Nonprofits Can Avoid IRS Scrutiny – Pay and Report Correctly

The IRS wants nonprofits to comply with rules and regulations for tax exempt organizations, particularly on executive compensation and employment-related payments. Enforcement efforts, as reported in the December 2010 Exempt Organizations Division (EO) annual report have been stepped up.

  • Audits of exempt organizations increased from 7,861 in FY 2008 to 10,187 in FY 2009 (a 30 percent rise) and to 11,449 in FY 2010 (up another 12 percent).
  • Compliance checks (i.e., EO asks about a specific item on a Form 990 or for more information on an organization’s operations) are also being used extensively. They require fewer resources and, as the report delicately puts it, enable the IRS to “touch more organizations than by using an exclusively exam-based strategy.”
  • Collaborations with the Social Security Administration and the states allowed EO to identify nonfilers and noncompliant organizations more effectively.

Increased enforcement is possible because of more EO staff – from 837 positions in FY 2008 to 910 in FY 2009, with another increase to 942 in FY 2010. Notably, 95% of these new positions were in Examinations. Want to steer clear of the IRS? No guarantees, but here are some suggestions:

  • Set your executive compensation according to IRS requirements.
  • Make sure that what’s reported in compensation on Form 990 matches what is reported to other federal agencies.
  • Correctly report and transmit income taxes and other payments related to employees, such as Social Security and unemployment compensation (if required).
  • If loans have been made to executives, trustees, and other key employees, be aware that IRS will be reviewing them and be sure to report accurately.   
  • E-file. It is easy and typically inexpensive. But even more important, it eliminates the possibility of the most common mistakes – the software won’t let you make math errors, forget to attach or complete required schedules, or fail to sign the return. Check out the free or low cost software at http://efile.form9
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