Recent public rumblings from the current federal administration have caused the Land Trust Alliance to increase risk monitoring regarding the potential for IRS audits of tax-exempt organizations. The administration has repeatedly stated that it will be applying additional scrutiny to tax-exempt organizations for compliance with all details of federal law and regulations. While the concern about an audit may be justified, the reality is that (so far) revocation of exempt status remains rare.
Pay particular attention to the completion of Form 990 and prohibitions on impermissible private benefit, private inurement and self-dealing—all specifically mentioned by the administration. Conservation easement enforcement has also been specifically enumerated as a point of scrutiny in at least one IRS notice. Understanding how the IRS generally approaches applications, compliance reviews and enforcement and then sprucing up your governance standards, your financial controls and oversight and your documentation of all conservation stewardship decisions would be a smart year-end risk mitigation step. Unrelated business income is a frequent compliance trap that organizations should take care to avoid. This exercise will place you in a strong position to fully and accurately complete Form 990 this coming spring. It is possible that the IRS might use computer scanning of Form 990 to identify tax-exempt organizations with incomplete returns for compliance audits. Your governance and financial house can be bright and shiny with some timely attention to detail.
Specifically, the topics below have been highlighted by the IRS as categories of risk that may draw scrutiny over time. You can always refer to the Land Trust Standards and Practices, but LTA has included some specific resources to guide your end-of-year house cleaning.
Unacceptable practices:
- Private Inurement and Impermissible Private Benefit Prohibitions
- Private vs. Public Benefit
- Practice 4C: Land and Conservation Easement Transactions with Insiders
Lack of internal controls and governance policies:
- Practice 6D: Written Internal Controls
- Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations
Unreported or inaccurately reported unrelated business income tax:
- Unrelated Business Income and Unrelated Business Income Tax
- UBIT – The Tax Consequences of Revenue Generating Activities for Your Nonprofit
Poor documentation of grant expenditures and other financial reporting:
Activities inconsistent with exempt purposes:
Failure to file required annual returns: