Top 11 Tax Issues for Exempt Organizations

Governance

The IRS believes that the absence of appropriate policies and procedures can lead to opportunities for excess benefit transactions, private inurement, operation for non-exempt purposes, or other activities inconsistent with tax-exempt status.

Unrelated Business Income

Organizations must report and pay tax on income from activities that are not furthering their exempt purpose or that are excluded by the Internal Revenue Code. In addition, they should exercise care in determining the method used to allocate expenses unrelated to activities.

Compensation and Benefits

The IRS continues to review high levels of compensation and the provision of benefits and perquisites that may not be reported or appropriately treated as taxable wages.

Employment Tax

Common issues in this arena that are often examined include employee versus independent contractor classifications, fringe benefits, officer compensation, employee expense reimbursement and certain deferred compensation matters

Form 990

With the Form 990 being expanded in 2008 and requiring responses on governance and policy issues, organizations should implement procedures to make sure this public document tells the organization’s story in the best light possible and is properly supported by workpapers in case of examination.

International Issues

Penalties for failure to file various forms (Forms 926, 5471 and 8865) for foreign investments are extensive. In addition organizations that have foreign programs and/or make foreign grants must monitor monies spent or granted outside the U.S. to ensure the funds are used to further the organization’s exempt purposes.

Bond Financing

The required completion of Schedule K of Form 990 for organizations with tax-exempt bonds requires organizations to be diligent in their post-issuance compliance and recordkeeping efforts to address private business use, arbitrage and other requirements to ensure their bonds maintain exempt status.

Charitable Spending

With increased scrutiny on the size of endowments an organization must make sure it doesn’t neglect its charitable missions, while paying excessive executive compensation investing too much in unrelated business activities, or focusing too much on investments just for the sake of growing the endowment.

Hospitals – IRC section 501(r)

The Patient Protection and Affordable Care Act (P.L. 111-148, 3/23/10) ("the Act”) has resulted in significant changes for tax-exempt hospitals by this new code section. In addition to complying with the requirements of section 501(c)(3) and the traditional community benefit standards described, tax-exempt hospitals must satisfy the requirements of new code section 501(r). These are:

  • Conducting community needs assessments.
  • Communicating financial assistance policies.
  • Limiting charges for indigent patients.
  • Following certain billing and collection practices.

Associations

The Internal Revenue Service recently published its FY 2011 Workplan, indicating that the Service expects to increase its focus on section 501(c)(4), (5) and (6) organizations. The issues to be reviewed are political activity, inurement and the extent of compliance with the requirements for tax exemption by organizations that self-identified themselves as sections 501(c)(4), (5) or (6) organizations.

Lobbying and Political Activity for 501(c)(3) organizations

A section 501(c)(3) organization may not participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office. However, a section 501(c)(3) organization is permitted to conduct insubstantial lobbying in support of or in opposition to legislation.