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January 18, 2011


IRS Increases Scrutiny of Nonprofit Organizations

Recently the Internal Revenue Service (IRS) has stepped up its enforcement efforts to ensure that non-profit organizations comply with tax laws and regulations.

The Exempt Organizations (EO) Examinations office is tasked with analyzing the operational and financial activities of exempt organizations.

According to a recent IRS report highlighting the accomplishments of Fiscal Year 2010, throughout the year, the office conducted 11,449 audits – an increase of 12 percent over the number conducted in Fiscal Year 2009. The number of audits conducted in 2009 already marked a 30 percent increase over those conducted in Fiscal Year 2008. This increased scrutiny is undoubtedly aided by the addition of 100 employees to the EO Examinations division.

The trend is clear; the IRS is scrutinizing the activities of non-profit organizations claiming tax-exempt status, and those filing tax returns must be careful to avoid any inaccuracies or misstatements when preparing the returns.

In the annual report for 2010, EO also announced several priorities for Fiscal Year 2011 that are likely to affect organizations across the non-profit sector.

Clearly, the IRS will be seeking to properly implement recent legislation, and the EO Examinations office will be evaluating some organizations directly affected by this legislation. For example, the Hiring Incentives to Restore Employment Act allows tax-exempt organizations to claim a payroll tax exemption for certain newly-hired employees. A division of the EO Examinations office has already started reviewing organizations claiming this credit.

International tax enforcement remains an ongoing focus area. Specifically, the report expresses concerns that charitable assets are being used for non-charitable activities overseas. The IRS has a variety of efforts underway to further address these concerns.

As one might expect, the IRS will continue to focus on non-filers. Within the Exempt Organizations office, this will involve compliance checks for those organizations who have not consistently filed.

Finally, a recent study indicated that one of the most significant tax issues comes from the misclassification of employees – both in the non-profit and private sectors. The IRS plans to address problems with employment taxes with a comprehensive study to measure compliance, and the EO division will participate in this study.

For more information regarding changes affecting the non-profit sector in the coming year, speak with a knowledgeable tax attorney.

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