Every tax-exempt and nonprofit organization must place a high priority on complying with applicable federal and state tax laws. The IRS devotes substantial resources examining nonprofits to ensure tax compliance. The IRS recently released its Tax Exempt and Government Entities Work Plan for Fiscal Year (FY) 2017. In this document, the IRS discussed its priorities for FY 2017.
- Examining unrelated business income tax liability
- Scrutinizing employment taxes
- Ensuring that organizations are accurately reporting their institution's purpose under Section 501 of the Tax Code
- Analyzing evidence of self-dealing, excess benefits and loans to unqualified individuals or organizations
- Looking at overseas reporting, including Report of Foreign Bank Account (FBAR)
The two biggest tax concerns for nonprofits in FY 2017 will be unrelated business income tax liability and employment taxes. In terms of unrelated business income taxes, the IRS will closely review "gaming, nonmember income, expense allocation issues, net operating loss adjustments, rental activity, advertising, debt-financed property rentals and investment income." For employment taxes, the IRS will take a close look at "unreported compensation, tips, accountable plans, worker reclassifications and noncompliance with FICA, FUTA and backup withholding requirements."
What Factors Increase a Nonprofit's Chances of an Audit?
According to its Work Plan, the IRS audited 4,984 nonprofits in FY 2016. Considering these numbers, it is fair for nonprofits to expect to receive more scrutiny than for-profit organizations. With this said, nonprofits can take certain steps to minimize the likelihood of an audit. One red flag that is likely to raise suspicions for IRS agents is when a nonprofit requests a tax refund.
Obviously, if a tax refund is warranted, a nonprofit organization is justified in requesting a refund. Before requesting a refund, however, nonprofits should look carefully to make sure their records can withstand IRS scrutiny. This is particularly important for nonprofits that work with independent contractors, or nonprofits that have unrelated business income. As the IRS has announced its intentions to monitor these issues closely, it is important for nonprofits to get their houses in order.
Nonprofit and other tax-exempt organizations can realize tangible benefits by working closely with skilled, intelligent tax attorneys. At Goldburd McCone LLP, our tax lawyers provide nonprofits, as well as business and individual taxpayers, with thoughtful legal counsel and strategic advocacy.
Sources: Tax Exempt and Government Entities FY 2017 Work Plan, Internal Revenue Service, September 28, 2016, IRS Plans More Efficient Audits of Tax-Exempt Groups, Accounting Today, October 20, 2016, by Michael Cohn.