July 2007

Revised Form 990

The IRS seeks feedback on the draft of the revised Form 990, which was released for public comment last month. In August, GuideStar will publish a special Newsletter issue focusing entirely on the proposed 990 revision. In the meantime, find more information >

Voluntary Compliance Program for Exempt Organizations

On June 13, 2007, the Advisory Committee on Tax Exempt and Government Entities recommended that the Exempt Organizations Unit of the IRS establish a voluntary compliance program for tax-exempt nonprofits. Such a program would allow nonprofits that find they are not in compliance with tax laws to take the initiative to rectify the situation.

The lack of such a voluntary compliance system, the advisory committee noted, "has led to the evolution of a dual-class system for exempt organizations: the represented and the unrepresented." Many large nonprofits have legal or accounting resources that are accustomed to negotiating IRS regulations and are able to resolve compliance problems in the organizations' favor.

Organizations that do not have access to such resources, however, "often flounder. They may contact IRS personnel who are unable to help or, worse, they may be paralyzed into continued inaction by their uncertainty as to what course to take." Similar situations are often resolved differently for nonprofits that do contact the IRS (with or without qualified assistance).

The number and variety of exempt organizations, the advisory committee contended, exceed the Exempt Organization Unit's oversight capabilities. A voluntary compliance program would lessen the strain on IRS resources and enable more nonprofits to be compliant with the tax code.

Common Areas of Noncompliance

The advisory committee identified the most common forms of noncompliance by exempt organizations:

• Failure to file a required form
• Late filing and inaccurate or incomplete filings
• Failing to file, or improperly completing, payroll tax reporting forms
• Failure to pay withholding taxes
• Mischaracterization of exempt status
• Inadvertent excess benefit transaction
• Confusion about or inaccurate reporting of political activities
• Identification of unrelated business taxable income

Implementing an Exempt Organization Voluntary Compliance Program

The advisory committee recommended starting with a transitional program related to the Pension Protection Act provision requiring the IRS to revoke the status of any exempt organization that fails to file an annual information return or ePostcard for three consecutive years. (For more information on this provision, .) The advisory committee's report outlined the specific steps to launch the transitional program.

The advisory committee also emphasized the importance of the annual returns and the benefits a voluntary compliance program could achieve in this area:

The Service requires Form 990 and its variations because, as a matter of law enforcement and of tax policy as well, both the Service and the public want exempt organizations to provide that information. If an exempt organization has been delinquent in filing its information returns, it is not only good tax policy but also a wise use of limited enforcement resources to offer a well-publicized and straightforward procedure for that organization to come back into compliance with the law by providing the missing information.

Over time, the IRS would expand the voluntary compliance program until it addressed most noncompliance issues, "including inurement, private benefit, electioneering, excessive lobbying and loss of or failure to qualify for public charity status."

Creating a voluntary compliance mechanism for exempt organizations would require substantial effort by the IRS. The advisory committee maintained, however, that in the long run, the benefits of such a program would offset the resources needed to establish it.

Read the complete report >

Suzanne E. Coffman, July 2007
© 2007, Philanthropic Research, Inc. (GuideStar)

Suzanne Coffman is GuideStar's director of communications and editor of the Newsletter.