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Exempt Organizations

Exempt Organizations
January 2011

Beyond the Form 990

Although the redesigned Form 990 has increased the reporting burden for organizations, it has also heightened awareness of areas of IRS concern. Many organizations have adopted the policies and procedures described in the Form 990.

However, preparing a Form 990 with positive responses in the governance section should not be the end of the process. The value of such policies and procedures lies not only in their implementation, but also in the resulting impact on the operations of the organization. Monitoring and self-assessment are required in order to ensure that these policies and procedures are followed.

Of course, this may mean adding yet another task to someone’s already long list of responsibilities. However, there are some opportunities to perform a self-check with relatively little burden on the organization. For example, organizations will soon be preparing Form 1099s. This is an opportunity to run some quick tests of compliance.

The issue of independent contractor vs employee classification is a common area of IRS (and California) scrutiny. It is one component of the study of employment tax returns which is a key focus area for the IRS. A review of 1099 reporting may disclose certain transactions with executives, key employees and others that have “fallen through the cracks.” Despite having policies and procedures in place, an organization’s credibility can be easily undone by records reflecting misapplication of the rules.

Tests that organizations might perform include the following:

  • Generate a list of individuals for whom the organization will issue both a Form W-2 and Form 1099 for 2010. There may be valid reasons for issuing both forms to a single individual, but there is also the possibility of a misclassification issue for payments reflected on Form 1099.
  • Identify any board members for whom the organization will issue a Form 1099 for 2010 (e.g., director fees). Were these payments taken into account in evaluating reasonable compensation? Will they be disclosed on the Form 990?
  • Identify any family members of board members, or entities related to board members, for whom the organization will issue a Form 1099 for 2010. Should there be disclosure on Form 990? Are there conflict of interest issues?
  • Identify Form 1099 recipients who provide services to the fundraising department. Is there a requirement for a commercial fundraiser or fundraising counsel agreement as required under California law? Is there a Form 990 disclosure requirement?
  • Scan the list of vendors for out-of-state addresses. Are there nonresident alien reporting or California withholding issues?
  • Does your system allow you to differentiate between payment for services and reimbursement of expenses?
  • Are there service providers for whom social security numbers are not reflected in the system?

There also may be a number of other “1099 series” or “W-2 series” forms which may be required of the organization, such as:

  • Form 1098-C for contribution of vehicles, etc.
  • Form 1099-MISC for rents, royalties and other payments
  • Form W-2G for gambling winnings

This is a good time to update the policies and procedures manual to ensure that forms and policies are current for 2011.

What the future holds

The Form 1099 is currently required with respect to payments for services. The Patient Protection and Affordable Care Act that was passed last year contained a provision that requires businesses, including nonprofits, to issue Form 1099 for 2012 for “amounts paid in consideration of property” (i.e., purchase of goods) and other gross receipts. 1099s would be required to be issued initially in early 2013 for transactions occurring in 2012. Businesses would be required to obtain federal tax identification numbers from vendors and modify systems to identify Form 1099 recipients. This provision surprised both taxpayers and practitioners as the compliance burden is so dramatic. While there are ongoing efforts to repeal this provision, it does remain the law for now. We will continue to keep you abreast of developments in this area.

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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