|Regulatory Crackdown: The Current Environment--Welcome to Our World
Act of 2006
(You know you're
getting old when a
seven-year old law is
Events! :-) )
|Pension Bill passes Senate with substantial NPO elements Aug 06
Iowa Republican Senator and Finance Committee Chair Charles Grassley got his way on a number of
things. August 17, 2006, the Pension Protection Act was signed into law, and had a substantial number of
changes for the nonprofit sector and charitable giving. The attached long technical writeup (by Joint
Committee on Taxation) explanation has a good table of contents and the nonprofit section starts on Page
prepared the attached summary for her clients and friends. The IRS has published its own summary now
Some of the highlights that affect my world and the world of my clients:
1) All charities must file something now. See Q&A page for the "990-No" (just love that!)
2) Excess Benefit Transaction penalties ("excise taxes") are doubled; this is even true for "automatic
excess benefit transactions" which is the one that touches spousal travel, laptops, cell phones and
blackberries, even when the key employee is underpaid counting all perks.
3) Major crackdown on Donor Advised Funds and Supporting Organizations that are not very tightly
controlled by public charities. In a number of ways, these law changes have made private foundations
relatively more attractive.
4) Improvements in deductibility for donating certain types of monies such as IRAs that I'm too
impecunious to fully grasp.
5) All financial contributions now require substantiation to be deductible; no change to which ones need
receipts, but the others need at least cancelled checks (what do they do about collection plates in
Regulatory Affairs: The Current Environment
|75% of Selected Charities not in compliance Aug 06
Charities (501(c)(3)) are prohibited from intervening in the election of candidates. Results from 2006
audits have not yet been released, but the IRS did a rather thorough report on its examinations in the 2004
cycle. They received 166 complaint and other "rapid response" referrals, and selected 68 of those for exam
(complaints are relatively new intake method for IRS), which added to the 64 exams ("audits" to you and
me) underway, equaled 132 charities examined, of which fewer than half were churches.
IRS determined that about 3/4 of them had violated the prohibition but many in just one case and promised
to cut it out. By the time of the report, 82 were done, with 3 revocations (no more (c)(3)) and 55 with some
activity. For now, this is the link to the IRS' reports.
|IRS Executive Compensation Initiative Mar 07
The IRS completed a program of compliance checks and audits around compensation, and released a
report, in which it found no major pattern of excessive compensation, but massive mis-reporting (30% of
2000 compliance check" targets "chose to amend their returns" :) and while not very many abuses were
found, some were large: 25 audits resulted in $21,000,000 of excess benefit transaction collections
stemming from compensation of 40 insiders. The IRS report is interesting, and only 10 pages, and below
is the summary they published. Note how they are under pressure to both defend our sector as well as
police it. Congress' role is pretty contemptuous and politicized.
The Executive Compensation Compliance Initiative involved examinations and compliance checks of
approximately 2,000 organizations. The project identified the following reporting errors and/or omissions
1. Failure to file Part V, which details compensation paid to officers, directors, trustees, and key
employees, when filing Form 990.
2. Incorrect reporting on lines 50 and 51, Part IV (Balance Sheet). Loans to current and former officers,
directors, and key employees should be reported on Line 50, but those to non-key employees should be
reported on Line 51. Organizations involved in the project were found to have combined amounts from
non-key employees along with those relating to officers, directors, trustees, and key employees on one line.
3. Missing required schedules supporting Part IV, Line 51a. Returns reporting loans receivable did not
include the required schedule detailing borrowers' identities and loan terms.
4. Errors and omissions involving Line 89b, Part VI. Line 89b asks whether the filing organization
engaged in, or became aware that it had engaged in, an excess benefit transaction. The IRS questioned
organizations that left line 89b blank or answered yes.
5. Errors or omissions involving Schedule A, Part III (Statements About Activities). Yes responses require
an attached supporting schedule. The IRS questioned organizations that answered yes or left questions
6. Errors or omissions in reporting officer compensation on Line 13, Part I, Form 990-PF. Yes responses
require an attached supporting schedule. The IRS questioned organizations that did not report any
compensation or check a box indicating that officers were not compensated.
Finally, IRS follows up these reports with free phone forums where they do a powerpoint and explain what
they've learned and plan to do. They really are to be commended for this transparency. You can find this
pretty easily on the IRS page. For now this is the link to the compensation study results.
|Hopefully we all keep learning. This is a little box of factoids that have caught me off guard lately.
* Insider Compensation on Form 990 (current form). Form 990 Line 25 compensation to officers directors
and key employees includes benefits (so in most cases this line will tie to all types of compensation in Part
V-A, not just the first compensation column), and for the purposes of deciding who gets listed on Schedule
A Line 1 (employees over $50K), benefits counts as well.
* More Forms 990 on Guidestar. 501(c)(4,5,6) organizations' Forms 990 as well as private foundation
Forms 990-PF are now on Guidestar, not just (c)(3) public charities' Forms 990.
* Tandems and "indirect public support" In a (c)(3)/(c)(4,5,6) tandem, income from one to the other is
"indirect public support" not "direct public support" on the Form 990.
* Medicaid/Medicare as payments from many individuals for public support purposes. For 509(a)(2)
organizations' public support tests, payments from Medicaid or Medicare for care count as multiple
payments from the people helped, not as a single fee-for-service from a single payer. (In many cases IRS
will view other government awards to care for a charitable class as payments from multiple payers). This
relieves some of the GAAP v TAX issue on government awards. The idea is that while one payer pays, the
client chooses which provider so it's to be treated as coming from the individuals.
* Treatment of Qualified Sponsorship Payments. The (current) Form 990 exclusion codes for when
earned income is not counted as unrelated business income has a new item for sponsorships; however,
qualified sponsorship income is treated as donated income on Line 1, so it's not clear why it is listed with
the exclusion codes. [News Flash: on the public support schedule on the New 990, Qualified
Sponsorship Payments are not treated as gift income.]
|IRS Colleges &
|Issues: 1. Unrelated Business Activity, and calculation of Taxable net; 2. actual comparability of
"comparables" used in Executive Compensation determinations Apr 13
The IRS did a pretty substantial research study of Colleges and Universities. Initially they sent
questionnaires to a selected set. From the results of those questions, they selected some for audit (such
questionnaires arrive with a letter saying, in effect, 'this is not an audit and you are not legally compelled to
respond, but if you don't respond we may decide to come and conduct an examination.')
The interim report on colleges and universities seemed to me to disclose outrageously poor compliance
with executive compensation basics with regard to loans to College Presidents by the institutions. The
final report is now out, and for most people the Executive Summary will be enough. This year at
Georgetown, Lois Lerner also talked of this report in her remarks.