December 13, 2007 | Read Time: 4 minutes
Washington
At a briefing Thursday to outline projects for next year, officials at the Internal Revenue Service said the agency plans to scrutinize charities’ donor-advised funds, business practices, and political activities in 2008. The agency will also investigate the tax-exempt status of colleges and universities and release new information about the 990 informational return charities must file every year and other tax forms.
Officials said they were especially concerned about whether people were taking tax deductions for donations that were not legitimately charitable. They said some gifts, like cars and other vehicles, are often overvalued, providing excessive tax breaks for donors.
IRS officials also worry that donor-advised funds give donors tax breaks but provide little benefit to charity, because donors retain too much control over the assets. Because many donor-advised funds are run through community foundations, the agency plans to examine 100 community foundations in 2008 on that topic, among others.
Business activities of charities will also come up for review. Business ventures “may be perfectly fine,” said Lois Lerner, director of the agency’s exempt-organizations division. “But we don’t know, and we want to look deeper.”
She said the agency will examine the scope of such ventures, whether they do business in areas related to the charities’ activities, and how much income they bring in. She cited “deconstruction” — the dismantling and selling of building parts before condemning a structure — as a particular area of interest, since many nonprofit groups engage in deconstruction now and draw income for it.
In addition, officials spoke of the need to educate charities about limits on political activity in the 2008 election cycle. The agency received far more complaints about such activity in 2006 than in 2004, but many of those complaints were not valid, proving that people still don’t understand the laws, said Ms. Lerner. In short, charities cannot engage in overtly partisan activity like endorsing candidates or donating to political action committees.
Many of the agency’s 2008 efforts will continue projects begun in recent years. An investigation into four-year colleges and universities will follow up on a 2007 examination of whether nonprofit hospitals provide enough “community benefit” to justify their tax-exempt status. Hospitals and colleges make up the largest portions of the nonprofit world, said Ms. Lerner.
In particular, the agency will examine how colleges report business income, how they determine compensation for executives, and especially how they invest and spend (or don’t spend) endowments.
To conduct research, the agency will send questionnaires to 500 colleges of all sizes. Before sending out the questionnaires, though, the agency said it will work with the National Association of College and University Business Officers to make sure the questions ask for meaningful and fair information. The agency did not make a similar effort before its survey of hospitals, and Ms. Lerner says it received complaints.
IRS officials also spoke about changes to tax documents. The new 990 tax form is expected to be available in the spring, and Ms. Lerner said she hopes the next draft — the third — will be the final one. The new form will be used starting in 2009.
In a related push, the IRS will soon require groups with budgets of less than $25,000 to file a new Form 990-N, which it calls an “electronic postcard.”
The 990-N — which asks for very basic information about groups and will be required starting in 2009 — will help the IRS provide current information about organizations and purge its databases of defunct groups. More details about the electronic postcards will be available in January.
Among other announcements made today:
The IRS will begin scrutinizing loans that charities make to executives, officers, and trustees, many of which are never paid back, officials said. It will also continue its 2007 examination of executive compensation in general, with an emphasis on hospitals and colleges. The IRS said it has reduced the backlog of applications for tax-exempt status by 27 percent, and cut the average wait time for approval by 12 days. As part of its electronic education program, the IRS will also begin offering podcasts in 2008 to supplement, and sometimes replace, educational forums it holds through telephone conferences. Two of the top officials at the IRS exempt organizations branch may retire next year: Ms. Lerner and Bobby Zarin, director of customer education and outreach for exempt organizations. Ms. Lerner said she hopes new procedures and programs at the IRS will ensure a smooth transition as other people take over.
