IRS Steps Up Scrutiny of Colleges and Other Nonprofit Groups

December 20, 2010

The Internal Revenue Service says it plans greater scrutiny of a wide range of charity activities in the next year, including compensation and loans that colleges and other nonprofit groups make to top officials and whether they paid sufficient employment taxes.

Most important for colleges, the agency said it would continue to focus on the results of a compliance questionnaire sent to 400 public and private institutions in 2008, asking about unrelated business income, endowments, and executive-compensation practices. A preliminary report on the findings of those questionnaires was released this year, and more than 30 of the colleges have been audited as a result of the agency's inquiries.

The IRS's plans follow stepped-up efforts over the past few years to oversee nonprofits. Figures released last week in a new report by the Internal Revenue Service show its audits of charities increased from 7,861 in 2008 to 10,187 in 2009, a jump of 30 percent. In 2010 the number of audits jumped 12 percent, to 11,449.

Michael Peregrine, a tax lawyer in Chicago, said nonprofits should pay close attention to the increasing number of audits, "The IRS is still fully engaged in oversight of tax-exempt organizations," he said.

That greater oversight is largely the result of an increased number of IRS employees. The report shows the IRS has added 100 employees since 2008 to the unit that handles audits of charities.

Employment Taxes

IRS officials also said their enforcement efforts had benefited from increased collaboration with the Social Security Administration and with state regulators, yielding valuable electronic data that allowed them to spot organizations that were trying to avoid paying employment taxes.

The collaboration also helped the IRS zero in on employment taxes as one of its areas of focus for next year, the agency said in a document outlining its 2011 priorities.

The IRS has been studying the employment-tax reporting practices of about 4,000 tax-exempt organizations each year since 2007, comparing information reported to the Social Security Administration against data reported on tax forms.

The agency was able to pinpoint organizations that reported paying wages to employees but didn't file a federal form to report employment taxes. Others showed compensation for officers on their informational tax forms but didn't file wage or employment tax documents for those workers.

Loans to executives, trustees, and other key employees are also drawing more scrutiny. The agency said it had studied the issue by conducting 169 audits and now will make this a regular part of its examination of charities.

Agents found loans to charity officials that were not correctly reported on the organizations' Form 990 in 91 cases; the IRS assessed more than $5-million in penalties.

The report also described IRS scrutiny of:

  • Consumer-credit counseling agencies, with which the IRS has found widespread problems in the past. The agency examined 63 of the largest credit-counseling organizations and revoked, terminated, or proposed revoking the tax-exempt status of 41 groups that the IRS said had failed to provide a charitable service.
  • Down-payment assistance groups, which offer financial and educational help to low-income homebuyers who cannot afford the initial down payment. The report says many of the groups offer the help through self-serving arrangements that disqualify them for tax-exempt status.
  • Supporting organizations, which are charities that typically collect and channel money to a specific nonprofit. The IRS says some nonprofit officials have established those organizations for their own financial benefit.

New Tax Forms

The report also contained data on filings using the redesigned Form 990. It suggested the full impact of the new form and its expanded disclosure requirements has yet to hit for many of the nation's smaller charities. That's because many charities took advantage of the three-year transitional window the IRS established, in which small organizations could file Form 990-EZ instead of Form 990. (Form 990-EZ wasn't changed when the IRS revamped Form 990 for the 2008 tax year.)

The new Form 990 requires more-detailed reporting about organizations' governance policies and executive compensation, among other things. Many groups, however, are avoiding using that form until they are required to do so.

For the 2008 tax year, for instance, organizations with gross receipts of $25,000 to $1-million and assets of less than $2.5-million could file Form 990-EZ.

That led to a big change as the number of groups that filed the regular Form 990 on paper fell 51 percent from the 2007 to the 2008 tax year. Meanwhile, the number of Form 990-EZ paper returns shot up by 80 percent.

Eric Frazier is a contributor to The Chronicle of Philanthropy. Eric Kelderman, of The Chronicle of Higher Education, contributed to this article.