Here are a few of the salient points from some of the key presentations at this conference

From a presentation by Lois Lerner, Director of IRS Organizations:

• The IRS continues to believe that good governance and compliance go hand-in-hand. Over the last few years, IRS agents have been completing a check-sheet in conjunction with examinations of 501(c)(3) organizations. They have made an initial analysis of this data. While not statistically valid, the data suggests that organizations are more likely to be compliant if the organization:

o has a written mission statement
o uses comparability data when determining executive compensation
o reviews their Form 990 with their board or appropriate committee

The analysis suggests that organizations are less likely to be compliant if organizational control is concentrated in one or a small number of individuals.

Ms. Lerner has authorized a statistically-valid study across the nonprofit sector.

• As part of a review of responses on Form 990s concerning the material diversion of assets to personal or non-charitable purposes, the IRS has identified 179 instances of material diversions reported on returns filed in 2009—many involving theft or embezzlement, a few Ponzi schemes. Some criminal charges have been filed (unrelated to IRS actions); 47 individuals were incarcerated; in 9 instances, restitution was made in full; in 11 instances restitution was partially made. A new IRS examination program will begin in the area of material asset diversion.
• Some nonprofits are filing both a Form 990-N and Form 990 in the same year. The IRS is not sure why this is occurring but it is not an appropriate practice. In other words, if an organization is eligible to file the Form 990-N, it should not file Form 990 and vice versa.
• A recent study published by the Chronicle of Philanthropy reported that 20% of Form 990s have at least one social security number (SSN) on them. This raises the potential for identity theft since the IRS does not have the authority to redact any SSNs from the Form 990 (they can only redact contributor data from Form 990/Schedule B). Thus, SSNs reflected on Form 990s are posted on websites such as GuideStar.

Ms. Lerner urged organizations to avoid placing any SSNs on Form 990 or any of the related schedules.

• For applications for tax-exempt status, the processing turn-around time is 70-75 days if the application clears their initial screening process. If applications include certain complexities or are missing information, the applications are referred to agents who possess the requisite experience to review the application. This referral often delays processing beyond the 70-75-day turn-around.
• The IRS is receiving about 60,000 applications for tax-exempt status annually, a much lower volume than in previous years.

Panel of Vicki Judson, Ruth Madrigal and Holly Paz (Treasury and IRS staff):

• Publication 78 data (list of tax-exempt organizations) is being updated online on a monthly basis.
• Under the automatic revocation process, 435,000 nonprofits lost their tax-exempt status for failure to annually file Form 990. 16,000 organizations have applied for reinstatement of their status. This confirms that the list of tax-exempt organizations maintained by the IRS was in serious need of being updated.
• The IRS has developed a new risk model strategy whereby they analyze the responses from certain questions on Form 990 to determine which organizations will be examined. Examples of this strategy include reviewing the basis for:

o Indicating that the organization has unrelated business income on Form 990 but not filing Form 990-T
o Filing Form 990-T but reflecting no tax due

• The Phil Driscoll case was highlighted, in which the Appeals Court panel concluded that multiple homes could not be excluded under the minister’s housing allowance rules.
• The IRS is working on finalizing Section 7611 regulations, which relate to church audit protection. They stated that church audits will resume when the 7611 regulations are finalized.

From a presentation by Gordon Clay, Preston Rutledge and Tiffany Smith (Capitol Hill staffers):

• It is unclear if the charitable gift rollover provision will be extended. There is no current movement on this provision.
• The Senate Finance Committee has held 14 or 15 hearings on tax reform and these hearings are continuing.
• A private roundtable was conducted with charity leaders in January. One of the topics discussed was whether there should be a hierarchy of charitable purposes.
• It was mentioned that Senator Hatch, ranking member of the Senate Finance Committee, has expressed that he is not in favor of limiting the charitable deduction or converting the charitable deduction to a tax credit.
• Under the current charitable deduction arrangement, a taxpayer saves $35 (at the top tax rate) for every $100 contributed to charity. The charity receives $100 for the $35 that the government forgoes—nearly a three-to-one ratio. Additionally, many of the dollars expended by charities are accompanied by unpaid efforts by an army of volunteers, thereby increasing the three-to-one ratio in those volunteer situations.
• Various proposals have and will be made to limit charitable gift deductions (caps, cuts, limits, etc.). These proposals are not going away. 58% of charitable deductions are made by individuals with $200,000 or more of adjusted gross income—in other words, individuals who generally utilize the charitable gift deduction on Schedule A.
• The so-called Pease limitation returns in 2013 unless Congress acts. The Pease limitation phases out itemized deductions above a certain income amount ($169,750 for all returns). The reduction in the value of the itemized deduction can be up to 80% depending on the income level.

From a presentation by Bruce Hopkins, Polsinelli Shughart PC:

• The commerciality and private benefit doctrines have commonly been used by the IRS to deny tax-exemption. These practices continue.
• Two recent private letter rulings denied exemption for religious publishing organizations (largely based on the commerciality doctrine), causing concerns for some organizations operating in this arena. (PLRs 201204021, 201205013)
• The IRS continues to rule that organizations that have a board that is too small amounts to personal benefit.
• The Section 7611 regulations relating to church audits have been out for about three years and still have not been finalized. The finalization seems to be taking a back seat to the finalization of other regulations.
• In the Foundation for Human Understanding case, the IRS attempted to define a church. Even though FHU satisfied some of the IRS’s 14-point criteria, it failed the associational test. Foundation of Human Understanding v. U.S. (U.S. Ct. Fed. Cl. 2009), affirmed, (Fed. Cir. 2010), cert. den., 3-21-11

From a presentation by Janne Gallagher, Council on Foundations, and Marcus Owens, Caplin & Drysdale

• Steps to take when insider theft/fraud is uncovered: Dealing with the results:

o Report of fraud/theft detection to the board, together with outline of proposed institutional response, including investigation strategy.
o Coordination with Human Resources regarding administrative leave (with or without pay), suspension, or termination of implicated employees.
o Coordination with law enforcement to ensure that any internal or external investigation does not compromise any law enforcement inquiry.
o Communicating the fact of the fraud/theft to employees
o Insurance carrier notification
o Consider engaging in recovery effort

• Steps to take when insider theft/fraud uncovered: Managing the message:

o Board notification
o Consider engaging a crisis communications expert
o Public notification—press release if the theft/fraud is significant. Expect internal communications on the theft to eventually surface in the media, except for insignificant matters.
o Form 990 filing: the following question is pertinent in Part VI, line 5: Did the organization become aware during the year of a significant diversion of the organization’s assets?

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