Recent legislative developments and directives affecting the not-for-profit sector have once again highlighted that tax-exempt organizations aren’t exempt from the complexities of an ever-changing tax compliance landscape. Some of the most critical developments of late 2014 and early 2015 were contained within last-minute tax extenders, the Department of the Treasury’s 2014–2015 priority guidance plan (PGP), and the Government Accountability Office’s most recent report on oversight of tax-exempt organizations.
Let’s look at a few of the most important developments and their impact on not-for-profits.
In December the president signed into law the Tax Increase Prevention Act of 2014 (TIPA). The most significant of the extended provisions affecting not-for-profits include:
- The deduction for contributions of capital gain real property made for conservation purposes
- Tax-free distributions from IRAs for charitable purposes
- The deduction for contributions of food inventory by taxpayers other than C corporations
- The basis-adjustment rule for stock of an S corporation making charitable contributions of property
- The extension of the modified tax treatment of certain payments to controlled organizations
Note that the first, second, and third items in this list were provisions that the America Gives More Act of 2014 sought to make permanent. Though the America Gives More Act was passed by the House of Representatives in July 2014, it failed to pass the Senate.
TIPA retroactively extended these provisions to apply to tax years beginning after December 31, 2013, removing the lingering uncertainty on the treatment of these items that existed throughout calendar year 2014. The status of these provisions for the 2015 tax year is, however, still undetermined.
IRS Priority Guidance Plan
On November 7, 2014, the Department of the Treasury released the first-quarter update to its 2014–2015 PGP. The PGP is the Department of the Treasury’s vehicle for communicating how it will prioritize various projects it intends to address during its fiscal year.
Specifically identified in the PGP update are the following items impacting not-for-profit organizations:
- Additional guidance on Section 509(a)(3) supporting organizations
- Guidance under Section 4941 regarding a private foundation’s investment in a partnership in which disqualified persons are also partners
- Final regulations on Section 4944 on program-related investments (the proposed regulations having been published in April 2012)
- Final regulations under Sections 4942 and 4945 on reliance standards for making good-faith determinations (the proposed regulations having been published in September 2012)
- Revenue procedures updating grantor and contributor reliance criteria under Sections 170 and 509
- Guidance under Section 512 regarding methods of allocating expenses relating to dual-use facilities
- Proposed regulations under Section 501(c) related to political campaign intervention
- Regulations under Sections 501(a), 501(c)(3), and 508 to allow the IRS commissioner to adopt a streamlined application process that an eligible organization may use to apply for recognition of tax-exempt status under 501(c)(3)
- Guidance regarding the new excise tax on donor-advised funds and fund management added by the Pension Protection Act of 2006
- Final regulations regarding tax-exempt recognition of 501(c)(29) health insurers and the additional requirements for charitable hospitals under 501(r) (the final regulations for the latter having been issued on December 29, 2014)
Government Accountability Office Report
Also of significance, the Government Accountability Office (GAO) released a report assessing current IRS oversight of the not-for-profit sector. Its stated purpose was twofold: first, to analyze the existing oversight of the sector in light of recent IRS budget reductions and, second, to provide a set of recommendations for enhancing the IRS’s ability to oversee it.
The GAO provided the following recommendations in its report to the Committee on Homeland Security and Governmental Affairs, which was released on December 17, 2014:
- Develop compliance goals and additional performance measures that can be used to assess the impact of enforcement activities on compliance
- Clearly communicate with state charity regulators how they are allowed to use IRS information related to examinations of charitable organizations
- Expanding the existing e-filing mandate for 501(c)3 organizations to cover a greater share of filed returns
The GAO noted in its report that the e-filing rate for tax-exempt organizations is significantly lower than that of other taxpayers. The GAO commented that a higher rate of e-filing would result in more accurate and complete data being available in a more timely manner. This increased data availability would likely allow the IRS to identify areas of noncompliance more easily. Currently, an exempt organization is required to e-file only when the organization has total assets of $10 million or more and files at least 250 returns during its taxable year (including informational returns such as W-2s and 1099s).
We're Here to Help
The activity of the last quarter of 2014 and the first of 2015 have already shown that oversight and tax compliance issues in the not-for-profit sector will likely continue their trend toward additional complexity. If you have questions about any of the legislation or proposed guidance discussed here, or if you would like insight on how your organization may be impacted, contact your Moss Adams professional.