Hunton Law

Legal Counsel for Nonprofit & Tax-Exempt Organizations

Legal Counsel for Nonprofits, Foundations & Social Enterprises

IRS Will Be Focusing on These Exempt Organization Issues

In early October the IRS released its Fiscal Year 2019 Program Letter explaining which areas of tax-exempt organization compliance it will be focusing on in the coming year.   

The following bulleted list is copied directly from the Program Letter and represents areas of concern to the IRS.  Accordingly, the IRS will be devoting more resources to detecting noncompliance in the following areas:

  • Internal Revenue Code (IRC) Section 501(c)(7) entities: focus on investment income, non-member income and non-filers of Form 990-T, Exempt Organization Business Tax Return, by tax-exempt social clubs.

  • IRC Section 4947(a)(1) Non-Exempt Charitable Trusts (NECTs): focus on organizations that under-report income or over-report charitable contributions.

  • Previous for-profit: focus on organizations formerly operated as for-profit entities prior to their conversion to IRC Section 501(c)(3) organizations.

  • Self-dealing by private foundations: focus on organizations with loans to disqualified persons.

  • Early retirement incentive plans: determine whether federal, state or local governmental entities that provide cash (and other) options to employees as an incentive for early retirement have applied proper tax treatment to these benefits.

  • Forms W-2/1099 matches: compare payments reported on Form 1099-Misc., Miscellaneous Income, with wages reported on Form W-2, Wage and Tax Statement, and subject to Federal Insurance Contribution Act (FICA) tax and income tax withholding.

  • Notice CP 2100 (backup withholding): determine whether mismatched and/or missing taxpayer identification numbers on Form 1099 indicate failure to comply withbackup withholding requirements.

  • Worker classification (misclassified workers): determine whether misclassified workers result in incorrectly treating employees as independent contractors.

The entire Program Letter is available at this link: https://www.irs.gov/pub/irs-tege/fy2019_program_letter_final.pdf.

New Online Tool to Check Tax-Exempt Status

In May 2018 the IRS replaced the “EO Select Check” online tool with a more comprehensive online tool called “Tax Exempt Organization Search” (TEOS). 

EO Select Check was a limited, albeit useful, tool that provided the following information to the public: whether an organization is eligible to receive tax-deductible contributions; whether an organization has had its tax-exempt status revoked for failure to file required forms or notices for three consecutive years; whether an organization filed a Form 990-N (e-Postcard) annual electronic notice with the IRS.  EO Select Check was particularly helpful for running a quick check to see if an organization was listed as a Section 501(c)(3) public charity or private foundation.   

The new tool, TEOS, provides the same information previously available on EO Select Check, in addition to offering users the ability to:

  • View images of Forms 990, 990-EZ, 990-PF, and 990-T filed by 501(c)(3) organizations. Currently, only 990 series forms filed in 2018 are available, and new filings are being added monthly. 
  • Conduct mobile-friendly searches on smartphones and tablets.
  • View favorable tax-exempt status determination letters issued by the IRS since January 2014.

The IRS allows users to rely on information provided on TEOS in determining the deductibility of their contributions.

501(c)(3) Tax Exemption Application Updates

The IRS recently changed several rules and processes relating to the application for Section 501(c)(3) status (IRS Form 1023 and Form 1023-EZ). 

IRS Form 1023 was revised in December 2017.  The IRS cautions applicants to use the most recent versions of tax exemption applications and instructions to avoid processing delays.  The most significant revisions to the Form 1023:

  • Eliminated a question about the advance ruling process
  • Eliminated an outdated question about organizations applying for 501(c)(3) recognition more than 27 months after formation
  • Increased financial data reporting requirements for organizations older than one year

Good news!  The user fee for Form 1023 has been reduced from $850 to $600.  Instructions to Form 1023 indicate that user fees are subject to change, so always check the current user fees before submitting your application.

Processing times for Form 1023 continue to vary, although overall processing times have significantly decreased in the past several years.  Many applications are reviewed in as few as four weeks, while some applications are reviewed in six months.  Applications that require additional information will undergo a lengthier review period, often around six months or more.  An organization that has submitted Form 1023 to the IRS is permitted to solicit and receive contributions while its application is pending, provided that it discloses to funders that it has not yet obtained recognition of tax-exempt status. 

The IRS continues to accept Form 1023-EZ from small nonprofit organization applicants that meet the eligibility criteria.  Form 1023-EZ requires less information from applicants than Form 1023, yet Form 1023-EZ was revised recently to require additional information about the applicant’s mission, activities, annual gross receipts, total assets, and public charity classification.  The user fee for IRS Form 1023-EZ is $275. 

The IRS website is a great source for helpful articles, issue snapshots, podcasts, and videos for tax-exempt organizations and applicants, such as reporting requirements while Form 1023 is under review, filing deadlines for employers, and charitable deductions.