Recent IRS Developments and Avoiding Form 990 Red Flags Brian Todd, CPA, Partner

Transcription

1 Recent IRS Develpments and Aviding Frm 990 Red Flags Brian Tdd, CPA, Partner

2 Agenda Recent IRS Activity Cllege and University Cmpliance Reprt IRS Annual Reprt and Wrkplan Observed IRS Examinatin Activity Frm 990 Red Flags Latest n 501(r)

3 IRS Cllege & University Cmpliance Reprt Final reprt issued in 2013 Sent questinnaires t arund 400 tax exempt clleges and universities Questinnaire tpics Demgraphic infrmatin Exempt activities Unrelated business incme (UBI) Endwment funds Executive cmpensatin Endwment funds 34 audits cnducted as a result

4 IRS Cllege & University Cmpliance Reprt Exams were designed t fcus n executive cmpensatin and UBI Exams fund widespread nncmpliance relating t reprting UBI Fcused n characterizatin f incme, methds fr allcating expenses, recurring lsses, and applicatin f mdificatins and exceptins

5 IRS Cllege & University Cmpliance Reprt Results Increases t unrelated business taxable incme fr 90% f rganizatins examined ttaling abut $90 millin Disallwance f mre than $179 millin in lsses and NOLs Primary reasns fr adjustments Misclassificatin as trade r business: lack f prfit mtive Misallcatin f expenses Errrs in cmputatin Misclassificatin f related activities

6 IRS Cllege & University Cmpliance Reprt Lack f prfit mtive Mst cmmn reasn fr disallwance IRS disallwed lsses in 70% f the examinatins Ttal amunted t mre than $150 millin Review f UBI reprting IRS als lked at whether advice was sught n UBIrelated matters

7 IRS FY 2012 Annual Reprt & FY 2013 Wrkplan

8 IRS FY 2012 Annual Reprt & FY 2013 Wrkplan Increased federal and state crdinatin ACA related activities (including stealth reviews ) Gvernance Preliminary results f analysis f check sheets Review f 285 rganizatins reprting significant diversin f assets

9 IRS FY 2012 Annual Reprt & FY 2013 Wrkplan 512(b)(13) Study Natinal Research Prgram (NRP) Internatinal Activities f Charities Clleges and Universities Referral Selectin Research Prject

10 IRS FY 2012 Annual Reprt & FY 2013 Wrkplan Using Frm 990 Infrmatin in Cmpliance Effrts Charitable spending initiative Cmpensatin transparency Plitical activity Frm 990 T and UBI The bttm line message t rganizatins and practitiners alike: The IRS uses the Frm 990 respnses t select returns fr examinatin, s a cmplete and accurate return is in yur best interest.

11 Ptential IRS Examinatin Triggers Frm 990 errrs, missins, r incnsistencies Areas f IRS interest, such as thse identified in Wrkplan Variety f payrll tax triggers Still an ccasinal randm examinatin als

12 Observed IRS Examinatin Triggers Organizatin reprted lbbying activity as plitical activity n Schedule C Organizatin reprted intercmpany lans as lans t fficers, directrs, etc n balance sheet with n crrespnding Schedule L Organizatin reprted salary and emplyee infrmatin incnsistent with payrll filings

13 Observed IRS Examinatin Triggers Freign activity Unrelated business incme lsses Public charity status f hspital with n Schedule H attached Frm 1099 and W 2 prvided t same emplyees

14 What is the IRS lking at? Depends single issue exam r full exam? Freign activity Mnitring f grants t ther charities Unrelated business incme (r lss) Emplyment tax filings (1099 v. W 2) Minister husing allwances Business dealings with disqualified persns

15 Example 1 Exam likely triggered by UBI lsses Exam was initiated with several phne calls befre any crrespndence was received Exam suppsed t be fcused n UBI and cmpensatin Initial IRS estimate was t spend 1 week n site per mnth fr at least 9 mnths, ttal exam time expected t be arund 18 mnths Currently n visit #3 and still in infrmatin gathering mde

16 Example 1 Start with IT specialist t map lines f general ledger t Frm 990 and 990 T Obtain all payrll data, benefit dcuments, physician cntracts, executive cntracts, etc Review accunts payable data, W 9s, 1099s Review Gverning instruments, bard minutes, etc Initial interviews and cnferences with parties invlved in the examinatin Obtain data frm hspital website

17 Example 1 Lking at specific areas f UBI (lab, pharmacy, ther retail, etc ) Review verall activity and histry f prfits r lsses Sample methdlgy used t determine unrelated v. exempt revenue Clsely review expense allcatin methdlgies Cnduct interviews with department heads and managers

18 Example 2 Payrll tax examinatin Exam was already appraching a year when BKD assistance requested Agent again gathered significant amunt f data frm hspital s website

19 Example 2 Issues written up by agent: Settlement t frmer CFO Lan frgiveness prgrams Reclassificatin t emplyee frm independent cntractr fr several individuals Medical directrs H 1B Visa issues Incnsistent treatment amng grups f emplyees Expanding exam t all pen years

20 Example 3 Physician grup subsidiary f a hspital Public charity status hspital Uses cmmn paymaster One day n site with agent Prvided all requested infrmatin and explained hspital and cmmn paymaster issues Resulted in n change

21 Mck IRS Exams Cnsider cnducting peridically either internally r with external assistance Practively identify ptential risk and expsure areas Gd way t educate department heads/managers Address risk areas prir t ptential IRS exam IRS mre willing t wrk with rganizatins when prblems are self reprted r crrected

22 Frm 990 Red Flags Missing Infrmatin Frm 990, Part IV Checklist f Required Schedules triggers ther Schedules Schedules A & O are always required Significant Unrelated Business Grss Incme r Net Lss Other Required Frms and Disclsures

23 Frm 990, Part IV, Line 3 Plitical Activities Prhibited Different Frm Lbbying Subject t Excise Taxes Culd Jepardize Tax Exempt Status

24 Frm 990, Part IV, Lines 25a b Excess Benefit Transactins Disqualified Persns Persns with Substantial Influence Have wrked with several rganizatins that had t reprt embezzlements Frm 4720 If yu have a reprtable transactin, yu shuld invlve legal cunsel

25 Frm 990, Part IV, Line 38 Narratives Required in Schedule O Even if these questins are answered N Culd be cnsidered nt timely filed due t incmplete return

26 Frm 990, Part V, Line 1c Backup Withhlding Missing and Incrrect TIN s Gambling Winnings Yes r Leave Blank If n payments subject t backup withhlding, leave blank, nt N

27 Frm 990, Part V, Line 3b Unrelated Business Grss Incme $1,000 Grss Incme requires 990 T, even if ultimately a net lss N Statute f Limitatins if never filed

28 Frm 990, Part V, Line 7b Quid pr qu cntributins Written disclsure f the deductible amunt and value f gds and services given Mst frequently seen with special events Penalties apply

29 Frm 990, Part V, Lines 7g h Qualified Intellectual Prperty Frm 8899 Cars, Bats, Airplanes, Other Vehicles 1098 C Leave Blank if nt applicable

30 Frm 990, Part VI, Line 5 Significant Diversin f Assets Unauthrized cnversin f assets Embezzlement, fraud, theft Relatinship f persn des nt matter Can Result in Excess Benefit Transactin

31 Schedule J, Part I, Line 1a Additinal detail n taxable benefits Written plicy fr payment r reimbursement

32 Schedule H, Part V Financial Assistance Plicy

33 Schedule H, Part V Emergency Medical Care

34 Schedule H, Part V Limitatins n Charges

35 Schedule H, Part V Billing and Cllectins

36 Ntice Treasury Department and the IRS cnfirm that yu may rely n all f the prvisins f bth the 2012 and 2013 prpsed 501(r) regulatins pending temprary r final regulatins Hwever, hspital rganizatins will nt be required t cmply with the 2012 and 2013 prpsed regulatins until such regulatins are published as final r temprary regulatins

37 Ntice Prpsed revenue prcedure that is intended t allw hspital rganizatins t disclse and fix failures t meet 501(r) Only applies t failures that are nt egregius and willful

38 Ntice General A hspital rganizatin may rely n prpsed regulatins t crrect and disclse any failure that is nt willful and egregius The hspital rganizatin must have begun crrecting the failure and disclsed the failure befre the hspital rganizatin has been cntacted by the IRS cncerning an examinatin

39 Ntice A failure that is willful includes a failure due t grss negligence, reckless disregard, r willful neglect. A hspital rganizatins crrectin and disclsure f a failure des nt create a presumptin that the failure was nt willful r egregius

40 Ntice Restratin f affected persns Crrectin shuld be made with respect t each affected persn Crrectin shuld restre the affected persn(s) t the psitin they wuld have been if the failure had nt ccurred

41 Ntice Reasnable and apprpriate crrectin The crrectin shuld be reasnable and apprpriate fr the failure Depending n the failure there maybe mre than ne reasnable and apprpriate crrectin Timing The crrectin shuld be made as prmptly after discvery as pssible given the nature f the failure

42 Ntice Implementatin/mdificatin f safeguards If the hspital rganizatin has nt established practices and prcedures that are designed t achieve cmpliance with 501(r), the hspital rganizatin shuld establish practices and prcedures as part f the crrectin prcess If the hspital rganizatin has established practices and prcedures that are designed t achieve cmpliance with 501(r) and failed t identify the failure, the hspital rganizatin shuld determine what changes need t ccur t reduce the likelihd f anther failure

43 Ntice Disclsure A descriptin f the failure A descriptin f the discvery A descriptin f the crrectin made A descriptin f the practices and prcedures

44 Brian D Tdd Partner btdd@bkd.cm