March 26, 2004
Ms. Lois Lerner
Director, Exempt Organizations Division (T:EO:RA:T)
Internal Revenue Service
1750 Pennsylvania Avenue, NW, Room 6031
Recently, the IRS has sent "educational letters" informing charitable organizations with contribution income that they are (1) disclosing an amount less than 5 percent of contributions; or (2) not disclosing any fundraising expenses in Part II of Form 990. (See example letter attached.) The AICPA understands the Service's desire for complete and accurate Form 990 information, and agrees that "soft contacts" by mail can be a useful and important educational tool. However, our members are reporting that these letters are confusing and are creating anxiety among their clients.
Exempt organizations often receive—and properly report—contributions, but have little or no fundraising expenses. For example:
Volunteer fundraising labor is an in-kind contribution that is not reported on Form 990 and does not generate a reportable expense.
Supporting foundations often incur the fundraising expenses for hospitals and universities.
Grant revenue is reported with donations. However GAAP classifies efforts to seek government funding as an administrative, rather than fundraising expense.
The educational letters do not indicate what action the recipient should take; stating only that the IRS "will be inspecting your Form 990 to evaluate our educational efforts." Organizations are not comfortable "doing nothing" in response to an IRS contact. We recommend that future letters specify any action the organization should take, and—at a minimum—include an IRS contact name and telephone number. We also suggest describing the purpose for these letters on the IRS Website, and revising the Form 990 Instructions to direct organizations with low fundraising expenses to attach an explanatory statement.
We would be happy to meet with you to discuss ways to improve the "soft contact" process. Please contact me at (703) 637-2670; or Lisa Winton, AICPA Technical Manager, at (202) 434-9234.
Harvey J. Berger
Chair, AICPA Tax Exempt Organization
Taxation Technical Resource Panel