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Tuesday, December 14, 2010

Is the IRS About to Focus on UBIT and Political Activity?

Posted by Armanino Nonprofit Team

Former IRS exempt organization director, Marcus Owens (currently principal with Caplin & Drysdale), predicted at a tax-exempt conference on October 22 that the IRS’s next compliance check questionnaires are likely to address unrelated business income taxes (UBIT) and possibly political activity. If your organization has not had a recent “check-up” in these areas, do so now.

“Voluntary” compliance check questionnaires were sent to tax-exempt hospitals in 2006 addressing community benefit and executive compensation practices and reporting.

Questionnaires were later sent to a cross-section of small, mid-sized and large private and public four-year colleges and institutions in 2008 focusing on unrelated business income, endowments and executive compensation practices. The IRS explained that this effort reflected its work to build a better understanding of the largest, most complex organizations in the tax-exempt sector. The IRS indicated the information to be gathered would be used to help identify issues and areas that may need more outreach and education or further scrutiny.

Owens indicated that the IRS has been using these questionnaires to gauge taxable activity in the targeted areas and may now consider branching out into UBIT, which he said was “tailor made” for a compliance check. Owens further commented that “I say that for no other reason than that unrelated business income tax has not been a particular focused area of interest for the IRS for many years. In fact, the last focused UBIT project I am aware of was for the calendar year 1986 Form 990-Ts.” Owens said the Service has discovered that sending these questionnaires to tax-exempt organizations and asking them to voluntarily answer questions about an area of activity is a good way to discern who should be targeted for an audit and is a way to conserve resources.

Owens also predicts political activity would become another audit project in 2011 or 2012 due to the increased political activity by 501(c)(4)s, (5)s, and (6)s. He said it will be interesting to see how the Service deals with the gift tax issue, because it has not been addressed since the 1960s. Questions have arisen as to whether labor unions, business leagues, and social welfare organizations should be classified instead as tax code Section 527 political organizations. Their current pronounced political activity raises questions as to whether the gift tax might apply to the large amounts being contributed to 501(c)(4)s for campaign-like activity.

Contact Armanino with any question or to set up an appointment for a “check-up” or consultation about how to further audit proof your organization.

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