For tax-exempt organizations, the most important tax form is the Form 990, which is used to maintain tax-exempt status. But while many groups simply file the Form as an act of repetition and necessity, not paying special attention to the details can result in serious consequences.
In the ten years since the IRS released the dramatically revamped Form 990, my colleagues and I have repeatedly met with our tax-exempt clients about the IRS’ new matrixes for not-for-profit organizations, all of which were created to discover anomalies in tax reporting. Since most tax-exempt organizations are required to file the Form 990 electronically, the IRS has the raw, electronic data ready to be shared, sliced and diced in innumerable ways, any of which can open the door to increased scrutiny where any variation can raise a red flag. The uniqueness of each tax-exempt organization makes the challenge of comparing each entity an obviously challenging task; however, the IRS has developed these matrixes to track a large list of important criteria, including, but not limited to, the number of employees and independent contractors, geographical location, mission, compensation to board members, related entities – and many more.
In the IRS’ Tax Exempt & Government Entities (TE/GE) Fiscal Year 2018 Accomplishments Letter, the agency addresses their use of data-driven approaches, defining them as “models and queries to select work based on quantitative criteria, which allowed TE/GE to allocate resources that focused on issues that have the greatest impact.” With this approach, the IRS hopes to overcome its limited resources by using the new matrixes to identify and take a closer look at organizations who have some type of anomaly, compared to other “similar” organizations. The letter also mentions the IRS will continue to use other techniques to determine which organization it will examine more astutely, such as the Historical Compliance Strategies Approach and the Data Driven Strategies Approach. Introduced in fiscal year 2018, the IRS used the Historical Compliance Strategies Approach to initiate 307 new inquiries into tax-exempt organizations, while the Data Driven Strategies Approach saw the IRS start 3,902 new inquiries to tax-exempt organizations in the same year.
The TE/GE letter and the combined number of new inquiries for fiscal year 2018, simply confirms what many tax professionals have believed since the first days of e-filing of Form 990, plus what the IRS has stated over the last few years. The Form 990 data is utilized by the IRS to evaluate each filing tax-exempt organization against a “standard” created from other “similar” tax-exempt organizations. The bottom line: it is imperative that all tax-exempt organizations not merely view the filing of the Form 990 as a requirement just to maintain tax-exempt status, but as an important exercise in spreading the accomplishments of the organization, and making sure the Form 990 truly represents the activities of the organization.
Each tax-exempt organization wants to ensure it is compared against the right “standards” or there is more opportunity for an anomaly to exist and perhaps lead to a dreaded call from the IRS. In short, accuracy has never been more crucial and working with a tax expert is more important than ever.