January 10, 2011 | Read Time: 3 minutes
The Internal Revenue Service says it plans greater scrutiny of a wide range of charity activities in 2011, including loans nonprofits make to top officials and whether they paid sufficient employment taxes.
The plans follow stepped-up efforts over the past few years to oversee nonprofits.
Figures released in December by the Internal Revenue Service show its audits of charities increased from 7,861 in 2008 to 10,187 in 2009, a jump of 30 percent. In 2010 the number of audits jumped 12 percent, to 11,449.
Michael Peregrine, a Chicago tax lawyer, said nonprofits should pay close attention to the increasing number of audits. “The IRS is still fully engaged in oversight of tax-exempt organizations,” he said.
That greater oversight is largely the result of an increased number of IRS employees.
The report shows the IRS has added 100 employees since 2008 to the unit that handles audits of charities.
Employment Taxes
IRS officials also said their enforcement efforts benefited from increased collaboration with the Social Security Administration and with state regulators, yielding valuable electronic data that allowed them to spot organizations that were trying to avoid paying employment taxes.
The collaboration also helped the IRS zero in on employment taxes as one of its areas of focus for the new year, the agency said in a document outlining its 2011 priorities.
The IRS has been studying the employment-tax reporting practices of about 4,000 tax-exempt organizations each year since 2007, comparing information reported to the Social Security Administration against data reported on tax forms.
The agency was able to pinpoint organizations that reported paying wages to employees but didn’t file a federal form to report employment taxes. Others showed compensation for officers on their informational tax forms but didn’t file wage or employment tax documents for those workers.
Loans to executives, trustees, and other key employees are also drawing more scrutiny. The agency said it had studied the issue by conducting 169 audits and now will make this a regular part of its examination of charities.
Agents found loans to charity officials that were not correctly reported on the organizations’ Form 990 in 91 cases; the IRS assessed more than $5-million in penalties.
‘Activist Agenda’
Mr. Peregrine said the areas of IRS interest mentioned in the report show “more of an activist agenda than I’ve seen in the past. It’s a fuller list of topics, and topics that are of practical concern” for charities.
Other issues and groups the IRS said would command top priority:
• Consumer credit counseling agencies, with which the IRS has found widespread problems in the past. The agency examined 63 credit-counseling organizations and revoked, terminated, or proposed revoking the tax-exempt status of 41 groups it said failed to provide a charitable service.
• Down-payment assistance groups, which offer financial and educational help to low-income homebuyers who can’t afford the initial down payment. The report says many of the groups offer the help through overly self-serving arrangements.
• Supporting organizations, which are charities that typically collect and channel money to a specific nonprofit. The IRS says some nonprofit officials have established these organizations for their own financial benefit.
New Tax Forms
The report also contained data on filings using the redesigned Form 990.
Many charities took advantage of the three-year transitional window the IRS established in which small organizations could file Form 990-EZ instead of Form 990. (Form 990-EZ wasn’t changed when the IRS revamped Form 990 for the 2008 tax year).
The new Form 990 requires more detailed reporting about organizations’ governance policies and executive compensation, among other things. Many groups, however, are avoiding using that form until they are required to do so.
For the 2008 tax year, for instance, organizations with gross receipts of $25,000 to $1-million and assets of less than $2.5-million could file Form 990-EZ.
That led to a big change as the number of groups that filed the regular Form 990 on paper fell 51 percent from tax year 2007 to 2008. Meanwhile, the number of Form 990-EZ paper returns shot up by 80 percent.
