News from The Non-Profit Times

Audits Show Widespread Underreporting of UBI

By The NonProfit Times - April 29, 2013

Unreported unrelated business income in higher education was found in almost every case examined by the Internal Revenue Service (IRS).

“The audits identified some significant compliance issues at the colleges and universities examined,” said Lois Lerner, director, Exempt Organizations division of the IRS. “Because these issues may well be present elsewhere across the tax-exempt sector, all exempt organizations need to be aware of the importance of accurately reporting unrelated business income and providing appropriate executive compensation.”

This is part of the multi-year project on tax-exempt colleges and universities. The Colleges and Universities Compliance Project was launched in 2008 with the distribution of detailed questionnaires to 400 randomly-selected colleges and universities. The IRS selected 34 of the 400 for examination because their questionnaire responses and Form 990 reporting indicated potential noncompliance in the areas of unrelated business income and executive compensation.

Unrelated business income (UBI) is the income from a trade or business regularly conducted by an exempt organization and not substantially related to its exempt purpose. Unrelated business taxable income is the UBI that is taxable after deducting expenses directly connected to the trade or business. Because UBTI is calculated by totaling the UBI from all activities and subtracting the total allowable deductions, losses from one activity can offset profits from another. Examinations have resulted in:

• Increases to UBTI for 90 percent of colleges and universities examined totaling about $90 million;
• More than 180 changes to the amounts of UBTI reported by colleges and universities on Form 990-T; and
• Disallowance of more than $170 million in losses and Net Operating Losses (NOLs, i.e., losses reported in one year that are used to offset profits in other years), which could amount to more than $60 million in assessed taxes.

The primary reasons for increases to UBTI in the completed exams were:

• Disallowing expenses that were not connected to unrelated business activities.

The IRS found that examined colleges and universities were reporting certain losses as connected to unrelated business activities when they were not. The misreporting occurred in two ways:

1. Lack of profit motive: The IRS found that organizations were claiming losses from activities that did not qualify as a trade or business. Nearly 70 percent of examined colleges and universities reported losses from activities for which expenses had consistently exceeded UBI for many years. UBI must be generated by a trade or business.

An activity qualifies as a trade or business only if, among other things, the taxpayer engaged in the activity with the intent to make a profit. A pattern of recurring losses indicates a lack of profit motive. The IRS disallowed reporting of activities for which the taxpayer failed to show a profit motive. Those losses no longer offset profits from other activities in the current year or in future years, with more than $150 million of NOLs disallowed.

2.  Improper expense allocation: The IRS also found that on nearly 60 percent of the Form 990-Ts examined, colleges and universities had misallocated expenses to offset UBI for specific activities. Organizations may allocate expenses that are used to carry on both exempt and unrelated business activities, but they must do so on a reasonable basis and the expenses offsetting UBI must be directly connected to the UBI activities. In many cases, the IRS found that claimed expenses, which generated losses, were not connected to the unrelated business activity.

The IRS checked the calculations for all NOLs reported on returns under exam and found that NOLs were either improperly calculated or unsubstantiated on more than a third of returns. As a result, the IRS disallowed nearly $19 million in NOLs.

The IRS also determined that nearly 40 percent of colleges and universities examined had misclassified certain activities as exempt or otherwise not reportable on Form 990-T. Fewer than 20 percent of these activities generated a loss. The examinations resulted in the reclassification of nearly $4 million in income as unrelated, subjecting those activities to tax.

Examinations resulted in more than 180 changes to UBTI reported for specific activities by colleges and universities. More than 30 different activities were connected to the changes. The majority of these adjustments came from the following activities: Fitness, recreation centers and sports camps; advertising; facility rentals; arenas; and, golf.

To see the online aricle click here.

The NonProfit Times Weekly E-Newsletter

IRS Reports 10,000 Fewer Nonprofits In 2012

There were 10,000 fewer registered tax-exempt organizations in 2012 than in 2011. According to the Internal Revenue Service (IRS) Data Book for 2012, which was released Monday, there were 1,484,818 501(c) organizations for the fiscal year ending in September, compared with 1,494,882 in 2011 – a decrease of 10,064, or about 0.68 percent.Read more... Professional Development... 5 principles for ethical mentoring “I never meant for that to happen.” Just as the above lament can be the swan song for a nonprofit that doesn't follow good organizational practices, it can also be the epitaph for a mentoring partnership gone wrong. Read more... Human Resources... 15 interview questions you can legally ask There are a lot of laws these days that restrict the kind of information you can request from candidates during job interviews. Since you probably don't want to get in trouble with the law, it's important to know the questions that you can and should ask. Read more... Management... 6 reasons change is good It's usual to resist change. Those who aren't pulling their own (or any) weight know that their gigs can be threatened if they don't do a whirlwind job of convincing change agents just how essential they are. Those who are pulling their own weight (or more) know that their livelihoods are threatened because they are too busy working to prove how essential they are to the operation. Read more... To Read More Click Here

Voluntary Compliance Program announced by IRS to address worker misclassification

Information for your members: You may have seen that in late September the IRS announced a voluntary compliance program for employers (including nonprofit employers) to enable those who have mistakenly classified workers as independent contractors to make a correction, along with a modest payment, and avoid the usual penalties of noncompliance. This program’s announcement offers an opportunity to remind nonprofits about the risk of misclassification and share information with them about the voluntary compliance program. See the National Council’s website materials on this topic.

Here is the text of the IRS announcement about the voluntary compliance program (from the IRS’s EO Update circulated on October 4):

“The IRS has launched a new program that will enable many employers, including tax-exempt employers, to resolve past worker classification issues and come back into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit. To be eligible for the new Voluntary Classification Settlement Program an applicant must:

Consistently have treated the workers as nonemployees in the past

Filed all required Forms 1099 for the workers for the previous three years

Not currently be under audit by the IRS, Department of Labor or a state agency concerning the classification of these workers.

Full details, including FAQs, will be available on the Employment Tax Pages of IRS.gov and in Announcement 2011-64.”

SCHUMER: IRS ANNOUNCEMENT COULD MISTAKENLY COST UPSTATE NY CHARITIES, LITTLE LEAGUES, PUBLIC LIBRARIES, MUSEUMS AND OTHERS THOUSANDS OF DOLLARS EACH

After Reports That The IRS May Have Mistakenly Stripped NY Groups Of Tax-Exempt Status, Schumer Urges All Nonprofits To Double Check The IRS List To Make Sure They’re Not Included By Mistake

Report Provides County-By-County Breakdown Of The Over 6,000 New York Nonprofit Groups That Lost Tax Exempt Status – Groups Can Correct Error, But Have To Do It Soon Before Costs Go Up

Schumer: Losing Tax-Exempt Status Could Be An Unfair Blow To New York’s Nonprofits

Today, U.S. Senator Charles E. Schumer unveiled a new section of his website to aid New York nonprofit groups that may have mistakenly lost their tax exempt status. Schumer is strongly encouraging nonprofit groups to check a recently-released Internal Revenue Service (IRS) list, available on Schumer’s website, to ensure that they have not been mistakenly stripped of their tax-exempt status – a move that could cost these groups thousands of dollars. Schumer’s webpage was launched shortly after media reports indicated that several nonprofit groups, including the New Windsor Little League and Plattekill Public Library, were included on the list released June 8th, despite the fact that their paperwork was up to date and filed with the IRS. Several nonprofit groups were never contacted by the IRS, despite several attempts to send mailings and other communications to warn the groups of the looming deadline to avoid losing their designation as a 501(c)(3) group.

“Little leagues, public libraries, museums, meal programs, and other nonprofit organizations that are the very fabric of communities throughout Upstate New York are at risk of losing their tax-exempt status and paying thousands of dollars in penalties through no fault of their own,” said Schumer. “Whether because of a lost notice in the mail or paperwork errors, no nonprofit should needlessly lose their tax exempt status. Every nonprofit group in Upstate New York should take a moment to ensure that they won’t be forced to pay unnecessary taxes this year. I’ve launched this new page on my website to make it easy and painless for groups to make sure that they’re not on the list, and to take steps to correct the problem if they are. Remaining tax-exempt helps keep costs down while boosting fundraising for charity organizations.”

"The good work of community charities has a vital impact on the everyday lives of New Yorkers,” said Doug Sauer, Chief Executive Officer of the New York Council of Nonprofits. “Whether it is providing volunteer first responder assistance, providing food and housing to families in need, caring for our children, disabled and elderly, fostering economic development or creating and promoting arts and culture - charities are integral to our quality of life in ways that are often taken for granted. NYCON is eager to do what we can to assist those organizations whose tax status have been revoked so that they continue their important contributions."

On June 8th, the IRS released a list of 275,000 nonprofits nationwide who automatically lost their tax-exempt status because they failed to file annual reports for three years in a row. The list included over 19,000 New York organizations, including more than 6,000 across Upstate New York. While the IRS believes that many of these organizations are no longer operational, they acknowledge that some groups on the list might not have been aware of the requirement, and are taking steps to allow these nonprofits to reinstate their tax-exempt status. In making the announcement, IRS Commissioner Doug Shulman said that, “We realize there may be some legitimate organizations, especially very small ones that were unaware of their new filing requirement.”

The list includes a diverse range of nonprofit groups including sports leagues, public libraries, museums and other educational programs, conservation groups, religious organizations, business networking groups, and others. There are over 106,000 registered nonprofits in New York state, according to the New York Council of Nonprofits, employing over 1.2 million New Yorkers statewide. Included in this total are 3,000 food pantries that feed approximately 3 million people each year. Over 17,000 people work in New York museums, which help contribute over a billion dollars to the state’s economy each year, thanks to visits from 6.6 million families, senior citizens, and students. In 2010, the American Red Cross in New York responded to 3,920 local disasters, and has trained nearly 590,000 people in First Aid. The group has also trained over 168,000 people in emergency preparedness, collected over 400,000 units of blood, and helped over 66,000 military families through their Armed Forces Emergency Services and Community Outreach Programs, according to the New York Council of Nonprofits. New York charities play an important role in communities across the state, and should be allowed to continue to do their good work in a tax-exempt state that will help their bottom line, allowing the nonprofits to serve more Upstate New Yorkers.

Here is how the nonprofits who lost their tax-exempt status break down across the state:

• In the Capital Region, approximately 952 nonprofits lost their tax-exempt status.




• In Western New York, approximately 687 nonprofits lost their tax-exempt status.




• In the Rochester-Finger Lakes Region, approximately 867 nonprofits lost their tax-exempt status.




• In the Southern Tier, approximately 562 nonprofits lost their tax-exempt status.




• In Central New York, approximately 811 nonprofits lost their tax-exempt status.




• In the Hudson Valley, approximately 1,942 nonprofits lost their tax-exempt status.




• In the North Country, approximately 426 nonprofits lost their tax-exempt status.

Being included on the list means that these nonprofits are no longer eligible to receive tax-deductible contributions, and that any income the group receives may be taxed. This has the effect of raising taxes on the nonprofit, while also putting a serious damper on their fundraising. The Pension Protection Act, passed by Congress in 2007, requires tax-exempt organizations to file an information return or notice each year with the IRS. Smaller groups are required to file for the first time in 2007, and the law automatically revokes the tax-exempt status of groups that do not file for three consecutive years. As a result, the first nonprofits to be revoked under the new law saw their status removed based on 2010 returns, filed in April of this year.

Fortunately, as long as groups are aware that they have been improperly stripped of their tax-exempt status, they can take corrective action at minimal cost to the group. Any nonprofit that can demonstrate that it has met its filing requirement for one or more of the last three years can fax copies of their past tax returns to be reinstated at no cost to the group. Additionally, those groups with under $50,000 in income that have not filed tax returns over the past three years can file for reinstatement for a reduced fee of just $100. If the groups fail to file by December 31, 2011, that fee jumps to $400-850 for 2012. Due to the limited window to take advantage of cheaper and easier ways to reapply for tax-exempt status, Schumer is encouraging nonprofits across Upstate New York to check his website and the list of those that lost 501(c)(3) status to ensure that their paperwork is up to date. If a group finds that they have lost their tax exempt status, they can follow the instructions on Schumer’s website and take steps to see that it is reinstated.

The new section of Schumer’s website can be accessed by visiting http://schumer.senate.gov/Public/irs_6_22_11.htm

Don’t get burned. File the 501(h) election!

With much of America gripped by below-freezing weather this winter, it’s nice to imagine being on a sunny beach, with white sand all around, gentle island breezes playing in your hair, and nothing for miles but a cloudless blue sky.

Did you bring your sunscreen?

Reality check – whether freezing or on a beach – you still want to protect your nonprofit from getting burned.

Filing the 501(h) election protects nonprofits from being burned.
By filing one simple form, IRS Form 5768, a charitable nonprofit can protect itself from penalties for engaging in "too much" lobbying. (Charitable nonprofits can lobby; read why lobbying is legal.) A charitable nonprofit can only spend an insubstantial amount of its activities on lobbying. But there is a hazy ill-defined line between what "activities" are considered "substantial" and which are "insubstantial." Here’s where the sunscreen comes in. By filing IRS Form 5768 (also referred to as "taking the 501(h) election") instead of being judged by the uncertain “substantial part” test that evaluates undefined "activities" -- your nonprofit will have the added protection of being evaluated with a more specific test called the “expenditure” test that offers a bright line based on how much money the nonprofit spends on its lobbying activities. If you don’t take the 501(h) election, it’s li! ke guessing how long to stay in the sun before you’ll get a sun burn.

Read all about the advantages of taking the 501(h) election on the National Council’s website. (Note: Private foundations, churches, and integrated auxiliaries of churches are not permitted to file the 501(h) election.)

It’s so simple and effective that some nonprofit practitioners have called it the "cheapest and best insurance on the planet." Indeed, we wonder why more nonprofits don’t use this easy process. Once a nonprofit files the 501(h) election by completing Form 5768, it simply reports annually how much money it spent during the year on lobbying activities on Form 990, Schedule C. As long as the nonprofit’s expenditures are within the acceptable (and generous limits) established by law, the nonprofit is protected. However, if it does not file Form 5768, not only is the reporting to the IRS more detailed, but the IRS will decide, based on uncertain criteria, whether the charitable nonprofit’s lobbying activities are “substantial” or not. Because the IRS has never defined how much is “too much,” the results of this analysis are uncertain. Why not file the! 501(h) election and be sure?

Start off the New Year by protecting your nonprofit with the 501(h) election – it’s easier than putting on sunscreen. (You only have to do it once!)

How Will the New Tax Law Affect Your Nonprofit, Your Employees, and the People You Serve?

Yesterday Congress passed the $857 billion tax package negotiated by President Obama and congressional Republicans. President Obama is expected to sign the legislation today.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (H.R. 4853) has numerous components of interest and concern to nonprofits – as employers and as mission-based organizations involved in local communities. This list presents portions of interest to most nonprofits, nonprofit employees, and the people they serve:

• Tax Rates Maintained: All of the individual tax rates put in effect in 2001 and 2003 are maintained through 2012, including those for upper-income tax brackets. Most immediately, this means that nonprofit and other employers will not have to adjust employee withholdings for income taxes.
• Individual Payroll Taxes Reduced: Employees receive a two percent reduction in the Social Security tax they pay. For 2011, nonprofit and other employers will need to reduce the individual's share of payroll withholding from 6.2 percent to 4.2 percent. To illustrate what this change means, an individual earning $50,000 will see $1,000 in tax savings.
• Estate Tax: The bill restores and reduces the federal estate tax at a rate of 35 percent and increases the exemption level to $5 million, two changes that many fear will eliminate previous incentives for the wealthy to give.
• Charitable Giving Incentives: The IRA rollover and other expired charitable giving incentives (promoting donations of food, land, computers, and books) are restored for the remainder of 2010 and through the end of 2011, which should help promote giving.
• Unemployment Benefits: The legislation extends the enhanced program of 99-weeks of unemployment benefits through 2011. This allowance may prevent additional strain that would have hit many nonprofits that provide services to those with no income.
• Alternative Minimum Tax: Middle-income taxpayers will not be subject to the alternative minimum tax in 2010 and 2011 because the bill renews a "patch" that limits the application of the AMT to approximately four million upper-income individuals. Without this patch, many taxpayers would have seen an automatic increase in their tax rates.

The following link will take readers to a 12-page summary that provides greater detail about the bill, including provisions that might be of interest to particular nonprofits (e.g., those providing child care, adoption assistance, certain education): Summary of the Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Also, the IRS just released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011. See Notice 1036.

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Nonprofit Resources Regarding the Oct. 15 Deadline

Time is running out for small nonprofits facing loss of tax-exempt status because they have not filed Form 990-N or Form 990-EZ for three consecutive years. The deadline for the IRS's one-time filing relief program is October 15, 2010. After that, nonprofits that are required to file a 990 and whose filings are at least three years in arrears will automatically lose their exemptions. To regain tax-exempt status, they will have to apply to the IRS all over again, a process that can take several months and requires payment of fees. To help you make sense of the rules and regulations surrounding this program, GuideStar is offering you a few resources:

• GuideStar Resource Center: includes articles and links to keep you updated in this ongoing process.
• IRS Communications Toolkit: includes facts outlining the situation, a list of organizations IRS records show are at risk, a YouTube video, and a widget for posting on Web sites.
• Guide Star Charity Check: includes information on exemption status of organizations and is updated as more information from the IRS becomes available.