form 990 challenges for tax advisers to nonprofit...

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Form 990 Challenges for Tax Advisers to Nonprofit Entities Identifying Areas of IRS Scrutiny in Exempt Organization Tax Return and Schedules

MONDAY, NOVEMBER 20, 2017, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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mailto:[email protected]

Nov. 20, 2017

Form 990 Challenges for Tax Advisers

Christopher M. Pekula, CPA, Manager, Tax Strategies

Kreischer Miller, Horsham, Pa.

[email protected]

Katherine Breslin

Laura Solomon, Esq. & Associates, Ardmore, Pa.

[email protected]

Richard Ruvelson, Principal

WithumSmith+Brown, Bethesda, MD

[email protected]




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.

IRS FORM 990: TOP 10 REPORTING ISSUES & POTENTIAL

PITFALLS FOR EXEMPT ORGANIZATIONS

November 20, 2017

Copyright 2017 Laura Solomon, Esq. & Associates

OVERARCHING GOALS

DISCUSS CHANGING ENVIRONMENT

UNDERSTAND FORM 990

OVERVIEW OF PURPOSE, CONTENT, AN

REPORTING OBLIGATIONS

IDENTIFY COMMON ERRORS AND TOP 10

PITFALLS

ADDRESSING KEY AREAS IN REPORTING,

WHAT’S REQUIRED, AND HOW TO AVIOD

THEM

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CHANGING ENVIRONMENT

HIGHLY REGULATED AND INCREASED SCRUTINY

Tax Reform?

Wide implications

U.S. SENATE FINANCE COMMITTEE

• Pension Protection Act

U.S. HOUSE WAYS AND MEANS COMMITTEE

• Focusing on exempt hospitals

INTERNAL REVENUE SERVICE

• Audits, initiatives on politicking, compensation, UBI

7


PUSH FOR TRANSPARENCY AND COMPLIANCE

9/11

• Charities used to channel terrorist funds

• Treasury Department Guidelines

ENRON- SARBANES- OXLEY ACT

• Whistleblower, Document Retention Policies

(required)

• Audit Committees, Financial Statement

Certification (recommended)

8


EVOLVING BEST PRACTICES

• Panel on Nonprofit Sector “Principles for Good

Governance”

• Independence Sector “Code of Ethics”

PUSH FOR TRANSPARENCY AND COMPLIANCE

9


SIGNIFICANT REGULATORY STRUCTURES

FEDERAL

• Pension Protection Act

• Treasury Department – updates to Form 1023, 990

STATE

• Solicitation Act, real estate, sales tax changes

• Lobbying regulation

LOCAL

• Lobbying regulation

• Real estate tax challenges

• Gaming

10

UNDERSTANDING FORM 990

PURPOSE OF THE FORM

PROMOTE COMPLIANCE

ENSURE ACCOUNTIBILITY

ENHANCE TRANSPERACY

SERVE AS A PUBLIC RELATIONS TOOL

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CONTENT

SIGNIFICANT AMOUNT OF FINANCIAL AND NONFINACIAL REPORTING

REVENUE – focus on qualification of tax-exempt status

EXPENSES – reporting on a functional basis

FOUR AREAS OF REPORTING IMPACT

• Governance

• Programmatic

• Financial

• Tax Compliance

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UNDERSTANDING FORM 990 CONTENT – CORE FORM

PART I - Summary

PART II – Signature Block

PART III – Statement of Program Service Accomplishments

PART IV – Checklist of Required Schedules

PART V – Statements Regarding Other IRS Filings and

Tax Compliance

PART VI – Governance, Management, and Disclosure

13


CONTENT – CORE FORM

PART VII – Compensation of Officers, Directors, Trustees,

Key Employees, Highest Compensated Employees, &

Independent Contractors

PART VIII – Statement of Revenue

PART IX – Statement of Functional Expenses

PART X – Balance Sheet

PART XI – Reconciliation of Net Assets

PART XII - Financial Statements and Reporting

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CONTENT – SUPPORTING SCHEDULES

SCHEDULE A – Public Charity Status and Public Support

SCHEDULE B – Schedule of Contributors

SCHEDULE C – Political Campaign and Lobbying Activities

SCHEDULE D – Supplemental Financial Statements

NOTE: FASB Update 2016-14; Change To Net Assets With And Without

Donor Restrictions

SCHEDULE E – Schools

SCHEDULE F – Statement of Activities Outside the U.S.

SCHEDULE G – Fundraising or Gaming Activities

SCHEDULE H - Hospitals

15


CONTENT – SUPPORTING SCHEDULES

SCHEDULE I – Grants and Other Assistance to Orgs,

Govts, & Individuals in the U.S.

SCHEDULE J – Compensation

SCHEDULE K – Tax-Exempt Bonds

SCHEDULE L – Transactions with Interested Persons

SCHEDULE M – Non-Cash Contributions

SCHEDULE N – Significant Disposition of Assets

SCHEDULE O – Supplemental Information

SCHEDULE R – Related Organizations and Unrelated

Partnerships

16


REPORTING OBLIGATIONS

ALL TAX-EXEMPT ORGANIZATIONS

ANNUAL FILING

• 990, 990-EZ, 990-T, 990-PF, 990-N,

e-Postcard

REVOCATION FOR FAILURE TO FILE

FOR THREE YEARS

• Reinstatement

SUBJECT TO PUBLIC DISCLOSURE

17


PUBLIC DISCLOSURE REQUIREMENTS

WHAT’S REQUIRED

• Form (including all schedules, supporting

documentation, & attachment) is a matter of

public record

• All information reported is made available by the

IRS for public inspection – www.guidestar.org

• Exemption application (Form 1023) is also

subject to public disclosure

WHO’S LOOKING

• Org staff, local media, Board members,

Watchdog groups, State charity regulators,

donors, AND THE IRS….

18

http://www.guidestar.org/


IRS 2016 EO COMPLIANCE REVIEW

AREAS OF FOCUS

• Exemption: Non-exempt purpose activity and private

inurement

• Protection of Assets: Self-dealing, excess benefit

transactions, and loans to disqualified persons

• Tax Gap: Employment tax and unrelated business income

tax liability

• International: Oversight on funds spent outside the U.S.,

exempt organizations operating as foreign conduits, and

Report of Foreign Bank and Financial Accounts (FBAR)

requirements

• Emerging Issues: Non-exempt charitable trusts and IRC

501(r)

19

COMMON ERRORS ON FORM 990

21


Instructions:

Glossary:

22


Instructions:

23


X

X

X

X

24


X

25


Instructions:

26


27


Instructions:

28


29


30


31


Glossary:

32


X X

X

33


Instructions:

34

IDENTIFYING TOP 10 PITFALLS

36

REPORTING ISSUES – KEY AREAS

PITFALL #1 - PUBLIC SUPPORT TEST

COMPLETED ANNUALLY TO MAINTAIN PUBLIC

CHARITY STATUS (SCHEDULE A)

CHARITIES AVOID PRIVATE FOUNDATION

“DEFAULT” …

• 509(a)(1) – Supported by contributed income from

public or governmental sources (1/3 with 2% cap

on individual contributions, or “facts and

circumstances”)

• 509(a)(2) – Supported by program revenue and

investment income (1/3/with 1% cap, or $5,000)

• 509(a)(3) – Related to a public charity (Types I, II,

and III)

37


PITFALL #1 - PUBLIC SUPPORT TEST

CHALLENGES

• “Classification” of income – what counts and

what doesn’t

• Special considerations – “One-time” events

• Unusual grants

• Percentage is status for next year

• Multi-year “failure” of test

• 10% Facts and Circumstances

Under Sections 509(a)(1) and

170(b)(1)(A)(vi)

38


PITFALL #2 - UNRELATED BUSINESS INCOME

INCOME DERIVED

• From a trade or business (profit motive)

• That is regularly carried on, and

• Not substantially related to the organization’s

exempt purpose

SOME EXCEPTIONS

• Passive income – interest, dividends, royalties

• Rental income

• Volunteer labor, donated merchandise

Provided for convenience of members

39



WHAT DOES IT MEAN FOR YOUR

ORGANIZATION

• Too much of a good thing

• More may mean less

• Understanding the tax consequences

• Area of IRS focus

• How much is too much?

REPORTING REQUIREMENTS

• Question on “dashboard” of Form 990

• Form 990-T - when gross receipts related to the

activities are $1,000 or more

40



CHALLENGES

PROPER IDENTIFICATION

• Unrelated classified as exempt

• Unrelated excluded

EXPENSE ALLOCATIONS

• Improper or unsupported

• Align with activity – not “shared”

• Understanding the tax consequences

• Commerciality

TAX PROPOSALS

• NOL limitations and greater corporate & trust rate differential

• Taxation of name and logo licensing

• Separate calculation for each trade or business

41


PITFALL #3 - BOARD INDEPENDENCE

DEFINED

• Not compensated as an officer or employee

• Not receiving more than $10,000 as

independent contractor

• Neither the member nor a family member was

involved in a transaction or relationship reported

on Schedule L

Treasury Regulations provide guidance on a

“representative governing body” (Treas. Reg.

§1.509(a)-3(d)(3)(i))

42


PITFALL #3 - BOARD INDEPENDENCE

IMPACT TO YOUR ORGANIZATION

• Required? – Yes!

• Duties of care, loyalty, and obedience

• When? – All situations!

• Conflict of Interest Disclosure Policy

CHALLENGES

• Only know what we know

• Need transparency – perception

• Creates governance issues

43


PITFALL #4 - IN-KIND DONATIONS

RECEIVED IN THE FORM OF GOODS, SPACE,

AND/OR SERVICES

IMPACT TO YOUR ORGANIZATION

• Why important to recognize/report

• Public Support Test

• Receipt during start-up period


• Schedule M, Non-Cash Contributions (stuff)

• IRS believes significant tax compliance issues

exist

44


PITFALL #5 - FUNDRAISING

INFORMATION ON FUNDRAISING PRACTICES

IN GENERAL AND SPECIAL EVENTS

(SCHEDULE G)


• Professional fundraisers – Custody/control of

funds raised, and reasonableness of fees paid

• >$15,000 spent on professional fundraisers

• >$15,000 in fundraising income

• Certain level of detail for special events

45


PITFALL #5 - FUNDRAISING

CHALLENGES

• “Non-existent” fundraising expenses

• Inconsistencies in reporting

• State registration(s)

• IRS & State “hot button” – believes

there is significant noncompliance

46


PITFALL #6 - SIGNIFICANT DIVERSION OF ASSETS

INCLUDES ANY UNAUTHORIZED

CONVERSION OR USE OF THE

ORGANIZATION’S ASSETS

MUST DISCLOSE “MATERIAL” DIVERSIONS –

LESSER OF:

• $250,000;

• 5% of gross receipts; OR

• 5% of total assets

REGULATORS SCRUTINIZING HOW WELL

NONPROFITS SAFEGUARD CHARITABLE

ASSESTS

47




• Part VI, Section A – Governing Body &

Management

• Diversions from PYs to which you became

aware of in the CY

• Must explain

• Nature and amount of diversion

• Corrective action plan

• Pertinent circumstances

• Schedule L reporting

48



CHALLENGES

• Concerns over public disclosure and

perception

• Some organizations choose not to

report

• IRS is reviewing

WASHINGTON POST DATABASE:

http://www.washington post.com/wp-

srv/special/local/nonprofit-div ersions-

database/

49

http://www.washingtonpost.com/wp-srv/special/local/nonprofit-diversions-database/











PITFALL #7 - COMPENSATION

WHAT’S REQUIRED

• Who

• Current and former

• Certain thresholds, certain positions

• What

• Current and deferred

• Other benefits

• Where

• All sources

50




• Governance perspective, policy perspective,

key individuals

• Detailed disclosure

• Certain positions, certain thresholds

• “Other” compensation

• Have you informed them?

51



CHALLENGES

• Highly visible – users and interested parties

• Not doing your homework

• Scrutiny of key person compared to

compensation

• Private inurement – prohibited for all charitable

organizations

• Proposed intermediate sanctions application to

labor unions and trade associations

52


PITFALL #8 - INVESTMENTS

MORE SOPHISTICATION WITH PORTFOLIOS

SCHEDULE D – REPORTING BY ASSET TYPE

• Donor-advised funds

• Proposed donor-advised fund reporting

• Conservation easements

• Collections of art, historical treasures

• Escrow and custodial accounts

• Endowments

• Investments – Other securities

• Investments – Program-related

53


PITFALL #9 - RESTRICTED FUNDS

CONSIDER ACCOUNTING, TAX RULES, AND

DONOR INTENT

CLASSIFICATIONS

• Unrestricted net assets

• Temporarily restricted net assets

• Permanently restricted net assets

(endowments)

• Board-designated net assets

• Nonprofit Operating Reserve NCCS Wiki –

www.nccs2.org/wiki

ENDOWMENT MANAGEMENT IS GOVERNED

BY STATE LAW

54

http://www.nccs2.org/wiki


PITFALL #10 - TRANSACTIONS WITH RELATED PARTIES

AND “INTERESTED PERSONS”

WHO ARE THE PLAYERS

• Related Party – Parent, Subsidiary,

Brother/Sister, Supporting/Supported

• Interested Persons – Defined by purpose and

context of activity

• Disqualified Person – Any person in a position

to exercise substantial influence over the affairs

of the organization

55




WHAT’S REPORTED(SCHEDULE L)

• Excess benefit transactions

• Loans

• Grants or other assistance

• Direct business relationships

• Indirect business relationships

56




WHAT’S REPORTED(SCHEDULE R)

• Complex organizational structures

• Ownership of disregarded entities

• Relationships with taxable and tax-exempt

entities

• Relationships with controlled entities

• Significant activities conducted through

unrelated entity taxed as a partnership

57




WHY REQUIRED

• Concern over use of related entities for

questionable purposes

• Identification of board independence

58


MORE PITFALLS – IS YOUR ORGANIZATION FILING IN ALL

REQUIRES STATES

Core Form and Schedule G

States to which Form 990 is provided and list of

states in which registered or licensed to solicit

contributions

Gaming

Is the organization properly licensed?

59

QUESTIONS?

THANK YOU FOR YOUR PARTICIPATION! T O E N S U R E C O M P L I A N C E W I T H T R E A S U R Y D E P A R T M E N T R E G U L A T I O N S , W E W I S H

T O I N F O R M Y O U T H A T A N Y T A X A D V I C E T H A T M A Y B E C O N T A I N E D I N T H I S

P R E S E N T A T I O N ( I N C L U D I N G A N Y A T T A C H M E N T S ) I S N O T I N T E N D E D O R W R I T T E N T O

B E U S E D , A N D C A N N O T B E U S E D , F O R T H E P U R P O S E O F ( I ) A V O I D I N G T A X R E L A T E D

P E N A L T I E S U N D E R T H E I N T E R N A L R E V E N U E C O D E O R A P P L I C A B L E S T A T E O R

L O C A L T A X L A W P R O V I S I O N S O R ( I I ) P R O M O T I N G , M A R K E T I N G O R R E C O M M E N D I N G

T O A N O T H E R P A R T Y A N Y T A X - R E L A T E D M A T T E R S A D D R E S S E D H E R E I N .

M A T E R I A L D I S C U S S E D I N T H I S T A X P R E S E N T A T I O N I S M E A N T T O P R O V I D E G E N E R A L

I N F O R M A T I O N A N D S H O U L D N O T B E A C T E D O N W I T H O U T P R O F E S S I O N A L A D V I C E

T A I L O R E D T O Y O U R O R G A N I Z A T I O N ’ S I N D I V I D U A L N E E D S .

60

RESOURCES

Form 990 – Internal Revenue Service

https://www.irs.gov/pub/irs-pdf/f990.pdf (Form)

https://www.irs.gov/pub/irspdf/i990.pdf(Instructions)

Washington Post

http://www.washingtonpost.com/wp-

srv/special/local/nonprofit-diversions-database/

Guidestar

www.guidestar.org

61

http://www.stayexempt.org/

RESOURCES

Treasury Regulations

https://www.irs.gov/Tax-Professionals/Tax-Code,--

and-Official-Guidance

FASB’s Nonprofit Financial Reporting Project

http://nonprofitblog.bdo.com/index.php/resources/no

nprofit-financial-reporting-resource-center/

http://www.fasb.org/jsp/FASB/FASBContent_C/Proje

ctUpdatePage%26cid%3D1176159286112%23due

www.Stayexempt.org

62

http://www.stayexempt.org/

CONTACT

Katherine Morgan Breslin, Esq. Laura Solomon & Associates

610-645-0992

Richard Ruvelson, Principal

Withium

301-272-6070

Let’s connect

on LinkedIn!

Christopher M. Pekula, CPA Kreischer Miller

215-441-4600 x 378

63

form 990 challenges for tax advisers to nonprofit...

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