Author Archive | David McRee, CPA

What is the Source of Most IRS Problems for Nonprofits?

What do most nonprofits and/or their CPA’s who run into problems with the IRS have in common?

They simply aren’t taking care of business, that’s what. Ineffective behavior.

Now, they may have a good reason for shirking their duty, or they may not.

I work almost exclusively with nonprofits and CPA’s who are facing penalties or who are in a difficult spot with the IRS. Sometimes the solution to their problem is easy. Or at least it would seem so.

I explain to my client what the solution is, how I can help, and what information I will need to resolve the problem.

The client agrees to provide the information and seems eager to have me resolve the issue. Then the problems begin.

Weeks go by and either the information dribbles in bit by bit via email attachment, or I face complete unresponsiveness.

The same behaviors that got them into the mess in the first place are continuing to prevent the issue from being resolved.

After doing this problem resolution work for almost a decade I see the same pattern of behavior in many of my clients. Not all, to be sure, but many. Delay, ignore, make excuses, lose documents, submit duplicate information, submit irrelevant information.

Even though a client may have already paid me in full up front, they still drag out the process over a period of weeks or months when it could have been resolved in three days.

The IRS HATES delays. They don’t like to be ignored. Of course they’ll ignore YOU as much as they want to and will make you wait for months. There is nothing you can do about that.

How do you stay out of trouble with the IRS:

  • Know what your filing requirements are. It’s not that hard, really. Just do a quick Google search on IRS filing requirements for nonprofit organizations. Anyone can do it. If you are a nonprofit officer, director, or manager, you MUST do it. Don’t just rely on the CPA who is a member of your board of directors unless he/she has a lot of specific experience with nonprofits. Even then, trust, but verify.
  • Assign more than one person the responsibility of meeting the filing requirements. Don’t just leave it to the Treasurer. This is the single biggest mistake nonprofits make that makes them miss filing deadlines.
  • Get the board of directors involved in monitoring the filing of all IRS returns.
  • If you receive an IRS notice and it requires a response, do so within the time period given. If you don’t know what the notice means, call the IRS!
  • Don’t hesitate to get professional help from a CPA or tax attorney with IRS problem resolution experience.

IRS Fails to Properly Process Documents Sent by Nonprofit

In this video I discuss a situation where we responded to an IRS demand for a completed Schedule A from a small nonprofit that filed a return without properly completing the Schedule A. The IRS made a written demand for the Schedule A and assessed a late-filing penalty because the return was deemed incomplete.

According to the law, filing an incomplete or incorrect Form 990 is the same as not filing a return.

I determined that we needed to prepare a Schedule A, prepare an amended Form 990 (because the original was prepared using incorrect numbers), and we needed to request penalty abatement by making a reasonable cause argument.

I submitted all the documents to the IRS with detailed explanations.

The result:
The IRS saw the amended return and determined that it was a “duplicate” return despite the fact that the “amended” box was checked and I had written “Amended” in red ink at the top of the return. They ignored both the schedule A (which they had requested) and the abatement request letter.

The agent on the phone was very nice, but said none of the documents were processed, though there was a note in the file that a “duplicate” return had been received (which was not true).

The agent suggested that I resend all the documents, but send the amended return in a separate envelope. I could send it to the same address at the same time, just in a different envelope.

Does that make sense? They are telling me that they are not capable of handling an amended return when it is enclosed with an abatement request along with the Schedule A they requested?

The notice received from the IRS said to send only the information requested (Schedule A) and to not send the entire return “unless the requested information changes the original return.”

Well, the requested information did change the original return, so we sent along a complete amended return in addition to the Schedule A that they requested.

When dealing with the IRS you have to be patient and methodical. There are some very good people working the front lines at the IRS. Unfortunately they are working with systems so complicated that a rocket scientist would be flummoxed. Have you ever tried to read the Internal Revenue Manual?

Tax-Exempt Status Revoked Before it is Recognized by the IRS: Rev. Proc. 2013-9

Problem: A nonprofit organization fails to file Form 1023 with the IRS to request recognition of its tax-exempt status within the 27 month window AND it does not file a Form 990 for three consecutive years. Sometime beyond 27 months after formation it files its application for exempt status. Instead of receiving an approval, it receives notice of revocation. Why is this happening? How can the IRS revoke the exempt status even before it “approves” the exempt status?

Understanding this issue requires some understanding of the law.

The Law of Federal Tax Exemption under Section 501

Internal Revenue Code Section 501(c) sets out the conditions under which a nonprofit organization may qualify as exempt from federal income taxes. For instance, section 501(c)(3) defines the qualifications for a charitable nonprofit. 501(c)(4) defines the qualifications for a social welfare organization.

It is important to understand that the IRS does not “grant” tax-exempt status. The status occurs by operation of law. If the organization meets the organizational and operational requirements, it is, by definition, tax-exempt under the relevant paragraph of section 501(c). The IRS simply “recognizes” an organization’s exempt status if the organization applies. With one common exception, no application need be made to the IRS.

Section 508 Notice Requirement

The exception referred to above relates to 501(c)(3) charitable organizations. Congress has mandated via section 508, that in order to qualify under 501(c)(3), an organization must “give notice” to the IRS that it is claiming to be exempt under that code section. It does this by filing Form 1023. It has 27 months from the date of formation to do so. This notice requirement does not apply to most other non-charitable organizations.

The Old Law

Before enactment of section 6033(j) mandating revocation for failure to file a return for three consecutive years, an organization that failed to apply for recognition within the 27 month window AND which failed to file Form 990, could simply file Form 1023 late, offer the “reasonable cause” explanation that it filed before being notified by the IRS that it had failed to file Form 1023 on time, file the delinquent returns, and request recognition of tax-exempt status retroactive to the date it came into existence. On several occasions I’ve seen organizations that were more than 5 years late filing Form 1023 receive recognition of their tax exempt status retroactive to the beginning of their existence. They also received late-filing penalties for the delinquent Form 990’s, but those were forgiven upon showing of reasonable cause.

Organizations that did not qualify for retroactive recognition of charitable status had the option of being treated as a 501(c)(4) social welfare organization from the beginning of their existence until the date they filed Form 1023. They could then be recognized as a 501(c)(3) starting on the day the 1023 was filed with the IRS. While not a perfect solution, this option at least avoided the undesirable situation of being treated as a taxable entity during years before the 1023 was filed.

Organizations are responsible for filing their Form 990 even if their Form 1023 is still “pending” approval.

The New Law

For taxable years beginning in 2007, section 6033(j) mandates that an organization will lose its tax-exemption if it fails to file its Form 990 for three consecutive years.  The new law mandates that ALL tax-exempt organizations (except churches) file some type of Form 990. Small organizations that fell under the filing threshold for the 990-EZ could submit an electronic postcard to meet their filing requirement. When applied on top of the 27 month window for filing Form 1023, the new law has created some confusion. This confusion seems to stem from the fact that once the 3 consecutive filings have been delinquent, the option to be treated as a (c)(4) is no longer available to a charitable [(c)(3)] entity. Instead, revocation is automatic.

The Results of the New Law as Applied to 501(c)(3)

A 501(c)(3) organization that fails to file Form 1023 within the 27 month period AND which fails to file a Form 990 for three consecutive years may find itself in a predicament. There are two “windows” to be aware of. This is best explained by an example. I’ll make it as simple as possible:

ABC Charity incorporates on January 1, 2010 and uses a December 31 year end.

ABC Charity has 27 months beginning January 1, 2010 to file Form 1023. This means the 1023 must be filed on or before March 31, 2012. This is the first “window.”

Under the new law, it is required to file some form of 990 return for each year. The due dates of the first three returns are as follows:

  1. May 15, 2011
  2. May 15, 2012
  3. May 15, 2013

If it has not filed any of the three returns by May 15, 2013, it automatically has its tax-exempt status revoked on May 15, 2013. This is the second “window.” It does not have the option of being treated as a 501(c)(4) social welfare organization for the preceding years. It will be treated as a taxable business.

If ABC files Form 1023 within the 27 month window, it will be tax-exempt beginning 1/1/2010. As long as it files its Form 990 each year it is in good standing. If it then fails to file any of the required returns before 5/15/2013, it will lose its tax-exemption on 5/15/2013 and will have to file Form 1023 again. Assume it files Form 1023 on 12/31/2013 to apply for reinstatement. If approved, it will be reinstated as of the date the IRS receives the application (probably mid-January 2014). This creates a period between 5/15/2013 and January 2013 when ABC will be considered a taxable corporation. Whether the IRS will pursue corporate tax return filings is currently unknown.

If ABC files Form 1023 AFTER the 27 month window, but BEFORE 5/15/2013 (assumes no Form 990’s have been filed), it can request that the IRS accept the late-filed 1023 because it was filed before being notified by the IRS that it had not been filed (reasonable cause), and can request recognition of exempt status effective 1/1/2010.  If granted, the organization will be treated as tax-exempt until it fails to file any of the returns by the 5/15/2013 due date. If it files any of the returns before the 2013 due date, its exempt status will not be in jeopardy, but it will be subject to late filing penalties where applicable. If it fails to file any of the returns by 5/15/2013, its exempt status will be revoked as of that date. You can see where the confusion can come into play with various documents being filed in close proximity to the various windows and due dates.

Finally, if ABC lets 5/15/2013 pass without filing either the 1023 or any of the 990’s, its exempt status will be automatically (by operation of law) be revoked on 5/15/2013.  ABC will have to re-apply with a new Form 1023 which can only be effective as of the date it is received by the IRS. Yes, I know the IRS has said that upon showing reasonable cause the organization’s exempt status can be retroactively reinstated, but in practice this is pie-in-the-sky. It rarely happens. This means that ABC will be considered a taxable entity from 5/15/2013 until the date the IRS received the Form 1023. If that happens to be a 5 or 10 year period, you can see the possibility of a large tax liability accruing for some types of organizations. There is no provision for the organization to request that it be treated as a 501(c)(4) social welfare organization during the period that its exemption was revoked.

Applying the new law to organizations that are tax exempt under some other paragraph, such as 501(c)(4) or (6) or (7), is similar to the above examples, except that the 27 month window does not apply to those organizations. They are not required to file Form 1024, though many do so. Generally, once a non-charitable entity reaches the filing threshold of Form 990-EZ it will need to file Form 1024 or the IRS will not accept the 990-EZ  or Form 990 filing. The IRS may accept a Form 990-N even though no 1024 is filed, but you’ll need to call them first to let them know you’ll be submitting a 990-N.

There is some question as to whether the IRS will accept as valid a timely filed extension for the third year return. See my discussion of the law and guidance on this issue.

Reference: IRS Revenue Procedure 2013-9, section 11

Testimonial: Success With Form 990 Late-Filing Penalty Removal

Success! $6,000 IRS late-filing penalty removed!

I’d like to share this email I received in January 2013 from the director of a small nonprofit that purchased my Form 990 Late-Filing Penalty Abatement Manual in November 2012:

I just wanted to thank you so much for your assistance in guiding us through how to write a reasonable cause letter to the IRS.  We are a very small animal rescue organization and were both shocked and scared when we received a penalty letter from the IRS stating we owed almost $6,000.  While this may not seem like much to many people, it might as well have been a million dollars to our small group.

I wasn’t sure what to do or where to go when I happened to Google the problem online and found your website.  After mailing our abatement request letter, I received a demand notice from the IRS stating if we didn’t pay within so many days they would seize our assets. When I called the IRS they confirmed that they had received our request but hadn’t assigned it to anyone.  The IRS employee read our letter while placing me on hold and came back with the good news that all fees would be forgiven.  I know we couldn’t have done this without your expertise.

Your book is well worth its weight in gold.  Thank you again for helping our group focus on our mission without having to stress about the IRS!

This above is a good testimonial to the excellent results many people are having by following the methods in my book for requesting abatement of late-filing penalties.

It also highlights the importance of following your letter with a phone call after two weeks to make sure the IRS received your letter and has assigned it to an agent. I recorded a short video about the importance of following up and staying in touch with the IRS as you wait for a response to your abatement request.

Does Your Charity Give Its Donors What They Need at Tax Time?

Your donors are giving you their hard-earned money. Are you giving them the documentation they need at tax time in order to deduct their contribution on their tax return?

“Yes” you say?  Not so fast.

This is an area where you’ll need to comply exactly with the letter of the law.

A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor “obtains” a contemporaneous acknowledgement of the contribution from the public charity.

These rules also apply to contributions (tithes) made to a Church, which is a type of public charity.

In the eyes of the law, it is not technically the charity’s responsibility to supply the written acknowledgement–it is the responsibility of the donor to “obtain” it from the charity before taking a deduction.

What information is required to be provided in the contemporaneous written acknowledgement?

  • The name of the public charity.
  • The date the contribution was received.
  • The amount of the contribution (if cash).
  • A description of the items contributed (if non-cash). The organization should not indicate in the letter the value of non-cash donations received. It is the donor’s responsibility to assign a value to the items for purposes of a tax deduction. (The organization will value the non-cash item received for internal accounting purposes, but would not communicate that information to the donor).
  • A statement indicating whether any goods or services were provided in return for the contribution (even if none was provided). If any goods or services were provided in return for a contribution, the organization should provide a good faith estimate of the value of goods or services provided.

What does “contemporaneous” mean?

An acknowledgement is contemporaneous if it is obtained by the donor on or before the due date of the return for the year the contribution was made (including extensions) OR if it is obtained on or before the due date the return is actually filed–whichever is earlier. In plain language, it just means that the donor has to have the acknowledgement letter in hand before filing the tax return on which the deduction is claimed.

What’s the Problem?

Most organizations provide acknowledgement letters to their donors as a matter of good donor relations. Unfortunately, not all letters meet the standard set by the Treasury Regulations. This can result in good faith donations being disallowed by the IRS upon examination. It happens–especially with larger donations. This type of failure to comply and its consequences cannot be relieved by reliance on “reasonable cause” provisions.

In Tax Court Memorandum 2012-140 (link opens as pdf), the case of Durden vs. the IRS is a fine example of the harsh application of the regulations.

In 2007, Durden contributed at various times during the year, cash donations to their church (NCC), totaling $22,517. The IRS disallowed the deduction and sent a bill for additional taxes owed.

Durden sent, as proof of the legitimacy of the claimed deduction, copies of canceled checks and a copy of the contemporaneous acknowledgement letter from NCC dated January 10, 2008.

The IRS did not accept the acknowledgement letter because it lacked a statement regarding whether any goods or services were provided in consideration for the contributions.

NCC the provided Durden with a second acknowledgement letter, dated June 21, 2009, with the same information found in the first letter as well as a statement that no goods or services were provided to them in exchange for their contributions.

The IRS rejected the second acknowledgement letter because it was not “contemporaneous.” In other words, Durden did not have the letter with the proper wording in hand on or before the date the tax return was actually filed.

The court ruled in favor of the IRS, noting that the language of code section 170(f)(8)(A) provides that “No deduction shall be allowed…” unless an acknowledgement letter with all the required elements is in hand. There is no wiggle room in the statute. The first letter obtained by taxpayer Darden lacked the proper language, and the second was not contemporaneous.

Darden argued that even though they did not meet the letter of the law, they “substantially complied.” The court was of the opinion that without the timely statement of whether goods and services were provided, the donor could not properly determine the amount of the deduction allowable and could not file an accurate tax return. Substantial compliance was not enough. Ouch!

The Takeaway for Donors and Charities

If you are a charity, make sure you give your donors a contemporaneous acknowledgement letter that complies with the law and regulations.

For more information, refer to IRS publication 4221-PC, Compliance Guide for Public Charities.

If you are a donor, pay attention to the letters of acknowledgement you receive from charities you’ve donated to. If you’ve made any single donations that are $250 or more, make sure the statement indicating that “no goods or services were received in exchange for the contribution” is included on the letter, or if goods and services were received, that a description of and dollar amount of those goods and services is included on the letter. If not, request a new letter right away.

Any charity that refuses to provide a proper acknowledgement letter is not worthy of your donations.

 

 

Form 990 Late-Filing Penalty of $50,000 Abated for Reasonable Cause

IRS Penalty Notice Form 990 late filing $50,000I’m very pleased that I was able to help a nonprofit client obtain relief from this $50,000 late-filing penalty.

The original penalty was caused by the client’s CPA failing to notify the IRS of an accounting year change. The error went undetected for a number of years, resulting in a mix-up in due dates.

By the time I was brought in, a levy was in place.

Consequences of slow and inadequate responses to IRS notices and demands were magnified by the IRS losing written communications from the client.

After many hours on the phone with the IRS EO and ACS,  and after a properly prepared reasonable cause letter with supporting documentation was received by the IRS, the levy was lifted and the penalty abated.

This case was a prime example of how a simple case that easily qualifies for abatement can become very tangled and very expensive if not handled promptly and properly.

Most CPA’s simply don’t have the experience or know-how to properly handle reasonable cause abatement requests for nonprofits. But they can learn.

Nonprofit Form 990 Penalty Abatement Manual Now in Print Edition

December 26, 2016 Update: Currently, I am no longer offering the PRINTED book format. The manual is only available as a pdf file. The example abatement letters are available as a Word file which is included with the pdf when you order it from my website. Why am I no longer offering a printed manual? It is just too difficult to keep the printed book updated. I regularly update the pdf manual with new information and new sample letters.

I’m happy to announce that my Form 990 Penalty Abatement Manual is now in print. This book has taught hundreds of CPA’s and nonprofit directors how to properly structure a reasonable cause argument to increase the chances of success in having late-filing penalties abated, or to have the IRS accept a late-filed Form 1023 and grant retroactive exempt status.

After being available only in e-book format since its first publication, the penalty abatement manual is now available as an 8.5 X 11, 150-page softcover book.

I’ve had the book printed because a number of people have indicated that they would prefer having a book that they can actually hold in their hands and keep on their book shelf as a reference book.

Many people find it easier to read and digest a printed book than to try to read an entire book on a computer screen.

I offer several different price points for purchasing the book, to meet different needs and budgets.

For more information and to purchase, visit me on the web at:

Form-990-Penalty-Abatement.com

or

Form990Help.com

I look forward to helping you NOT pay ridiculous penalties to the IRS.

 

Address to File Form 990-PF with Florida Attorney General

Form 990-PF image

Federal Treasury Regulation 1.6033-3(c)(1) and the IRS instructions to Form 990-PF require that a private foundation furnish a copy of its Form 990-PF to the attorney general of the state where the foundation’s principal office is located and the state in which the foundation was incorporated or created. A copy of the annual return must be sent to the attorney general at the same time the annual return is filed with the IRS. “Contemporaneously,” as the IRS likes to say.

Are you having trouble figuring out who to send it to? I finally got in touch with the right person at the Florida AG’s office and learned that they do in fact accept Form 990-PF from private foundations.

Here is where you send it as of November 2012:

Attorney General Pam Bondi’s Office
The Capitol
Room PL01
Tallahassee, FL 32399-1050

Note that Pam Bondi is the current Florida AG.  You would naturally need to replace Bondi’s name with whomever is the current AG at the time of filing.

Several years ago I had called the AG’s office to inquire about where to send the 990-PF and was told that they didn’t want it and had no idea what I was talking about. So if you’ve just been checking “yes” on the 990-PF and then not filing with the AG, I wouldn’t worry.

I just called again and reached a more knowledgeable person  and was told that because of the IRS requirement (it’s not a state requirement), they have been accepting the 990-PF’s for about 16 years. The state apparently doesn’t do anything with them other than put them in a file.

Here’s an excerpt from the IRS instructions to the 2011 Form 990-PF:

IRS requires Form 990-PF to be furnished to state Attorney General

What About Schedule B?

Do you have to send Schedule B to the Attorney General as part of the 990-PF? Yes, for purposes of Form 990-PF, Schedule B is open to public inspection. On the 990-PF filing, the donors’ names and addresses are not protected as they are on Form 990 or 990-EZ. See IRS Schedule B instructions https://www.irs.gov/uac/about-schedule-b-form-990-990ez-or-990pf for documentation of this point. You’ll find a section called “Public Inspection” in the General Instructions that are appended to the end of the Schedule B.

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