IRS Developments Affecting Not-for-Profit Entities
Not-For-Proft Advisor, 2005 Spring Issue

Electronic Filing Required for Certain Exempt Organizations
The Internal Revenue Service recently issued temporary and proposed regulations that will require certain large U.S. businesses and tax-exempt organizations to file tax forms electronically beginning next year.
More specifically, tax-exempt organizations with assets of $100 million or more will be required to file Form 990 electronically for taxable years ending on or after December 31, 2005. Exempt organizations with assets of $10 million or more will be required to file their Form 990 electronically for taxable years ending on or after December 31, 2006, according to the regulations.

In addition, all private foundations, including charitable trusts that are treated as private foundations, will be required to file Form 990-PF electronically for taxable years ending on or after December 31, 2006. The $10 million and $100 million thresholds do not apply to these entities.
An important caveat in the proposed rules is that only taxpayers filing at least 250 tax forms during the calendar year ending with or within the organization’s tax year are subject to the regulations. In determining whether an organization files 250 tax forms, all federal tax filings are included, such as Forms W-2 and 1099, excise tax returns, payroll tax returns, etc. Entities under common control must also be aggregated with the exempt organization for purposes of making this determination.

The IRS indicates that taxpayers will benefit from filing electronically by providing them with more certainty regarding their returns (i.e., knowing that the IRS has received and accepted them) and reducing the chance of IRS errors when returns are processed. The IRS benefits by reducing their processing time and facilitating the transfer of information electronically under public disclosure requirements. Please be assured that Plante & Moran currently files a large portion of our clients’ individual and business returns electronically and is prepared to assist our not-for-profit clients with this electronic filing requirement.

No Response to Excess Benefit Question Will Raise a Red Flag
The Internal Revenue Service has indicated that it intends to contact all exempt organizations that have failed to respond to question 89b, dealing with excess benefit transactions, on Form 990. Furthermore, the IRS is considering the imposition of penalties, which can range up to $50,000 per year, to encourage compliance.

According to Leonard Henzke Jr., an IRS tax law specialist, a significant number of charities each year do not answer the question, which asks if organizations have been involved in an excess benefit transaction or become aware of having been involved in one in a previous year. Those organizations responding “yes” must attach a statement to the Form 990 describing the transaction.

The penalties referred to by the IRS are calculated based on a set dollar amount for each day that the return is outstanding past its due date. For many organizations, the penalty is $20 per day, up to the lesser of $10,000 or 5 percent of the organization’s gross receipts; for organizations with gross receipts in excess of $1,000,000, the penalty is $100 per day, up to a maximum of $50,000. Because the failure to file penalty also applies to Forms 990, which omit required information, the IRS has the ability to penalize organizations that file their returns in a timely manner but with incomplete information. In our experience, the IRS has not often assessed this penalty when required information is inadvertently omitted from a Form 990. However, Mr. Henzke’s comment highlights the importance of completely and accurately entering all required information on the organization’s Form 990.

In addition, in a related comment, Mr. Henzke indicated that the IRS continues to focus on proper reporting of executive benefits in connection with the intermediate sanctions rules. He specifically mentioned that failure to properly track, document, and report personal use of automobiles can result in an automatic excess benefit transaction.