INTERNAL REVENUE SERVICE EXEMPT ORGANIZATIONS DIVISION 2012 ANNUAL REPORT

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By Douglas M. Hasler, CPA – Director

In early 2013, the Internal Revenue Service (IRS) Exempt Organizations Division (EO) released its 2012 Annual Report on its activities and accomplishments. Following is a summary of two issues in the report that we believe may be of particular interest to you:

Governance Study—Preliminary Results

The EO has completed its analysis of 1,300 501(c)(3) organizations and has produced its preliminary findings. It is important to note that this analysis included only public charities that had been previously selected for examination based on other criteria. Therefore the results are not statistically representative of the overall population. They do, however, offer insight into governance practices which might be useful indicators of tax compliance.

The presence of the following factors was associated with compliance for the group that EO reviewed:

• A written mission statement
• Use of comparability data when making compensation decisions
• Controls established to ensure proper use of charitable assets
• The Form 990 was provided to and reviewed by the entire board of directors prior to filing

An organization in which control was identified as being concentrated in one individual, or in a small, select group of individuals was the key factor associated with noncompliance.

In light of the initial findings, during 2013, the EO will examine a statistical sample of 501(c)(3) and 501 (c)(4) organizations to gather information on their governance practices. As they continue their work in this area, they will look at whether other factors or practices are relevant to identifying organization as compliant or not.

Exempt Status Determinations

The EO Determinations group consistently receives approximately 60,000 new applications for exemption every year. As the complexities of the applications and the concerns about potential abuse have increased over the last several years, EO Determinations has implemented a number of improvements to the application process. Rather than assigning all cases to a revenue agent for development, they have put in place a screening system to fast track applications that are substantially complete and require little or no further development. This technical screening is conducted by EO Determinations' most experienced revenue agents who upon review of the applications separate them into one of the following four categories:

• Substantially complete applications are those that do not require additional information. A determination letter is usually received within approximately 90 days.
• Applications that are not substantially complete will receive a letter advising that the case was closed without action usually within approximately 60 days.
• Applications where minor additional information is needed will receive a request for additional information usually within approximately 120 days.
• Applications that must be assigned to an agent for further development to determine whether requirements for tax-exempt status are met.

During 2012, 70 percent of all applications for exemption in the technical screening phase (i.e., cases in the first three categories above) were reviewed and closed within approximately 120 days. Applications that cannot be completed through technical screening are grouped as unassigned inventory and held pending the availability of a revenue agent with the appropriate grade level and experience to address the issues involved in the matter.