by Fred Stokeld
An IRS official April 6 said the agency understands the recession is making life difficult for nonprofits but stressed that charities desperate for cash should not engage in abusive practices that are inconsistent with their exempt purposes.
An IRS official April 6 said the agency understands the recession is making life difficult for nonprofits but stressed that charities desperate for cash should not engage in abusive practices that are inconsistent with their exempt purposes.
At a program in Washington that was sponsored by the Georgetown University Law Center's Continuing Legal Education program, IRS Exempt Organizations Division Director Lois Lerner said the weak economy has caused drops in endowment values and in charitable contributions, forcing many charities to cut back their services. But she added it is important for charities to retain the public's trust during the crisis and that the IRS is looking closely at possible trouble spots.
One problem that may occur with both nonprofit and for-profit organizations is failure to pay employment taxes to the IRS, Lerner said. She noted that organization officials who are responsible for the failure face significant penalties, referring to a recent court opinion in which the chairman of the board of a nonprofit hospital was found personally liable for the hospital's unpaid payroll taxes.
Lerner said the IRS also is on the lookout for aggressive fundraising tactics by charities and the valuation manipulations that often are involved. She said that because of information on noncash charitable contributions on the redesigned Form 990, "Return of Organization Exempt From Income Tax," reforms in the Pension Protection Act of 2006, and the loss of exemption for organizations that do not file returns for three years, there will be "very little room for these types of manipulations to hide."
Some cash-strapped charities are conducting more unrelated business income activities to get more revenue, Lerner said. That is not necessarily a problem but could invite more scrutiny because of public disclosure of organizations' Forms 990-T, on which unrelated business income is reported, she said. She added that the IRS is trying to figure out why so many organizations that report unrelated business income also report losses.
"It's a business activity, yet they never have to pay any" unrelated business income tax, Lerner said.
Lerner also talked about her division's charitable spending initiative -- a long-term study that got under way earlier this year that is designed to look at charities' funding sources and how they spend their money. The first phase will look at organizations with unusual fundraising levels and organizations that report high levels of unrelated business activity but low levels of program services, she said.
Lerner predicted the public furor about high compensation and bonuses in the for-profit sector will spread to the nonprofit sector and said it may be a good idea for exempt organizations to review their processes for setting executive compensation. It is not enough for an organization to say it used comparability data on similar organizations when setting executives' salaries; it also should look at how the data were used, she said.
"It's not just a question of do you have comparables," Lerner explained. "You want to look beyond those comparables to see how they were determined, and we also want to see how people are using those comparables when they set the salary, because if everybody is setting the salary at the high end of the range, then we're not really talking about a range of comparables; we're just talking about a high end."
Lerner said she thinks exempt organizations could benefit from economies of scale, and she mentioned reports that some of them are considering mergers and acquisitions with other nonprofits. Organizations contemplating such arrangements should consider whether a change in the use of their assets would be consistent with their donors' intent and with charitable purposes, she said. She added that the IRS might publish an informal educational tool to give organizations "a sense of what they have to think about if they're going down that road."
Lerner also announced that her division's rulings and agreements function, which works on guidance and private letter rulings, will be getting more staff.