January 10, 2008 | Read Time: 3 minutes
At a briefing to outline projects for 2008, officials at the Internal Revenue Service said the agency plans to scrutinize charities’ donor-advised funds, business practices, and political activities. The agency will also investigate the tax-exempt status of colleges and universities.
Officials said they were especially concerned about people who seem to be 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 set up at 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 G. 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 involve 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 as a business venture, yielding income they might not realize needs to be reported differently than other income.
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 such as endorsing candidates or donating to political-action committees.
Colleges and Hospitals
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.
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.
The IRS also said that this month it will make available an “electronic postcard” for charities with budgets of less than $25,000 to file. The postcard — officially called a 990-N — asks for very basic information about groups and will be required starting in 2009. The new form will help the IRS provide current information about organizations and purge its databases of defunct groups.
Among other announcements made last month:
- 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 whether hospitals and colleges pay executives too much and whether incomes reported to the IRS undercount some perks and alternative compensation.
- The IRS said it had reduced the backlog of applications for tax-exempt status by 27 percent, and cut the average wait time for approval by 12 days.
- The agency will also scrutinize organizations that support charities — known as 509(a)(3) groups after their section in the Internal Revenue Code — to determine if those groups have grown too much or have taken on too many separate responsibilities to continue to qualify as supporting organizations. It has identified 300 such groups that were expected to file a Form 990 but did not.
- The IRS will offer podcasts to supplement, and sometimes replace, educational forums it holds through telephone conferences.
