles]

Current IRS Process For Reviewing Form 1023 Applications

[Jim Ritts]

Slide 7 – Slide 9

Slide 47 – Slide 54



Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

6

OVERVIEW OF FORM 1023 AND ITS INDIVIDUAL PARTS


General Information

Purpose:

Show that the organization meets IRS requirements for

exemption

Address IRS emphasis on good governance and describe

safeguards in place, so that operations will fulfill the exemption

requirements

8

General Information (Cont.)

Purpose (Cont.):

Determine provisional classification of private foundation status

or provisional determination of public charity status

9

REVIEW OF THE FORM 1023 SCHEDULES


Part I

Line 8, paid advisors

Line 10, no Form 990 filing requirement

Church

Church auxiliary

Certain governmental organizations

11

Slide Intentionally Left Blank

Part II

LLC valid only if elect to be treated as a corporation

Organizing documents

Articles of Incorporation

Evidence filed with state of incorporation

By-laws

13

Part III

Required clauses

Purpose: Charitable, educational, religious, etc.

Termination: Assets go to a qualifying 501(c)(3) organization.

Indicate where IRS can find wording

14

Part IV

Describe each significant activity

What, who, when, where, how, time involved, how funded

Reliance on determination letter may only be as good as the

completeness of the descriptions.

Consider your future 990 filings

15

Part V

Definitions

Director, trustee

Officer

Include all forms of compensation

16

Part V

Line 1a – Any compensation of officers or directors

Line 1b – Five highest-paid employees, if more than $50,000

Line 1c – Five highest-paid independent contractors, if more than

$50,000

Include businesses?

17

Part V (Cont.)

Line 2a – Business or family relationships among officers/directors

Line 2b – Business relationships between the organization and

officers/directors

Line 2c – Officers/directors related to employees/contractors

18

Part V (Cont.)

Line 3a - Add supplemental table with name, qualifications, average

hours, duties

Line 3b - Any payments to directors/officers/highest-paid

employees/highest-paid contractors by a related entity

19

Part V (Cont.)

Line 4 – Policies/process to determine compensation

None required for exemption, but must explain if any “no”

answers

Line 5 - Conflict of interest policy

Line 6 – Non-fixed compensation

Lines 7-9 – Transactions with officers/directors

20

Part VI

Line 1 - Benefits to individuals and organizations – May want to refer

to Part IV discussions

Line 2 – Programs with a limited number of potential beneficiaries

may get additional scrutiny.

Line 3 – Benefits to officers/directors or related parties

21

Part VIII

Line 1 – Intervention in political campaigns prohibited

Line 2 – Limited lobbying permitted

Line 3 – Gaming is broadly defined.

Line 4 – Fundraising

State registration (4d)

Donor-advised funds (4e)

22

Part IX

Income data – New instructions

Organization has existed for five or more years; the most recent

five years should be completed.

Organization has existed for between one and five years;

provide five years of data (include projected if necessary).

Organization has existed for less than one year; provide three

years of data.

23

Part X

Lines 1-4 apply to private foundations.

Line 5 – Select public charity status

Line 6a – New instructions; do not complete (replaced by Schedule

A of Form 990/990 EZ)

Lines 6b and 7 only apply organization has been in existence for

more than five years.

24

Supplemental Schedules

Schedule A – Churches

Schedule B – Schools, colleges, universities

Schedule D – Supporting organizations

Schedule C - Hospitals

26

Supplemental Schedules (Cont.)

Schedule E – Form 1023 filed more than 27 months from formation.

Schedule F – Homes for elderly or handicapped, and low-income

housing

Schedule G – Successor organizations

Schedule H – Organizations providing scholarships

27

Resources

www.IRS.gov

IRS instructions to Form 1023

IRS Publication 4220, Applying for 501(c)(3) Tax-Exempt Status

IRS Publication 557, Tax-Exempt Status for Your Organization

www.stayexempt.irs.org

28

http://www.irs.gov/

http://www.irs.gov/

http://www.stayexempt.irs.org/

http://www.stayexempt.irs.org/

Resources (Cont.)

EO update

TE/GE Customer Service – (877) 829-5500

National Association of State Charity Officials – www.nasconet.org

29

FORM 1023 COMPLIANCE ISSUES CONFRONTING PREPARERS

James Skyles, Skyles Law Group

Disclaimer

Unless you have a signed retainer with Skyles Law Group, LLC, you

do not have an attorney client relationship. As a result, there is no

attorney-client privilege created through this presentation. Any

information exchanged will be kept confidential, but is still subject to

testimony in a court of law.

Although this presentation is on a topic related to legal issues, and

given by a licensed attorney, none of the information contained in this

presentation should be construed in any way as legal advice. If you

have an issue which needs legal attention, please contact an

attorney who can handle your case.

Skyles Law Group ● 200 E. Evergreen #121,

Mount Prospect ● SkylesLaw.com

31

General Information

Spectrum of the 501(c)3 non-profit world

Small charities to giant charitable organizations

No outside funding - funded by a single person - funded by the

public at-large/government grants

Operations solely towards charitable mission - operates almost

like a for-profit

Single entity - giant network of related entities, i.e.

501(c)3s/(c)4s/(c)6s working together



32




What type of organization (corporation, LLC, trust)

What type of 501(c)3

Private foundation

Public charity

What type of public charity

Charity vs. support organization

Form of the charity

State compliance

Corporation model compliance

State registration

33




IRS compliance

Executive compensation

Foreign entities

Financial information

34

Type Of Organization



Type of organization - the corporate, business or institutional

structure of an organization

Corporation

The vast majority of 501(c)3 organizations

Limited liability for directors and officers

Regulated largely by state law

Limited liability corporation

In order to qualify as a 501(c)3 organization, must be structured

as a corporation

Charitable trusts

Trust law can be complicated; amending trusts can be difficult.

35

Type Of Charitable Organization



Public charity

Most common type

Publically supported (generally)

Private foundation

Generally a single or very small number of donors

Often organized as charitable foundations, but not always

Many organizations believe they are private foundations when they

are actually public charities.

Look to the funding source

36

Types Of Public Charities



509(a)1- most public charities fall under this category.

Churches and church associations

Certain educational organizations

Hospitals and medical research organizations

College and university endowments

Public supported charities

Another umbrella category

Complicated tests to determine whether organization qualifies

509(a)2- a publicly supported organization for which most of the

funding comes from internal activities

Also has a complicated tests to determine qualification

38

Types Of Public Charities (Cont.)



509(a)3 charity support organization

Organizations formed for the financial support of an existing

charitable organization

Must file Form 1023, Schedule D

39

State Issues



State compliance

Corporate compliance

Corporations must incorporate in a state.

Corporations must file annual reports.

Solicitation for funds

40 states and D.C. require registration if you are going to solicit for

funds.

States are more and more often requiring registration for online

solicitation.

37 states and D.C. use a uniform registration statement (URS).

Many states require an annual financial audit.

40

IRS Compliance



1023 checklist for initial

Five-year test for public support organizations 509(a)1 and (a)2

Form 990

41

Executive Compensation Example



Who benefits from the organization???

Organization has three directors.

One director is also the president, secretary and treasurer.

Organization qualifies as publicly supported under 509(a)1.

President is also an employee, and salary is 50% of the budget.

STRONG IRS SCRUTINY

Is the purpose of the organization the support of one individual?

42

Media Organization Example



Cir. 2007: Print media are dying, online media are growing.

Organizations want to form as a public charity, for tax purposes.

Several organizations successfully organize and receive a positive

determination from the IRS.

March 2009: IRS approval comes to a screeching halt.

IRS scrutinizes organizations for media bias.

All pending organizations are put into limbo.

43

Foreign Organizations



Foreign entities can obtain 501(c)(3) status.

Must have U.S. entity for U.S. donors, to obtain charitable

contribution deduction

Homeland Security regulations can apply to U.S. charities operating

in foreign locations.

44

Financial Information



CPAs can assist the development of historical and future financial

information.

Need assistance from the organization, especially for projections

How solid is the business (mission) plan?

45

Additional Resources



Citizen Media Project, Berkman Center, Harvard University

http://www.citmedialaw.org/

Lawyers for the Creative Arts, http://www.law-arts.org/

Internal Revenue Service, www.irs.gov

Unified registration statement kit, http://www.multistatefiling.org/

(Note: This site has not been updated in two years.)

46

CURRENT IRS PROCESS FOR REVIEWING FORM 1023 APPLICATIONS


General Information

Who must file

501(c)(3) organizations, except for:

Churches

Church auxiliary

Organizations with less than $5,000 in gross receipts

Public disclosure

48


Be clear, concise, well labeled and well organized

Application effective back to date of formation if submitted within 27

months of formation

Otherwise, effective date of filing

50


User fees

$400 if gross receipts less than $10,000 (four-year average)

$850 for all others

Cyber Assistant – Not yet available

User fees will change.

$200 if use Cyber Assistant

$850 if use paper application

51

Form 1023 Checklist

Required schedule

First schedule in application package to be filed

Last step in completing the application

52

IRS Processing

More than 60,000 Form 1023 filings per year

Former process

Assigned to review on a FIFO basis

Consistently takes six months or more to get an approval

53

New IRS Process

Screening of filings

No issues, no or minor questions

75-day process

Key issues, larger questions

May still take the six-month time frame

54

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