The IRS’ new compliance questionnaire for “self-declareds”

The IRS recently sent out at least 1,300 compliance questionnaires to “self-declared” Section 501(c)(4), 501(c)(5), and 501(c)(6) organizations.  These are organizations that have never filed a Form 1024 to obtain recognition for tax-exempt status (the law does not require them to), but claim that they operate in accordance with the relevant requirements for their claimed tax-exempt status.   The questionnaire is not an audit or examination of the organization – its purpose is simply to gather information about organizations that claim exemption (again, without filing for formal recognition) under these tax code sections.  The IRS will then collect that information and use the results to guide future compliance projects, examinations, etc.

Information about the questionnaire can be found on the IRS’ website.  It is important for organizations to note that while the questionnaire is technically voluntary, the IRS specifically states that “[an] officer or director may refuse to participate in a compliance check without penalty.  However, [the IRS has] the option of opening a formal examination, whether or not the organization agrees to participate in a compliance check.” Translation – fill it out or risk getting that little “nasty-gram” saying your organization is now under examination.  In a recent speech at the Minnesota CLE nonprofit institute, Lois Lerner (Director of IRS Exempt Organizations) echoed this point.  She did mention that refusal alone would likely not lead to an examination – but refusal coupled with facts gathered from the organization’s returns (990s) indicating noncompliance (insider transactions, political activities, etc.) could quite likely result in an examination.

Filling out the questionnaire can be an informative and educational experience for an organization (don’t roll your eyes – stick with me here).  The compliance check questionnaire serves as an opportunity to remind organizations what kinds of issues the IRS cares about (or will care about more in the future).  I read through the questionnaire and these are just some of the issues I noted:

  • The IRS is interested in the reasoning behind not filing for formal recognition for exemption, and whether that decision was made after seeking professional advice
  • Not surprisingly, almost a page is devoted to questions regarding political (or potentially political) activities
  • Questions about activities and revenue all also ask about the amount of unrelated business income, in addition to a separate page of questions devoted solely to UBI – indicating that IRS is concerned  (again, no big surprise) that these organizations may not be complying in that arena
  • Sources of donations over $50k (whether they are from individuals, tax-exempt organizations, or for-profits) – interesting request, IMHO, particularly in light of complaints about the ability of these organizations to operate as “shadow money” organizations
  • More requests for information about whether the organization received outside professional advice about whether activities are unrelated to exempt purposes, allocating expenses between activities, and transactions between related organizations
  • Compensation still continues to be a big concern (and thus has two pages of questions)

It might be helpful for organizations (whether or not they have received the questionnaire) to review the issues the IRS is asking about and use it as an opportunity to see if they have potential compliance issues in any of those areas.  No better time than before the IRS aggregates their data and formulates a plan of action….

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