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Thursday, April 26, 2012

Insight from the Director of the IRS Exempt Organizations Division

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 Lois Lerner, Director of the IRS Exempt Organizations Division, opened the Georgetown Law “Representing and Managing Tax-Exempt Organizations” conference on April 19th with a thorough overview of things to come. Some topics discussed by Lerner are highlighted below.

Governance
Lerner discussed findings from an IRS study that an organization’s governance practices directly correlate to its compliance. The IRS has been completing governance checksheets when examining exempt organizations. Though checksheets do not reflect a representative sampling of all organizations, as they were only completed for organizations already under examination, the results of the study indicate that exempt organizations following certain practices were likely to be more tax compliant than those that do not. The most compliant organizations were those that: 1) had a written mission statement; 2) always used comparability data when making compensation decisions; and 3) reviewed Form 990 with the entire board of directors. Lerner said the IRS will supplement this study with a statistically valid sampling of organizations across the sector.

Diversion of Assets
Lerner also announced a new audit program related to the significant diversion of assets by exempt organizations. Lerner stated that the program will give the IRS a better understanding of how such diversions occur and what organizations are doing to prevent them. Accordingly, the IRS will use that information to develop risk models for selecting returns for future audit.

Social Security Numbers on Form 990
As a practical matter, Lerner pointed out that the IRS has no authority to redact any information from a Form 990 before it is made available to the public. Thus, in an effort to prevent identity theft, social security numbers should not be placed on Form 990 or any supporting documents that are attached to it. Lerner pointed out that a recent study published by the Chronicle of Philanthropy reported that 20% of organizations filing form 990 have at least one incidence of including a social security number on the form.

The Takeaway
Proper governance is key. Despite continued criticism by many practitioners that the IRS has no authority under the Code to regulate how an organization is managed, these continued studies and discussions related to governance aren’t being conducted in vain. Whether the information will be used to provide best practices information to organizations, or by the IRS as risk indicators for determining which organizations to look at more closely when determining eligibility for exemption or audit examination, this information will be used. So, perhaps the IRS cannot and should not tell nonprofits how to govern themselves, but if incorporating the IRS’s findings into the organization’s best practices will help expedite an exemption determination or lessen the likelihood of an audit examination, it may very well be worth the trouble to do so.

Tara C. Jackson, J.D., LL.M.
Federal Tax Law Editor
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