By Samuel J Fanburg from Exempt Magazine
The Internal Revenue Service (IRS) is inviting public comment on issues and frequently asked questions regarding Form 990. Issues for comment include a consideration to eliminate a section asking to report activity codes, reporting compensation to management companies and leasing companies owned by an organization’s leadership, and thresholds for reporting compensation to key employees.
The revised Form 990 was extensively redesigned in 2008 to “promote tax compliance and increase transparency,” and once again is coming under public comment as in 2009 and 2010 to make the form “easier to understand and complete.”
The IRS is seeking public comment on whether or not activity codes that signify certain program service activities need to be identified, given that the current systems do not reflect the ranging program services supplied by nonprofits.
In addition, the IRS aims to introduce debate surrounding reporting compensation to management companies and leasing companies owned and controlled by an organization’s leadership. There have been concerns raised to the agency that the new rules protect organizations from reporting compensation to highly paid executives, by paying these figures indirectly through management companies.
Also being reviewed is reporting revenue from governmental units. Currently, the rules have an organization reporting payment from the government unit if its primary purpose is to help the organization provide a service or maintain a facility for the direct benefit of the public. Now, the IRS is asking the public to comment on how requirements should change in the area, reflecting even more transparency.
Other aspects of the Form 990 open for public comment are: thresholds for reporting compensation to employees and leadership of an organization; net asset reconciliation; reporting on audited financial statements; names and EINs of foreign grantees; indirect foreign expenditures; reporting bank deposits as loans or business transactions on Schedule L; report of component parts of community trusts, and scope of related organization reporting on Schedule R.
Comments must be submitted by Aug. 1, 2011. The public can comment by mail to the IRS’ Washington D.C. office:
Internal Revenue Service
Attn: Stephen Clarke (Announcement 2011-36)
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
Comments can be hand-delivered between the hours of 8 a.m. to 4 p.m. to:
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
Nonprofit news organizations were supposed to be journalism’s next great hope. Like a rocket shooting from the dying planet of print news, nonprofit outlets were supposed to be able to focus on the tough, gritty investigative reporting newspapers were no longer doing enough of while not being beholden to advertisers.
But the past few months have seen the nonprofit news sector take some big hits. In December, Voice of San Diego had to layoff staff when fundraising totals didn’t hit targets. The came the impending merger of the Bay Citizen with the Center for Investigative Reporting. And then the demise of the Chicago News Cooperative.
But beyond money issues, there’s a structural problem nonprofit outlets are dealing with: getting all-important 501(c)(3) status from the IRS. Many nonprofits (or nonprofits-to-be?) have arrangements with existing entities that allow them to receive donations. But 501(c)(3) status is the key to standing on their own and cementing an operational structure. And at the moment, the IRS appears to have a rising backlog of journalism groups applying for nonprofit status, with waits approaching two years. And the question on many minds is: Why?
Our friends over at the Digital Media Law Project (formerly the Citizen Media Law Project — they’re in the process of rebranding) decided to take a deeper look at this issue; they’re planning on releasing a report in the next few weeks that can serve as a guide for journalism organizations trying to apply for nonprofit status. Reviewing decades of case law around nonprofit news organizations as well as previous IRS rulings, the guide tries to make the complex 501(c)c(3) process less of a mystery.
“It seems to us there’s a lot of confusion about why the IRS is asking certain types of questions, applying certain standards, and reaching certain results,” Jeff Hermes, the project’s director, told me.
While DMLP puts the finishing touches on its report — “Guide to the Internal Revenue Service Decision-Making Process under Section 501(c)(3) for Journalism and Publishing Non-Profit Organizations” — Hermes shared some of the key points with us.
Education, not journalism
The single biggest problem for news organizations seeking 501(c)(3) status, Hermes said, is that they don’t properly identify themselves when applying. Namely, they make the mistake of calling themselves journalism organizations. That’s a problem, because the IRS doesn’t recognize journalism as one of the defined categories eligible for nonprofit status. But what is eligible? Education. And civically oriented news organizations can make a very strong case that what they do qualifies as educational.
The problem is that some journalists, in their applications, are willing to leave that journalism-to-education up to interpretation — as a step for the IRS to take. Wrong: The IRS doesn’t deal in interpretation. “If you have journalism listed as your purpose, the IRS will look at that and say, ‘journalism isn’t on my list of eight categories,’” Hermes said.
(The eight categories? “Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations.”)
Any journalist can make the case that their work is educational in nature, but in this instance it really does have to be spelled out, Hermes said. “The key to passing this side of the test is whether journalism is your purpose or the method by which you’re achieving the educational purpose,” he said. Think journalism as tool for education.
Who’s wearing what hat?
In keeping with the educational standard, potential news nonprofits have to pass a kind of operational test that shows they are structured to educate the public. What does that look like? Hermes said the IRS will look at whether you provide researched, factual information to a specific audience and are not engaging in advocacy. They’ll also want to know how your work is being distributed and whether you are trying to reach a targeted group or mass audience. As an educational entity, journalists fill the role of researchers and experts — the kind of structure the IRS is looking for, Hermes said.
Another note on that advocacy issue: Hermes said the IRS scrutinizes groups for whether they are lobbying for specific political candidates or campaigns. That means no editorial-page-style endorsements of candidates.
About that money
Another point on the organizational issue: How closely does your shop resemble a commercial newsroom? If your publication looks and acts like a newspaper, only with a big “nonprofit” sticker slapped across the masthead, that won’t suffice. Specifically, if your group plans to (or already does) generate revenue through subscriptions or advertising, that’s a red flag that could sink your application, Hermes said. “There’s a common misconception among applicants that it’s okay to earn advertising revenue and other revenue as long as you pay taxes on it,” Hermes said. “That’s not quite right.”
While nonprofit news organizations are allowed to do those activities, income from those areas can’t make up the main source of money for an organization. What the IRS is looking for is whether or not your organization makes money like most nonprofits (memberships and foundation support for instance) instead of like a commercial business.
Ads and subscriptions typically fall under what Hermes calls “unrelated taxable income,” or, taxable dollars made by a tax exempt group. One exception is if your advertising is connected to your work (and is educational itself) and doesn’t just support your operation.
Again, it’s not that more traditional means of money aren’t allowed — it’s that they can’t be the bulk of how you get paid. “The IRS wants to see you try to use traditional nonprofit sources of funding before turning to regular commercial revenue models,” Hermes said. “It will help if you are using commercial revenue models to augment your nonprofit style fundraising or show you tried nonprofit fundraising and failed.”
The business of experts
In looking at the organizations that have been granted 501(c)(3) status, Hermes and his team found that having a specific focus and area of expertise can make a difference. If your news organizations is designed to report on specific issues — say, politics, the environment, health care, or a limited community — that can help. Also, a specific focus, such as investigative reporting or other watchdog work, can help. This ties into the organizational structure (do you have an experienced, expert-like staff?) as well as meeting the overall idea of an educational purpose. “The organizations that are most successful are those involved in investigative journalism and show some institutional expertise in researching particular topics,” Hermes said.
Hermes said they are currently reviewing the final report, as well as talking with foundations that support journalism to they could add further insight to the report. There’s clearly a lot at stake here — even as some nonprofit news shops merge or close, new ones are starting up. In the eyes of many journalists as well as some charitable groups, nonprofit news remains one of the more viable ways of supporting journalism going forward. Hermes said that even with a guide and concrete suggestions in place for news outlets, the 501(c)(3) process will remain byzantine in how it applies to journalism.
“The current structure is very complex in terms of standards the IRS applies — it’s not always intuitive,” he said. “The mixing of consideration of content-related issues — what the content of your publication is — with issues of your business model and where you’re getting revenues give rise to what sometimes look like contradictory results.”
While Hermes didn’t want to speculate on the IRS motives or reasons for the delay, one possibility for what looks like increased scrutiny could be last year’s FCC report on the information needs of communities, which discussed the need for support of nonprofit journalism. The IRS, like most federal agencies, wants to be very careful around setting precedent, Hermes said. “They are sensitive to the fact that ruling on these things can have a dramatic impact on an entire industry,” Hermes said.
(One final note: Nonprofit news organizations struggling these issues — along with waiting to see the full report — might consider reaching out to the Online Media Law Network, a DMLP project that connects online news outlets to attorneys willing to do legal work for them, often at no cost. Helping with 501(c)(3) applications is one of the areas where OMLN can provide help.)
IRS releases guidance and forms for employers seeking to claim the newly-expanded tax credit for hiring veterans
On Feb. 9, 2012, the IRS released guidance and forms for employers seeking to claim the newly-expanded tax credit for hiring veterans as outlined in the Veterans Opportunity to Work (VOW) to Hire Heroes Act of 2011.
Enacted Nov. 21, 2011, the VOW Act provides an expanded Work Opportunity Tax Credit to businesses that hire eligible unemployed veterans, and for the first time, also makes the credit available to certain tax-exempt organizations.
The VOW Act offers many direct benefits to personally assist the nation’s veterans, such as education and training programs. For employers, the law provides tax incentives when qualifying, unemployed veterans are hired and begin work between Nov. 22, 2011, and Dec. 31, 2012.
Up to $2,400 in tax credits are available for employers who hire veterans who have been unemployed at least four weeks; up to $5,600 for hiring veterans who have been unemployed longer than six months; and up to $9,600 for employers that hire veterans who have service-connected disabilities and have been unemployed longer than six months.
For additional information on the VOW Act, click here.
For details on claiming the credit, click here.
From The Nonprofit Times:
IRS Adjusts Disclosure Requirements
The North Bay Business Journal reported today that, in a recently released Jan. 11 memo, the IRS outlined changes to Form 990 for the 2011 tax year. While the changes are relatively small, they are designed to help reduce some of the headaches that come with disclosure requirements. Among the changes is a clarification of what could be considered income for executives and other highly compensated employees, including information from their W-2 forms. This change should make it easier for nonprofits to know what they need to report when it comes to executive compensation.
Another change that was discussed in the memo involves how nonprofits should treat partnerships on their balance sheet. It is now required that organizations report the share of assets between the partner organizations as a separate item, showing the ending capital from the joint venture. The IRS also sought to clarify requirements to foreign activity, which is important for nonprofits that run missions overseas. Foreign investments can now be valued up to $100,000 before disclosure, whereas organizations were only required to disclose this information if the investments resulted in a $10,000 net revenue or expense.
While all these changes are designed to make the Form 990 easier to understand, it will undoubtedly lead to more work for nonprofits come tax day. We’d like to hear your thoughts on these new changes. Do you think they will make things easier, or do you foresee new headaches because of them?
IRS Revokes Exempt Status Of 275,000 Nonprofits
There are about 275,000 fewer nonprofit organizations in the United States this morning – at least according to the Internal Revenue Service (IRS).
The IRS released its initial list of revoked organizations late yesterday and plans to update it each month with additional nonprofits whose filing dates have come due. The 275,000 nonprofits represent more than 17 percent of the 1.6 million organizations currently on file with the IRS. Nonprofits that have lost their exempt status will have to apply to have it reinstated.
Organizations with annual gross receipts of $50,000 or less for 2010 that were subject to the new “postcard” filing can regain tax-exempt status — retroactive to the date of revocation — and pay a reduced application fee of $100 rather than the typical $400 or $850 fee. If an organization’s exempt status is revoked, it’s no longer exempt from federal income tax and may be required to file federal income tax returns.
Organizations are on the revoked list because IRS records indicated they had a filing requirement – either a Form 990, 990-EZ, 990-PF or 990-N (“e-Postcard”) – and did not file for three consecutive years, ending in 2009. The IRS believes that the vast majority of those revoked are no longer in existence and need to be removed from the tax-exempt listing, as required by the Pension Protection Act (PPA) of 2006.
The PPA required most exempt organizations (including associations, memberships organizations and charities), even the smallest ones, to file an annual information return or notice with the IRS for the first time in 2007.
The tax agency made a big push in the last few years to inform organizations that had not filed that they were in jeopardy of losing their status. The IRS mailed some 650,000 letters to charities in 2007, twice published a list of at-risk groups last year and also extended the filing period. There were about 341,000 nonprofits — more than a 20 percent — classified as at-risk a year ago, and about 50,000 organizations filed during the extension period, according to the IRS.
“During the past several years, the IRS has gone the extra mile to help make tax-exempt groups aware of their legal filing requirement and allow them additional time to file,” IRS Commissioner Doug Shulman said. “Still, we realize there may be some legitimate organizations, especially very small ones, that were unaware of their new filing requirement. We are taking additional steps for these groups to maintain their tax-exempt status without jeopardizing their operations or harming their donors,” he said in a statement accompanying the release.
The full list of revoked organizations is posted at www.irs.gov/autorevocationlist
IRS Announces Two Month Suspension of IRS Modernized e-File Operations for 990 Filers; Advises Hospital Organizations About 2011 Filing Requirements
In order to facilitate systems and programming changes, the IRS today notified tax-exempt organizations that the IRS Modernized e-file (MEF) system will not be available from January 1, 2012 through February 29, 2012 for electronic filing of Forms 990, 990-EZ, 990-PF and 1120-POL information returns. The IRS is suspending the availability of the system to implement changes to IRS programs and systems for the 2011 tax year. The 990-N e-postcard filing system will not be affected by the temporary suspension of the MeF system
To minimize the impact on affected organizations, the IRS is granting an extension of time to file to March 30, 2012 to organizations whose due date or first extended due date for returns is January 17, 2012 or February 15, 2012. Affected organizations required to file electronically may file electronically prior to January 1, 2012 or between March 1, 2012 and March 30, 2012. Organizations that are not required to file electronically may do the same and, alternatively, may file a paper return anytime before March 30, 2012. In addition, as described in Notice 2012-4, certain affected organizations normally required to file electronically will have the option to file a paper return during the suspension period.
An affected organization that has not previously received an extension and wishes to extend its filing due date until after March 30, 2012 may request an automatic 3-month extension by filing Form 8868, Extension of Time to File an Exempt Organization Return, by its original due date. If an affected organization has already obtained an automatic 3-month extension, the IRS will grant the organization an additional 3-month extension if the organization properly completes and files Form 8868 by its first extended due date. Organizations that have already been granted two extensions for a total of six months may not request a further extension.
Organizations are reminded that an extension of the time to file, including the automatic extension to March 30, 2012 provided in the Announcement, is not an extension of time to pay any tax liabilities that may be due for the year.
Organizations with a filing due date (or first extended due date) between January 1, 2012 and February 29, 2012 that file their returns by March 30, 2012 will be considered to have timely filed. In the case of an organization with a second extended due date that falls during the suspension period, the organization will have reasonable cause for late filing and will not be subject to the late filing penalties if it files by March 30, 2012. The organization should attach a Reasonable Cause Statement to its return referencing Notice 2012-4 , in order to avoid receiving a system-generated penalty notice for late filing. Some organizations generally required to file electronically that have already obtained two three-month filing extensions may be uncomfortable with taking advantage of the late filing penalty relief provided in this notice. In that circumstance the organization may file its return on paper during the suspension.
Reminder for Hospital Organizations
The IRS has released a draft version of the 2011 Form 990, Schedule H, Hospitals and its instructions. The IRS continues to seek input from the public on how to improve the Schedule. The IRS revised Schedule H to add Part V, Section B for tax year 2010 to gather information on hospital organizations’ compliance with new requirements imposed on tax-exempt hospitals by the Affordable Care Act.
Hospital organizations required to file Form 990 and Schedule H must complete all parts and sections of Schedule H for the 2011 tax year except for lines one through seven of Part V, Section B which relate to community health needs assessments. These lines will remain optional for tax year 2011 and are required only for tax years beginning after March 23, 2012. Hospital organizations must also attach a copy of their most recent audited financial statements to their tax year 2011 Form 990.
The IRS has considered public input on Schedule H, Part V, Section B, and has revised this section and its instructions for tax year 2011. The IRS welcomes public input on Form 990 and its schedules, including Schedule H.
Such input must be submitted to Form990revisions@irs.gov or by mail to the following address by January 15 to be considered for tax year 2012 form revisions:
Internal Revenue Service
Attn: Stephen Clarke (Notice 2012-4)
1111 Constitution Avenue NW
Washington, DC 20224
Source – www.irs.gov