Mandatory Electronic Filing Coming Soon

The IRS released regulations in January 2005 that will require certain Tax-exempt organizations to file their annual returns electronically beginning with tax year 2005 returns (Tax years ending on or after December 31, 2005). For the 2005 tax year, organizations with total assets of $100 million or more who also file 250 or more returns with the IRS (income tax, excise tax, employment tax, and information returns) will be required to file the Form 990 electronically. For purposes of determining if 250 or more returns are filed, each Form W-2 and quarterly Form 941 and Form 1099 is considered a separate return.

The electronic filing requirement expands for taxable years ending on or after December 31, 2006 to include exempt organizations with assets of $10 million or more and all Private Foundations. The 250 return threshold also applies in determining the electronic filing requirement for the year.

If an organization is required to file electronically but fails to do so it will be penalized as if the organization failed to file a return. The penalty for organizations with gross receipts exceeding $1 million is $100 per day for each day the failure continues up to a maximum of $50,000 per return.

Voluntary electronic filing is currently available for Form 990/990EZ, 990-PF, 1120-POL, and extension Form 8868. Similar electronic filing requirements are also being applied to corporations (Assets of $50 million or more for 2005, $10 million or more for 2006).

Vehicle Donation Changes

In 2004, the IRS issued two new publications – a Charity’s Guide to Car Donations (Publication 4302) and a Donor’s Guide to Car Donations (Publication 4303). Both publications describe types of car donation programs, their impact on the Tax Exempt status of the organization and when such contributions are deductible. The American Jobs Creation Act of 2004 made several significant changes to the rules for car donations made after December 31, 2004. In January 2005, the IRS issued Publications 4302-A and 4303-A which outline the new rules.

Documentation requirements for all non cash contributions have been slightly modified; the biggest change being that these rules are now included in the Internal Revenue Code instead of just in the Regulations. Failure to meet the requirements will result in the disallowance of deduction for the donor. The requirement for a donor to obtain a qualified appraisal for non cash contributions of $5,000 or more still remains and some exceptions are available for inventory and publicly traded securities. These changes apply to contributions made after June 3, 2004.

For contributions of motor vehicles, boats, and airplanes of $500 or more made after December 31, 2004, the donor must obtain a contemporaneous written acknowledgement for the donation and such acknowledgement must be attached to the donor’s tax return in order to receive a deduction. A copy of the acknowledgement must also be sent from the charity to the IRS. The amount of the contribution deduction is limited based upon the charity’s use of the vehicle.

If the vehicle is sold by the charity (without any material improvement to the vehicle or significant use by the charity in its exempt activities), the acknowledgement must include the sales price of the vehicle and the donor’s deduction is limited to the sales price. If the charity materially improves the vehicle or uses the vehicle significantly, the donor can generally deduct fair market value. The charity is subject to penalties if it knowingly furnishes a false statement, fails to furnish a statement with all the required information, or does not furnish the statement within a timely manner.

Organizations that desire to operate a car donation program, either by themselves or through a broker, should review these two publications and the updates for further details.

IRS Briefs

  • IRS EO division is shifting its focus from customer service to enforcement. Still concerned with customer service.
  • IRS Executive Compensation Review – IRS has begun its compensation review project targeting tax-exempt organizations. Letters have been sent to 1,784 tax-exempt organizations. Organizations that receive such letters should proceed with care and diligence in formulating their responses.
  • Tax-Exempt Monitoring Priorities – IRS is scrutinizing four areas of tax-exempt organizations: credit counseling agencies, low-income housing organizations, exempt supporting organizations, and donor-advised funds. These are types of organizations where abusive tax practices have increased in the last few years. In conjunction with investigating these organizations, the IRS has created two new examination units and hiring 75 new IRS personnel.
  • IRS is probing 130 charitable organizations as a result of complaints of improper political campaign activity.
  • IRS has issued a new Form 1023 – Application for Recognition of exempt status. The new form must be used for all filings after May 1, 2005. The form is more detailed and the IRS hopes that it will speed up the processing time for exemption applications.
  • IRS is proposing major revisions of the regulations for 403(b) plans. The regulations have not been updated for many changes in the law. Changes include limits on how such plans can be funded.
  • IRS Info Releases for Exempt organizations
    • INFO 2005-0002 - Adult Fitness Centers
    • INFO 2005-0051 – Hospital/Physician Joint Ventures
    • INFO 2005-053 – Who is considered private interest
  • IRS is expected to complete tax law compliance studies of labor organizations, social clubs, and religious organizations by the end of September.
  • IRS is expected to issue guidance on “substantial risk of forfeiture” for deferrals under §457(f) plans in the near future
  • IRS is considering a settlement initiative related to TE/GE abuses.

Court Briefs

  • Charity Lawsuits – federal lawsuits have now been dismissed in New York, Arizona, and Illinois. The U.S. District Court Judge in New York dismissed the claims “with prejudice” meaning that the lawsuits cannot be pursued in state court.
  • North Mississippi withdraws settlement – North Mississippi Health System announced that it has withdrawn from the memorandum of understanding it signed as part of the settlement in a class action lawsuits. NMHS’ charity care has jumped from $45 million to a projected $60 million since announcing the settlement.

Legislative Briefs

  • Senate Finance Committee held hearings related to exempt organizations on April 5, 2005 to discuss strengthening the role of charities in the U.S. and closing the tax gap.
  • Senate Finance Committee plans to crack down on supporting organization abuse through reform legislation to be introduced in the next few months.
  • House Ways & Means Committee held an unrelated hearing on exempt organizations on April 20, 2005. The hearing was to establish a foundation from which to examine the tax exempt sector and determine what remedies are needed to provide greater clarity, transparency and enforcement. Panelists discussed the need for a firm definition of what constituted a charitable organization.
  • Senate has introduced the MORE Act (S.6) which contains numberous provisions affecting exempt organizations including
    • Changes in disclosures including new requirements for entities that do not file Form 990;
      Coordination between federal and state governments regarding actions against exempt organizations;
    • Form 990 preparer penalties;
      Modifications to IRC §512(b)(13) related to amounts received from controlled entities;
    • Changes in lobbying expenditure limits;
    • Expedited review process for certain exemption applications
    • Appropriation of $80 million for IRS exempt organization division for enforcement activities and an additional $3 million related to §527 organization
 

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