IRS Discloses 2009 Plans for Reviewing Tax-Exempt Organizations

The Internal Revenue Service today announced the projects related to tax-exempt organizations it plans to pursue in 2009, including a long-term study of fund raising and spending by charitable organizations, a broad effort to educate the agency’s employees about governance issues, and an examination of nonprofit student-loan organizations that have related for-profit arms.

Lois G. Lerner, director of the exempt-organization division of the IRS, told reporters that it is especially important to monitor the nonprofit world during the current economic downturn as demand for charitable services rises and donations fall.

“We believe that compliant organizations are better positioned to serve the public interest and meet the growing demand for their services,” said Ms. Lerner, in a letter accompanying the department’s goals.

That philosophy has driven many of the agency’s recent past and ongoing measures to make the nonprofit sector more transparent and accountable, such as the redesign of the Form 990, the federal disclosure forms that will be required for about 30 percent of all nonprofit groups for the current tax year. The new forms require a much greater level of detail about executive compensation and outside business activity of tax-exempt groups.

The 2009 plans are largely consistent with previous efforts.

One of the major new studies the IRS plans to begin next year is a lengthy examination of how tax-exempt groups raise and spend money compared to how much they spend to achieve charitable goals. To start, the study will focus on organizations that raise unusually large amounts of money, have unrelated trade or business income, and spend relatively little on their programs.

The effort is not an attempt to formulate a so-called commensurate test — to determine if charities are spending a reasonable amount on exempt activities — Ms. Lerner said. “We haven’t decided what the answer is, we’re just looking for information,” she said.

Nonprofit student-loan groups also will be under greater scrutiny from the IRS next year, as the agency seeks to guard against abuses by organizations that are connected to for-profit businesses.

While those arrangements are legal, the federal tax agency is concerned that executives and other insiders at the nonprofit groups are improperly benefiting from profits of the associated businesses, said Ms. Lerner

In addition to federal tax filings of nonprofit lenders, the agency intends to issue a broad questionnaire to those groups and conduct audits to examine how much nonprofit-lending executives are being paid compared to the charitable spending of their organizations.

The IRS also will look at how nonprofit organizations and donors account for non-cash gifts, such as pharmaceuticals or used clothing, that are given to tax-exempt groups, which in-turn donate to a different nonprofit group. The IRS is concerned that donors and charities are crediting the donations with inaccurately high values.

The agency also plans to take a look at its own operations next year, and give its employees guidance on how to consider governance issues that may be used in determining whether an organization qualifies as a charity.

Critics of the IRS have charged that the agency is using the lack of certain governance policies to reject organizations’ applications for tax exemption, even though the law does not require those policies.

In July, the IRS issued a letter ruling saying that a group applying to be recognized as a church did not have “safeguards” to prevent the organization from benefiting the proposed board of directors, which was composed entirely of one person’s family. In addition, the applicants had not submitted bylaws or a conflict-of-interest policy.

While the IRS cannot require groups to have a conflict-of-interest policy or independent board members, the lack of those policies could trigger other questions about how a nonprofit organization would prevent abuses and insider dealing, Ms. Lerner said.

“What we want our staff to understand is that, while we want organizations to look at governance issues, we are not going to tell you how to govern yourselves,” she said.