Dan Romano Partner-in-Charge, National Not-for-Profit Tax Practice 212.542.9609

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OACUBO Annual Meeting"Engaging Your New World"

April 18, 2011

Form 990 – "Behind the Lines"

Presented by:

Dan RomanoPartner-in-Charge, National Not-for-Profit Tax Practice

[email protected]

Frank GiardiniTax Principal, Northeast Region

Not-for-Profit Tax Practice215.656.3060

[email protected]


The organization can highlight either its mission or its significant activities. Keep in mind the mission statement to the IRS on its exemption application.

New for 2008 to include this comparison section. A transparent snap shot of the organization from a financial perspective.

Has the organization performed an analysis of its unrelated activities? If filing the form 990 prior to 990T, provide an estimate in this box.


An organization must report new, significant changes in how it conducts program services on its Form 990, Part III, rather than in a letter to IRS. EO Determinations no longer issues letters confirming the tax-exempt status of organizations that report such new services or significant changes.


Report all such returns filed for the calendar year ending with or within the tax year. If the organization conducted gaming, be prepared to file appropriate forms.

IRS has started to conduct numerous payroll audits.

FBAR reporting: recent release of definition of other financial account. Must discuss all foreign holdings when preparing 990. A prohibited tax shelter trans is any listed transaction or any prohibited reportable transaction. May be a requirement to file other informational forms.

The need to adhere to IRS reporting requirements for charitable contributions. IRS Pub 526 is helpful.

Possible excise tax due if paid premiums on a personal benefit contract.

Both sponsoring org and supporting org are defined. Leave lines blank if not applicable.

New question for 2010: indoor tanning svcs-employing any electronic product designed to incorporate 1 or more ultraviolet radiation to induce skin tanning.


Need only disclose the individual and the type of relationship (i.e., family or business). No greater detail.

Mgmt duties include: hiring, firing, supervising personnel, planning/executing budgets or financial operations, or supervising exempt ops or unrelated trades or businesses.

Significant changes to articles, trust instrument, constitution, or similar or to its rules governing its affairs (e.g., bylaws or operating agreement). Ex of significant change: its mission, name, distribution of assets upon dissolution.

What was the nature of the diversion, amounts or property involved, corrective actions taken to address. Do not identify person who diverted.

Most all orgs now have COIs. Service keenly interested in how COIs handled (abstaining from deliberations or decisions when appropriate)

990 instructions include elements needed for a healthy process.

Joint venture means any joint ownership or contractual arrangement to jointly undertake an enterprise, investment or exempt purpose activity.

Clarification of another's website (not for guidestar). Consider a high level of transparency with governing docs, COI policy and AFS. Many posting on own website.


Compensation to be reported on 990 for calendar year with or within the org's tax year. Now presentation has a direct relation to form W-2 or 1099. If a related org was related to the filing org for only a portion of the tax year, then the filing org may choose to report only comp paid or accrued by the related org during the time it was actually related. Some payments from a related org are not required if less than $10k. Must make a reasonable effort to obtain related org comp info.


An organization's allocation of its expenses between program service, mgmt & general, and fundraising should be thoughtful. The IRS prefers to see at least 80% of total expenses as program service. Important to have your service providers weigh in on the organization's methodology. Program services are mainly those activities that further the org's exempt purposes. Fundraising expenses should not be reported as p/s expenses even though one of the org's purposes is to solicit contributions. P/S can include the org's unrelated trade or business activities. Mgmt/general expenses relate to the org's overall ops and mgmt. Expenses incurred to manage investments must be reported in column c. Fundraising expenses are the expense incurred in soliciting contributions, gifts and grants.

Disqualified person-any person (including an individual, corp, or other entity) who was in a position to exercise substantial influence over the affairs of org at any time during a 5 year period ending on the date of the transaction. A DP includes for example family members and 35% controlled entities.Persons described in section 4958(c)(3)(B): substantial contributor (defined), a family member of a substantial contributor, or 35% controlled entity. Substantial contributor: more than $5k if such amount is more than 2% of total contributions.

For payments not specifically identifiable to an individual, the org can use any reasonable method to estimate the cost of the expenditure to an individual. Regardless of whether the expenses are reported on Line 18 or 24, the org is responsible for keeping records of travel and entertainment expense related to a governmental official.


Be sure to report amounts owed on secured and unsecured loans. Report interest from these receivables on Line 11 of Part VIII. Possible Schedule L disclosure.

Other disqualified persons: again, substantial influence, family members, 35% controlled entities, DAFs, sponsoring orgs.

Again, report amounts whether secured or unsecured. Possible Schedule L disclosure.


The Single Audit Act requires states, local governments, and nonprofits orgs that expend $500,000 or more of federal awards in a year to obtain an annual audit in accordance with the Act.


Current status

May or may not be the same as original IRS determination


Consider calculating public support test (schedule A) to see if qualified for special rule and report only those contributions over 2% instead of $5,000


501(c)(3)'s prohibited from political campaign activity, others subject to tax

Lobbying must either be germane to cause or "insubstantial"

501(h) election beneficial to quantify amount of lobbying


IRS wants to make sure the ultimate control of funds rests with the Org to minimize/eliminate prior abusive transactions

written notification required to formalize intent and to verify control lies with Org

On conservation easements controls must be in place to maintain appearance/historic value


influenced by credit counseling industry issues, the IRS looking to crack down on similar abusive situations

Congress has thought of mandating a payout similar to private foundations (5%).

Information is being gathered to assist in this endeavor


Highlights amount of liability booked for UBI or other income taxes.

Likely will be compared to what is reported on 990-T or disclosed in FIN 48 footnote

FIN 48 or ASC 740 – requires you to self-examine to determine if operating like an exempt and if properly identifying and reporting UBI or other exposures to income tax


Focuses on the nondiscrimination rules schools are required to maintain – have you verified recently that you indeed abide by these and have the records asked for?


Currently a best practice the IRS desires, possible lead to rules similar to PF's that impose taxes if not followed

Known as "expenditure responsibility" in the PF world and a best practice for all – how do you check on the money granted?

Looking to "follow the money" as the IRS focuses on international abuses, includes investments

Also instituted in reaction to counter-terrorism needs


Requires due diligence on the organizations you grant to


Have you vetted grants to individuals (and orgs) against terrorist watch lists?

Controls in place to verify use of funds?


Required for capital contribution to foreign corporation over $100k in year either directly or indirectly

Required if responsible party (grantor, executor or transferor), own assets in, or received distribution from a foreign trust OR if you receive gifts/bequests from a nonresident alien individual or estate in excess of 100k or receive gifts from foreign corp or partnership in excess of $14,165

Required if obtain an ownership interest in a foreign corporation in excess of 10% or additional purchase that now gets to 10%

Required if recognize gain or receive distribution as a direct or indirect shareholder in a PFIC. If owned through pass thru entity only if that entity fails to file form or divedend received is UBI???

Required for capital contribution to foreign partnership over $100k in year either directly or indirectly or own greater than 10%

Required if operations in a boycotting country (not grants). Penalty for willful failure to file is $25,000 and/or 1-year in prison.


Largely influenced by state AG's to assist in enforcement efforts

IRS checks to verify who controls the money solicited and potential private benefit

States to cross check with their records to make sure charities active within their state are properly registered


Improper valuation of donor benefits leads to overinflated contribution deductibility

Prizes won in raffles require reporting on W-2G if value over $600 and withholding if value over $5,000

Numerous questions on return leads to thought of IRS gaming initiative – reporting, withholding, UBI

States also interested since many require gaming or gambling licenses and have specific rules related to such


To avoid private benefit orgs must verify grants are to charitable class or within exempt purposes

To avoid taxation on grants to individuals must be a true "gift" within purposes/class


Looking for automatic excess benefits

Potential employment tax issues on failure to properly report and withhold

Are controls in place to verify benefits are substantiated?

Are you prepared to support the salary and benefits provided to CEO are reasonable or is there an exposure?

Payments such as these must also be "reasonable" and IRS has found abuse in such payments as well as improper withholding and reporting

Nonstandard payment used to be frowned on, but are acceptable (and sometimes desired) as long as measurable and capped at a reasonable amount


W-2 reporting instituted to allow IRS to check against documents filed

Breakdown allows the reader to see the whole picture – for better or worse


IRS has an active bond examination unit that will utilize this information to select targets

Proceeds breakdown should match bond covenants and supported by records

Are contracts being reviewed to determine private use – research, facilities management, etc.?

How are you reviewing unrelated business activities to quantify a percentage of use?


Arbitrage calculations may be required if proceeds invested and earning more than issue rate


For IRS identified EBTs as well as self-identified and uncorrected

Sign 990 under penalties of perjury

Loans are frowned upon, but allowed (though check state law)

Interest must be fair value (IRS AFR) or amount below imputed in taxable income

If "from" an IP must be arms-length or beneficial

IP should not be involved in decision process and position as IP has no bearing on award


Always at arms-length or better terms

IP should not be involved in process

Documentation of decision process (i.e. bids) strongly recommended


Looking for abusive donation programs where improper value of goods is deducted by donors

8283 needed for donor to deduct noncash donation over $500, appraisal needed if over $5,000

IRS can check donor tax return to verify proper deduction

8282 filed by org if disposed within 2 years so IRS can go back and check proper value


If disposition of assets of 25% or more only

IRS concerned with continued operation as an exempt org


Use this to explain all required responses to core form questions as well as to clarify any answers/responses on return that you feel would be helpful to the reader


IRS wants to see the reach of organizations and all the parties involved


Certain transactions with subsidiaries could cause UBI

Certain transactions with for-profit parties could cause private benefit


Questions


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Dan Romano Partner-in-Charge, National Not-for-Profit Tax Practice 212.542.9609

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