Monday, November 21, 2022
This month saw three updates on IRS (and Treasury) tax-exempt organization plans or possible plans for fiscal year 2023, and those plans are (understandably) modest. The highlights from the 2022-2023 Priority Guidance Plan, the TE/GE FY2023 Program Letter, and the annual IRSAC report are:
- Six of the ten Priority Guidance Plan exempt organizations items are repeats from last year (group exemptions, supporting organization final regs, section 512 allocation regs, section 4941 partnership investment guidance, section 6104(c) final regulations, and section 7611 appropriate high-level official final regs). The section 6104(c) item is listed only to say it was completed (T.D. 9964), and the section 7611 issue may be moot as the IRS has identified the Commissioner, TE/GE and the Deputy Commissioner for Services and Enforcement as the appropriate officials in IRM 126.96.36.199.1.
- The other four Priority Guidance Plan EO items are an expansion of the single donor advised fund item from last year. The expanded items identify specifically donor advised fund regulations under sections 4966, 4967, and 4958, as well as guidance regarding the public-support computation with respect to DAF distributions.
- The Priority Guidance Plan drops guidance relating to LLCs and section 501(c)(3), apparently because the IRS has decided not to issue any additional guidance in response to comments on Notice 2021-56, as Paul Streckfus reported today.
- Other exempt organizations related Priority Guidance Plan items include section 170 general guidance and also specific guidance relating to conservation easements, section 414(e) definition of a church plan regulations, section 501(c)(9) voluntary employees' beneficiary associations regulations and other guidance, and section 514(c)(9)(E) fractions rule final regulations.
- The TE/GE Program Letter focuses on high-level, relatively vague goals (Service, Enforcement, People, Transformation) as has been typical in recent years. That said, it does report that TE/GE hired 187 new employees in FY2022 and anticipates hiring a greater number in FY2023.
- The IRS Advisory Council Public Report only contains two recommendations of tax-exempt organization interest, one relating to tax-exempt bonds and the other to the tax-exempt organization data. The former has to do with form revisions, and the latter with ensuring functionality of data sharing in compliance with section 6104.
Thursday, November 10, 2022
The Washington Post reports that the White House announced on Thursday that President Biden will nominate Daniel Werfel to lead the Internal Revenue Service, tapping a former budget official to spearhead implementation of key parts of the administration’s economic agenda.
Mr. Werfel served in the George W. Bush and Obama administrations, working at senior levels of the White House Office of Management and Budget and at the IRS. He was acting IRS commissioner in 2013, taking over after top officials resigned over a controversy involving the agency’s scrutiny of nonprofit groups.
What was the controversy about?
NPR provides the answer. In an October 5, 2017, report, NPR revealed that in 2013, IRS official Lois Lerner revealed that conservative groups seeking tax-exempt status had been getting extra scrutiny, based on words such as "tea party" or "patriots" in their names. For conservatives, Ms. Lerner's statement confirmed their darkest suspicions: in the Tea Party heyday years of 2009 and 2010, hundreds of groups affiliated with the party had sought tax-exempt status as 501(c)(4) "social welfare" organizations. IRS demands for documents left many of them in bureaucratic limbo for a year or more.
The NPR report revealed that an audit by the Treasury Inspector General overseeing the IRS had found that the agency had targeted not just conservatives but also scores of groups with words like "progressive" in their names. The Treasury Inspector General for Tax Administration, or TIGTA, did the report at the request of a bipartisan group of senators.
The report did not satisfy everyone, particularly supporters of the conservative groups who had sought tax-exempt status during that period. Conservative lawyer Cleta Mitchell, who represented eight groups that were given the extra scrutiny, said at the time that the approval process took far too long. In one case, she said, "the IRS wanted every communication that this organization had made about Obamacare," as the Affordable Care Act is commonly called.
Mitchell opined that even if progressive groups were targeted, "they didn't get subjected to the kinds of follow-up the Tea Party groups did." Meanwhile, in June 2013, Rep. Hal Rogers, R-Ky., told Fox News the IRS had an "enemies list out of the White House." Also, at a Tea Party rally on Capitol Hill, Sen. Rand Paul said an out-of-control government was "persecuting people for their religious and their political beliefs."
According to the NPR report,
Then-President Obama quickly cleaned house in the upper echelons of the IRS, but congressional hearings ran more than three years before they spun off into secondary issues, which inevitably included missing emails. Lerner became a target for conservative attacks when she took the Fifth Amendment at a House investigative hearing.
In cleaning house, President Obama appointed Mr. Werfel acting IRS Commissioner. According to the Washington Post, current Treasury Secretary Janet Yellen reacted positively to Mr. Werfel's pending nomination:
Danny’s prior service under both Democratic and Republican administrations, his deep management experience, and his work directing significant transformation efforts, make him uniquely qualified to lead the agency at this critical juncture. Danny’s deep commitment to fairness and making sure government works for all will also be invaluable as we improve the taxpayer experience and eliminate a two-tiered tax system.
John Koskinen, who served as IRS commissioner after being nominated by President Obama, also had words of praise for Mr. Werfel. According to Mr. Koskinen, Mr. Werfel worked effectively with the GOP at the height of the anger over accusations that the tax agency had targeted tea party groups for additional scrutiny. He continued: "Werfel was dropped into the middle of a maelstrom [yet] did a good job of responding positively to congressional inquiries.”
But not everyone is sold on the idea that Mr. Werfel is the best person for the job. The Post reports that at least one leading House Republican on Thursday criticized Mr. Werfel’s performance during that period. According to Rep. Kevin Brady (R-Tex.), the top Republican on the House Ways and Means Committee, "Daniel Werfel was named acting IRS commissioner in 2013 with the goal of restoring credibility and confidence in the IRS after the agency’s shameful targeting of conservative groups. He didn’t succeed in 2013 and I’m concerned about whether he can succeed in 2023 and beyond."
We shall have to wait to find out. If the Senate confirms Mr. Werfel's appointment as IRS Commissioner, he will face many challenges, including the challenge of improving IRS customer service, which struggled amid the pandemic after years of budget cuts. The IRS taxpayer watchdog reported over this summer that the agency had a backlog of 21.3 million returns, and call response rates have plummeted. Only 1 in 10 of the 73 million taxpayer calls for help reached an employee in the last filing season.
Whatever he does, though, it would be wise for Mr. Werfel to ensure that the IRS does not unnecessarily target nonprofit organizations for extra scrutiny.
Prof. Vaughn E. James, Texas Tech University School of Law
Tuesday, November 1, 2022
The Texas Tribune and Propublica published an investigation into churches, politicking and lack of IRS enforcement and quote a couple members, including myself, of this blog. From the article:
"At one point, churches fretted over losing their tax-exempt status for even unintentional missteps. But the IRS has largely abdicated its enforcement responsibilities as churches have become more brazen. In fact, the number of apparent violations found by ProPublica and the Tribune, and confirmed by three nonprofit tax law experts, are greater than the total number of churches the federal agency has investigated for intervening in political campaigns over the past decade, according to records obtained by the news organizations." . . .
"Among the violations the newsrooms identified: In January, an Alaska pastor told his congregation that he was voting for a GOP candidate who is aiming to unseat Republican U.S. Sen. Lisa Murkowski, saying the challenger was the “only candidate for Senate that can flat-out preach.” During a May 15 sermon, a pastor in Rocklin, California, asked voters to get behind “a Christian conservative candidate” challenging Gov. Gavin Newsom. And in July, a New Mexico pastor called Democratic Gov. Michelle Lujan Grisham “beyond evil” and “demonic” for supporting abortion access. He urged congregants to “vote her behind right out of office” and challenged the media to call him out for violating the Johnson Amendment."
Though the story is perhaps not news to those who follow this topic closely, it's a good piece, documenting pretty clear violations of the prohibition on charities from intervening in a political campaign. It has some nice history on the adoption of the amendment that I found useful alone. It also gives nice context for the PACI project where the IRS actually began actively looking at political activities in general, where many of the charities were indeed churches.
Though it is true that the IRS has barely enforced this provision over the years, the fact that there is a large effort among some churches to vigorously move into the politicking space today that is documented in this story is of concern. The biggest policy reason to focus in on this issue is summarized pretty well by the following quote by Andrew Seidel, vice president of strategic communications for the advocacy group Americans United for Separation of Church and State: “If you pair the ability to wade into partisan politics with a total absence of financial oversight and transparency, you’re essentially creating super PACs that are black holes.”
Monday, October 10, 2022
Nonprofits In the News (Not in a Good Way): Brett Favre; J.D. Vance; Hershel Walker; Indictments in Minnesota
For example, the continuing revelations about Brett Favre and alleged misuse of government welfare funds include both a nonprofit that was in the middle of that misuse and also new allegations about Favre's own foundation and its grants to support college athletes (and possibly the volleyball facility at the heart of the welfare funds scandal), even given the foundation's purported purposes being limited to helping children and cancer patients. (Favre's foundation is, despite the name, a public charity that appears to receive much of its contributions from people other than the former NFL football player.)
As for politicians, the N.Y. Times published an article over the weekend titled "J.D. Vance’s First Attempt to Renew Ohio Crumbled Quickly. In 2017, the Republican candidate for Senate started a nonprofit group to tackle the social ills he had written about in his 'Hillbilly Elegy' memoir. It fell apart within two years." And it earlier published an article titled "Herschel Walker’s Company Said It Donated Profits, but Evidence Is Scant," reporting that of the four charities that supposedly received 15 percent of the profits from Walker's company, "one declined to comment and the other three said they had no record or recollection of any gifts from the company in the last decade."
And in Minnesota, the other shoe dropped for the Feeding Our Future scandal, with a U.S. Department of Justice press release stating "U.S. Attorney Announces Federal Charges Against 47 Defendants in $250 Million Feeding Our Future Fraud Scheme." In addition, a federal court has denied the request of another nonprofit, Partners in Nutrition, to be reinstated to the child nutrition program given its ties to some of the alleged participants in the fraud.
Thursday, October 6, 2022
Late last month, California Governor Gavin Newsom vetoed a bill (SB 834) that would have revoked the tax-exempt status of nonprofit in California that the state Attorney General determined engaged in treason, insurrection, conspiracy, government overthrow, or mutiny by members of the military as defined under federal law. Here is the governor's explanation for the veto:
Without question, extremist groups that participate in anti-government acts such as those that took place during the insurrection on January 6, 2021 should be renounced and investigated for their participation. However, these are issues that should be evaluated through the judicial system with due process and a right to a hearing.
The legislature has 60 days (excluding joint recess days) to override the veto by a two-thirds vote in both houses. And in the unlikely event that occurs (the best information I could find states there has not been an override for over 40 years), the law would almost certainly face constitutional challenge.
TIGTA: More Information Is Needed to Make Informed Decisions on Streamlined Applications for Tax Exemption
The Treasury Inspector General for Tax Administration (TIGTA) this week issued a report titled More Information Is Needed to Make Informed Decisions on Streamlined Applications for Tax Exemption. Here are the highlights (emphasis added):
What TIGTA Found
On July 1, 2014, the IRS released Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, a simplified electronic application for smaller organizations to request and obtain exemption from Federal income tax as an organization described in I.R.C. § 501(c)(3) tax-exempt status. Form 1023-EZ requires applicants to attest, rather than demonstrate, that they meet the requirements for I.R.C. § 501(c)(3) status. For example, Form 1023-EZ applicants are not required to submit their organizing documents to the IRS; they instead attest that they meet organizational requirements.
Based on our assessment of internal and external stakeholder opinions, States’ reporting requirements, comparison with the information required on the long application form, our testing of the application process, and limited examination compliance efforts, we determined that the information provided on the Form 1023-EZ is insufficient to make an informed determination about tax-exempt status and does not educate applicants about eligibility requirements for tax exemption. TIGTA obtained I.R.C. § 501(c)(3) status for four of five nonexistent organizations. The IRS correctly identified one of our fictitious applications as potentially ineligible and sent a request for additional documentation. Our undercover testing illustrates vulnerabilities in the IRS’s tax-exempt status determination process.
The IRS relies on a Form 1023-EZ examination strategy to detect noncompliance after organizations are approved; however, less than 1 percent of tax-exempt organizations are examined each year. In addition, online guidance for the Form 1023-EZ is inaccurate. The online web page used to apply for tax-exempt status includes educational links to assist Form 1023-EZ applicants. However, one of the educational links takes the applicant to a web page containing inaccurate information for applicants using the Form 1023-EZ.
What TIGTA Recommended
TIGTA recommended that the IRS: 1) revise the activities description narrative on Form 1023-EZ, 2) assess the feasibility of requiring applicants to submit their organizing documents as an attachment to Form 1023-EZ, 3) notify applicants when additional time is needed to process their Form 1023-EZ applications, and 4) update online guidance with accurate information on the application process for Form 1023-EZ filers.
IRS management agreed with the second and fourth recommendations. In addition, the IRS will consider notifying applicants when their submissions need additional time to process. However, the IRS believes that requiring detailed activity descriptions is unnecessary to make determination decisions.
TIGTA, Review of the IRS’s Enforcement Program for Tax-Exempt Organizations That Participate in Illegal or Nonexempt Activities
The Treasury Inspector General for Tax Administration (TIGTA) last week issued a report titled Review of the IRS’s Enforcement Program for Tax-Exempt Organizations That Participate in Illegal or Nonexempt Activities. Here are the highlights:
What TIGTA Found
TIGTA found that both the IRS and State charity regulators are limited by their respective laws and procedures for coordinating with each other as a means to identity tax-exempt organizations potentially engaging in illegal or other nonexempt activities. Currently, no State Attorneys General Offices have formal disclosure agreements with the IRS.
TIGTA identified 3,726 closed EO function referrals alleging potential fraudulent or illegal activities during Fiscal Years 2018 through 2020. For these referrals, classifiers inaccurately recorded the results for 42 cases on the referral database. In addition, for the 15,522 unique referral cases closed during Fiscal Years 2018 through 2020, our analysis identified 980 closed cases for which two referral database fields included conflicting information about the final dispositions of the referrals. TIGTA also determined that 2,934 data fields were missing required information because referral database system controls do not require these fields to be completed prior to the case closing.
TIGTA reviewed two judgmental samples consisting of 46 referral cases closed between Fiscal Years 2018 and 2020 that alleged potentially fraudulent or illegal activities to determine whether the IRS’s assessments of the referrals were sufficiently researched and properly documented. All 46 referral cases sampled were sufficiently researched. However, five of the 46 referrals did not have sufficient documentation to justify the decision to not pursue an examination.
Finally, during this review and as in prior reviews, TIGTA found that the IRS has processes in place to identify whether a tax-exempt organization engages in substantial activities that do not further their tax-exempt purpose.
What TIGTA Recommended
TIGTA recommended that the IRS should: 1) ensure that Classification managers periodically emphasize to classifiers the importance of including supporting documentation in the case files for selecting or not selecting referrals for examination; 2) implement referral database system controls to ensure that complete and accurate data is input into the database; and 3) review the fields on the referral database and determine if any may be eliminated to avoid confusion, conflicting information in similar fields, and redundancy.
The IRS agreed with our recommendations and plans to take corrective actions.
Tuesday, October 4, 2022
The IRS recently reported to Congress that it had inadvertently made public confidential information from some Form 990-Ts. The IRS letter to Chairman Bennie G. Thompson of the House Committee on Homeland Security states in part:
This notification follows the IRS discovery that some machine-readable (XML) Form 990-T data made available for bulk download section on the Tax Exempt Organization Search (TEOS) should not have been made public. This section is primarily used by those with the ability to use machine-readable data; other more widely used sections of TEOS are unaffected.
The IRS took immediate steps to address this issue. The agency removed the errant files from IRS.gov, and the IRS will replace them with updated files in next few weeks. The IRS also will be working with groups that routinely use the files to update remove the erroneous files and replace them with the correct versions as they become available. The IRS will contact all impacted filers in the coming weeks.
* * *
Based on the IRS’s review, the inadvertent disclosure included limited information for approximately 120,000 individuals. However, the data did not include Social Security numbers, individual income information, detailed financial account data, or other sensitive information that could impact a taxpayer’s credit. In some instances, the data did include individual names or business contact information.
There have been a number of media reports regarding the apparent IRS revocation of tax-exempt status for hundreds of NAACP state and local affiliates, which are section 501(c)(4) organizations. For example, The News & Observer, in discussing a conflict between a state affiliate and the national NAACP, included this entry about the revocations:
After The N&O discovered and asked national leaders about the large number of tax-exempt lapses, the NAACP’s general counsel sent a letter to state conferences suggesting the IRS was at fault.
“It has (been) brought to our attention that several NAACP Units received letters from the Internal Revenue Service indicating that their tax-exempt status has been revoked,” Wallace, the NAACP’s general counsel, wrote. “This is an error because individual NAACP Units are not required to file Form 990s of their own.”
The problem may relate to a the group return filed by the national NAACP, and whether the affiliates were properly included in that return. According to the news report, more than 800 affiliates have been affected, including several state conferences.
Last week the IRS issued a request for written comments on the forms used by tax-exempt organizations, including Forms 1023, 1023-EZ, 1024, 1024-A, 1120-POL, 4720, and the 990 series returns and related schedules. Here is the summary:
The Internal Revenue Service, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other federal agencies to take this opportunity to comment on proposed and/or continuing information collections, as required by the Paperwork Reduction Act of 1995. The IRS is soliciting comments concerning forms used by tax-exempt organizations. See Appendix A for a list of forms, schedules, and related attachments.
The deadline for responding is November 28, 2022.
The IRS Statistics of Income division has issued a 26-page report on individual noncash contributions for tax year 2019. Here is the introduction:
For Tax Year 2019, individual taxpayers who itemized deductions reported a total of $74.8 billion in noncash charitable contributions on 8.8 million returns. About 45 percent (3.9 million) of these returns carried $72.8 billion in charitable contributions to Schedule A, Itemized Deductions, using Form 8283, Noncash Charitable Contributions. Form 8283 is used by individual taxpayers when the deduction amount claimed for all noncash donations reported on Schedule A exceeds $500. The number of returns filed with Form 8283 declined from 2018 levels by 7.5 percent, and the amount claimed by these taxpayers increased 2.8 percent. The average amount per return increased 11.2 percent from approximately $16,760 to approximately $18,635.
Donations of corporate stock, mutual funds, and other investments accounted for 59.8 percent ($43.6 billion) of all donations. Of the $72.8 billion in total donations, foundations received the largest amount ($20.1 billion or 27.6 percent), followed by donor-advised funds ($14.3 billion or 19.6 percent). Individuals with an adjusted gross income (AGI) over $10,000,000 donated 42.7 percent ($31.1 billion) of all donations, a slight (1.7 percent) decrease from the previous year. Donors in the age 55- under-65 category had the largest increase in donations of all age groups, increasing the amounts they carried to Schedule A by 44.8 percent, from $15.4 billion in 2018 to $22.3 billion in 2019.
Over the summer the U.S. Department of Education issued proposed regulations addressing, among other topics, conversions of for-profit educational institutions to nonprofit status. Here is a summary of that part of the regulations:
Clarifying procedures for institutions undergoing changes in ownership, including those converting from for-profit to nonprofit status. A growing number of institutions now undergo often-complex changes in ownership transactions, leading the U.S. Government Accountability Office to raise warnings that many of these conversions involved continued "insider involvement," presenting risks to students and taxpayers. The Department sought to clarify the requirements and processes institutions must follow in order to expand protections for students and taxpayers. The proposed regulations would clarify the definition of a nonprofit institution to prevent improper financial benefits to a former owner or other affiliate of a college. Additionally, institutions undergoing a change in ownership would be required to notify both the Department and the institution's students at least 90 days prior to the change to ensure advance notice is provided. Institutions undergoing a change in ownership may also be required to provide additional financial protection or to comply with additional conditions to protect against the risk of the transaction.
The Department said it expects to finalize the regulations later this year so they could take effect by July 2023.
SBA OIG Finds $684 million in PPP Loans to Potentially Ineligible Nonprofits; Grand Jury Indicts Nonprofit Leaders for Allegedly Fraudulent COVID Relief Loans
The Office of Inspector General (OIG) for the U.S. Small Business Administration (SBA) issued a review of Paycheck Protection Program (PPP) eligibility for nonprofit organizations. Here is its summary:
The U.S. Small Business Administration (SBA) Office of Inspector General (OIG) conducted this review to assess Paycheck Protection Program (PPP) eligibility for nonprofit organizations. Based on data analysis, we identified 179 PPP loans, totaling approximately $684 million, made to potentially ineligible nonprofits that may have exceeded SBA’s requirements for business size, known as size standards, at the time of application.
We also reviewed PPP loans for three large nonprofits, including Planned Parenthood of Illinois that received over $3.8 million, Goodwill of Southwestern Pennsylvania that received over $6 million, and YMCA of the Rockies that received over $3.5 million. OIG included a Planned Parenthood organization to address concerns from some members of the U.S. Senate Committee on Small Business and Entrepreneurship. We determined that the Planned Parenthood organization met PPP loan eligibility requirements. The Goodwill organization was not eligible for a PPP loan at the time of application but subsequently became eligible for forgiveness due to updated PPP guidance. The YMCA organization we reviewed did not meet eligibility requirements because they exceeded the applicable size standard of no more than 500 employees at the time of application and forgiveness.
We also reviewed the three national organizations associated with the PPP loans to the aforementioned Planned Parenthood, Goodwill, and YMCA for potential affiliation with the PPP loan recipients. We found no affiliation between the national organizations and the loan recipients.
We recommend SBA review the 179 PPP loans, totaling approximately $684 million, to ensure eligibility requirements were met and seek remedy or repayment for all loans deemed ineligible, and seek remedy or repayment of the PPP loan we reviewed for YMCA totaling $3.5 million. SBA management partially agreed with recommendation 1 and agreed with recommendation 2.
Separately, the Lexington Herald Leader reports that a federal grand jury has indicated two individuals associated with nonprofit entities, including a church, who allegedly fraudulently applied for more than $350,000 in coronavirus relief loans.
Friday, August 19, 2022
Two recent examples of nonprofit reporting moving slowly into the 21st century. First, as of September 19, 2022 the New York Attorney General's Charities Bureau will require all annual filings to be submitted online. The website provides an instructional video and an interactive online checklist for charities unfamiliar with the online submission process. Second, earlier this week the IRS announced that Form 990-N filers will need to use the IRS authentication platform to submit this form. This requires either an active IRS username or an account with ID.me.
Tuesday, August 16, 2022
Earlier this month the IRS released a spreadsheet showing the excise taxes reported by charities, private foundations, and split-interest trusts on Form 4720 for calendar year 2021. It included two notable figures relating to new excise taxes enacted by Congress in 2017.
First, 516 tax-exempt organizations reported owing $210 million in IRC section 4960 excise taxes on excess executive compensation (over $1 million annually paid to covered employees, plus certain excess parachute payments). This compares to only 302 tax-exempt organizations reporting owing $96 million in such taxes for calendar year 2020, likely reflecting increased awareness among tax-exempt organizations and their advisors about the tax as opposed to a large jump in the amount of excess executive compensation. The IRS has also made compliance with this tax a compliance focus, stating that "[o]n-going review of filing data shows there continues to be a high volume of exempt organizations that paid compensation of over $1 million to at least one 'covered employee' but did not report IRC Section 4960 excise tax on Form 4720" (see Tax Exempt & Government Entities – Compliance Program and Priorities).
Second, 33 tax-exempt organizations reported owing $68 million in IRC section 4968 excise taxes on investment income of certain private colleges and universities. This compares to fewer than 10 organizations reporting owing less than $3.2 million in such taxes for calendar year 2020. Given the relatively high profile of this new tax, and the fact that only colleges and universities with very large endowments relatively were affected, it is unclear why there was such a large increase in both the number of organizations reporting the tax and the amounts owed.
The IRS yesterday released final regulations under IRC section 6104(c) relating to how states may obtain non-public tax-exempt organization information from the IRS, including involving final and proposed denials and revocations of tax-exempt status. Only one comment was submitted in response to the 2011 (yes, 11 years ago) proposed regulations, issued in response to statutory changes made by the Pension Protection Protection Act of 2006. According to the Preamble to the final regulations, there is only one clarifying substantive change to the proposed regulations (as well as several non-substantive clarifying changes). The substantive change was to make it clear that the agent-contractor disclosure prohibition applies both to IRS disclosures and to appropriate State officer (ASO) disclosures.
One interesting piece of information from the Preamble is that the IRS now has section 6104(c) information sharing agreements with nine ASOs, all of whom are State tax officers responsible for administering State tax laws. The Preamble also indicates the IRS is hopeful that the issuance of final regulations will facilitate additional such agreements. That said, the requirements states must satisfy under section 6104(c) to access non-public information are relatively strict, and the final regulations necessarily have to reflect the strictness of the statutory scheme.
Thursday, August 4, 2022
Propublica reported a few weeks ago that the IRS had granted church status to a right-wing think tank, the Family Research Council. Sam Brunson blogged on here about why FRC might be interested in obtaining this special status.
"We are writing to express concern regarding the Family Research Council’s (FRC) tax-exempt status as an “association of churches.” In addition, we request a review of the existing Internal Revenue Service (IRS) guidance related to political advocacy organizations self-identifying as “churches” to obtain the status of churches, integrated auxiliaries, and conventions or associations of churches.
As you know, Congress has enacted many special tax rules that apply to churches and religious organizations. Under Section 501(c)(3) of the Internal Revenue Code (Code), churches are tax exempt organizations and are not required to file IRS Form 990, which provides transparency on tax-exempt organizations’ board members, key staff salaries, donations, and large payments to contractors. Further, there are special limitations on how and when the IRS can conduct an
examination of churches. In accordance with section 7611 of the Code, the IRS cannot conduct tax inquiries of churches without approval from a “high-level Treasury official.”
Thursday, July 7, 2022
The GivinG USA Foundation published its annual Giving USA report on charitable giving in 2021. According to the Indiana University Lilly Family School of Philanthropy, which researches and writes the report, here are some of the highlights:
- Total charitable giving grew by 4.0% to $484.85 billion, with $326.87 billion or slightly less than 70% coming from individuals. The remaining giving came from foundations ($90.88 billion), bequests ($46.01 billion), and corporations ($21.08 billion).
- The largest recipient area remained religion at $135.78 billion, followed by education at $70.79 billion, human services at $65.33 billion, and foundations at $64.26 billion, with lesser amounts to public-sector benefit organizations (e.g., United Ways and national donor-advised fund sponsors), health, arts, international affairs, and environmental.
Separately, the IRS Statistics of Income Office released spreadsheets with data on Noncash Charitable Contributions by individuals for tax year 2019. Highlights include:
- Over 3.9 million returns reported over 12.5 million noncash charitable contributions on Form 8283, with a total fair market value of over $96.5 billion.
- Donated investments accounted for almost half of the value donated ($45.0 billion), with real estate (including land and easements) accounting for an additional $33.9 billion and other categories such as clothing, household items, and art/collectibles making up the rest.
Wednesday, July 6, 2022
N.Y. Times, led by Pulitzer Prize-winning reporter David Fahrenthold, has been gathering information about the IRS exemption application process. In a story over the holiday weekend, it reported on a single individual who created dozens of fake charities and obtained IRS recognition of tax-exempt status for them, even after being warned about the scam by the American Cancer Society. The story highlights what nonprofit legal experts have long known - the application process has essentially become a registration process, particularly for applications submitted using the Form 1023-EZ. Combined with the less than 0.2 percent examination rate for exempt organization returns, and the very limited and inconsistent level of resources states devote to overseeing charities, it should be no surprise that fraudsters often use purported charities to enrich themselves, banking on the halo effect of IRS recognition to fool donors.
The 2021 IRS Data Book, covering the fiscal year that ended on September 30, 2021, contains its usual treasury trove of information about exempt organizations. Notable facts include:
- There are 1,980,571 tax-exempt organizations, nonexempt charitable trusts, and split-interest trusts (Table 14), of which 1,828,187 are recognized under IRC section 501(c) (1,431,266 under section 501(c)(3)) and 42,697 under IRS section 527 (political organizations).
- The IRS closed 94,466 applications for recognition of exemption (Table 12), approving 81,583 (86.4%), disapproving 84 (0.1%), and resolving 12,793 (13.5%) in other ways (including withdrawal, lacking required information, or incomplete). The vast majority (90,461 or 95.8%) of the applications were under IRC section 501(c)(3), with the next closest categories being approximately a thousand applications each under section 501(c)(4) and section 501(c)(6).
- The IRS also received 3,334 notices of intent to operate under Section 501(c)(4) (Table 13), of which it rejected 465 for a variety of reasons, including that notice was not required because of a previously filed annual information return or application for recognition of exemption, or the organization was exempt under a section other than 501(c)(4).
- The IRS examined (Table 21) only 1,383 Forms 990, 990-EZ, and 990-N, an additional 203 Forms 990-PF, 1041-A, 1120-POL, and 5227, 748 Forms 990-T, and 301 Forms 4720. This compares to 1,360,719 exempt organization returns filed in 2020 and 1,722,803 filed in 2021, which figures include all of the above forms except for Forms 1041-A and 1120-POL This means even taking into account examination lag the examination rate was less than 0.2%.