Transcript Exempt

Exempt
Organizations :
The Basics
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Edmund R. Sledzik
Attorney/Tax Practitioner/Associate EA
1704 Shagbark Circle
Reston, VA 20190-4437
Home/Work: 703-471-7584
Fax: 703-471-1537
[email protected]
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Introduction:
A.Abe Lincoln –
“A good lawyer knows what to do. It is not how long it
takes you to do a project that makes you successful. It is
what you know.”
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B. How I started. –
My first experience with an exempt organization was in
1972 when I received a 501(c)(7) for my dog club.
I attended my first audit in 1994. I learned that there
were a lot of organizations out there that needed Tax
Exempt Help and that there weren’t many providers that
could actually provide them with that service.
We have helped around 400 organizations get tax
exemptions since then, and we currently file about
147 Form 990’s
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We will focus on (C) 3, 4, and 7 Exempt Organizations,
then give you some insight on what we experience with
the IRS and clients, and end up answering your questions
A.
B.
C.
D.
Applications
Filing Forms 990 and 990-T,
990 EZ and 990-N
Keeping the books
Giving advice during the year
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Applications:
A. Form 1024 – All sections except (c)(3)
1. Usually 6 pages long. Focuses on what activities
make the organization exempt.
2. Write up on page 2 is important. It is used to persuade
the agent that the organization is within the rules for
an exemption. I usually ask the organization to tell
the IRS what they will be doing now, in the near
future, and in the far future. How much time will be
spent on each project; and how much will it cost.
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3. The IRS wants three years of Profit & Loss. If your
club is new or it did not keep good records, you are
allowed to project your clubs income and expenses
for the next two years.
4. You will also have to file a Form 2848 – Power of
Attorney and Declaration of Representative with
the IRS.
5. For 2010 the IRS Application fees for clubs who are
expected to make less than $ 10,000. on average for
three consecutive years is $ 400. For clubs who are
expected to make more than $ 10,000. on average for
three consecutive years it is $ 850. The IRS will
change this fee without notice.
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6. We send the application to the IRS in Covington,
Kentucky by UPS so that we can track the package.
The same day we send out the application to the IRS
we also send out your copy of the application to you.
This lets you know that we sent it into the IRS.
7. The IRS will send your clubs Authorized Official and
your Authorized Representative (Me) notice that they
received the application generally within four to five
weeks. During the main tax season this could take
longer.
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8. Kentucky assigns the cases to among 40 of its agents.
If there is an overflow, then the application goes out
to the field. This could be a problem. The field is not
up to date and they are not experienced. They tend to
question the applications. The persons in Kentucky
know what is good and what is bad for they get the
applications all the time.
9. One person in San Francisco gave me a hard time on
a dog club ruling because believed that dog clubs
should not be exempt. Another would not give a ruling
even when I showed him five rulings I had just
received. He did not care if I had a thousand. He
would stand his ground and say no.
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10. If you receive an exemption. Your exemption will go
back to the date of incorporation or the date that the
trust was set up. This means that your club can get a
refund from the IRS and most states if you filed a
Form 1120 and had to pay taxes.
11. The IRS has expanded the types of organizations you
can form to be exempt. It recognizes a corporation, a
trust, an association and an LLC. I usually
incorporate the main organization. Trusts are easier
to get done and they do not have to have yearly
meetings or pay a state a fee. I do not like
associations because they do not last. I have only
seen one LLC, and it was formed under special
circumstances to limit liabilities.
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12. When you incorporate or create a trust etc. there are
paragraphs that must be contained in the Constitution,
by-laws, the trust or the LLC. There must be a
dissolution clause giving the assets to a charity. There
must be a purpose clause. There must be a statement
that the members or the organization cannot use the
organization’s funds for personal matters.
13. Form 8718 – User Fee For Exempt Organization
Determination Letter Request.
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B. Form 1023 -- 501(c)(3) Organizations
1. This form is for Section 501 (C)(3) organizations
where donations to the organization by the donors are
deductible on a person's tax return. It is harder to get a
ruling here. We have experienced situations where a
club was turned down and had no trouble getting a
(C)(4) or (C) (7).
2. The form is 29 pages long. What pages to use?
Depends on what the exempt organization will
be doing.
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3. Normally pages 1 to 12 will be made out. Page 12
must be signed. Page 11 is no longer need, it allowed
the IRS to look at your client in five years. It is the
public charity versus private foundation issue. What is
the difference between a foundation and a public
charity? The public charity can accumulate its income
from year to year. A foundation must distribute its
income yearly or pay an excise tax. White elephant
problem involving a foundation. The IRS no longer
needs this.
4. What is deductible? Discussion of raffles, auctions
and cash gifts. Record keeping requirements.
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5. Need to have 35% of donations coming from dues,
activities, and public.
6. Lobbying – 20% rule
7. Dues not normally deductible. $100,000 rule –
statement on dues.
8. How to lose the exemption
9. Once they lose the exemption they cannot go anywhere
else.
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C. Form 1024 - (C) (4)
1. No deduction on individual’s tax return
2. Can lobby
3. Dividends and interest not taxed
4. Do not have to report on Form 990 if gross is less
than $25,000. These organizations now use Form
990-N yearly, electronically. It contains the
organization’s name, its address, the key officer’s
name and a statement that the organization is still
in existence. The three year rule ended this year.
Organization’s who did not file may lose their
exemption if did not file a 990-N.
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5. Problems arise because the IRS was caught by
surprise when Congress created this new rule.
They do not have a list of exempt organizations that
go back before the 90’s. The program broke down.
So some Clubs had to prove that they received an
exemption. Has anyone been looking for an
exemption paper you got in 1972? It happened to
my club, and we found it.
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D. Social Clubs: (C) (7)
1. IRS’s idea of a typical social club.
2. Must pay taxes on interest and dividends.
3. Form 990-T - $1,000 exclusion
4. Set aside rule.
5. 15%/35% test – auditing social clubs to take away
their exemption.
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Questions You May
Have Asked Me…
If We Had Time
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1. What happens if we miss a filing date or an
extension date?
Answer: You are fined $20 a day for being late
up to a maximum amount based on your
gross income.
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2. Is there any way out of this fine?
Answer: Yes. You can ask for an abatement of the
penalty. The IRS is willing to listen to your
story. The good ones are sickness, a person
resigning and getting even, you found out
that the last treasurer did not file and you
voluntarily filed before the IRS found you.
You attended my lecture and found out that
you had to file and you did so. I have had
embezzlement situations, death, stokes,
club disciplinary actions etc. I also had a
situation where the treasurer thought he had
two more months to file, because he was
misinformed on the ending year date. If
you do not ask, you get nothing. It is better
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to ask. Nothing ventured, nothing gained.
3. Are there any unforeseen situations we
should be aware of?
Answer: Yes. Clubs that gross more than $100,000
a year are required to have the treasurer
state on the dues notice that "The IRS has
stated that dues are not usually deductible."
There is a $1,000 fine for every year that
you do not do this.
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4. Are some states harder than others in
policing exempt organizations?
Answer: Yes. California is the worst. You must get
a ruling from them that you are exempt as
well as a ruling from the IRS. They
do not accept the IRS ruling. Some state
do not require you to collect sales tax if you
are exempt. This is important to you the
parent clubs because many of you have
roaming National Specialties. I have
available a book from CCH that comes out
yearly. It costs about $350. every year.
But it contains every state's rules on sales
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taxes and whether if you are a (C)(3)
organization you have to register and pay
to solicit donations in that state. Then states
are different. In Virginia if you come in for
a show, all you have to do is ask them and
they will waive the sales tax. Florida and
California will not waive. Treasure getting
even with a club turned the club in for not
filing sales tax for the last 5 National
Specialties. Three states waived it, and two
did not. Yes it was Florida and California.
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5. In this regard do we have to file in our state
of organization a tax return?
Answer: It depends on the State. Illinois, Indiana, and
California require you to file a return. They
have special forms. California has Form 199
for exempt organizations. New York has a
form for (C)(3) organizations and it charges
a fee annually. Many do not require a filing.
Delaware does not require one. The states
where there are no individual income taxes
do not require it. Those are Alaska, New
Hampshire, Washington, Nevada, Florida,
Texas, and I believe Tennessee. Many others
do not care. If you are exempt federally
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those states say you are exempt in their state.
6. What does the IRS concentrate on in an
audit of an exempt organization?
Answer: The IRS is trying to determine if you reported
everything to it. Is the income amount correct?
Are the expenses correct? What kind of
records do you keep? Quicken or Quick
Books? Do you have bills and receipts. They
do not get involved much in balance sheets.
They know that usually volunteers are the
treasurers and most are not being paid. Notice
that on Form 990-EZ there is a place for
adjustments to the balance sheet.
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7. What do we do with Form 1099? What if a
person refuses to give us their social security
number?
Answer: You give a Form 1099 to any individual or
partnership that you gave $600 or more to
during the calendar year of January to
December. If you hire someone more than
once, and the total of both goes over $600,
you are supposed to give a Form 1099 by
January 31, of the following year. We provide
this service to our dog clients. If the person
itemizes expenses and has most of the
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expenses available such as ticket, the expenses
can be deducted before we look at the total.
If you fail to provide a Form 1099 when
required, the IRS will penalize you at the rate
of $50 per person. In addition you then
become responsible for the social security taxes
and medicare taxes, and they will collect them
also. That amount is currently 15.4% of the
gross amount. That means on a $1,000 bill you
will pay the IRS $50 plus $154 for a total of
$204. If someone refuses without cause, then
you treat that person as refusing to do what the
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IRS requires, and you withhold backup
withholding of $154. We had an audit where
the agent wanted the club to show the hotel
lodging receipts. They had none because most
judges had not received their bill until the
show. She was insistent. So we called the hotel
where the judges were put up and the hotel
faxed the billings. She still gave us a problem
so we had to argue the Cohan rule and she
conceded.
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8. Do we need an audit yearly?
Answer: No. Not usually. You audit when there seems
to be a problem with the books or you foresee
a potential problem. I recommend that the
books be looked at by a committee every third
year or when a treasurer leaves. If there
seems to be a problem, get a Lawyer to
review the books or a CPA to audit the books.
A CPA usually will look at every entry and
check the billing etc. A lawyer will usually
spot check four to five months in a year. If
nothing is found out of place, he or she will
go to the next year and do the same. If
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something is wrong then he or she will look at
all 12 months , check bills, receipts and bank
transactions. Both will look at charge
accounts etc. It is unfair to audit books
without giving the treasurer notice and time
to get them together. There should be an
understanding up front that the books will be
audited within a certain time after the
treasurer taking office. A new treasurer should
want the books of the past treasurer to be
audited or reviewed so that she or he will not
be responsible for past mistakes.
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9. How do you account for stock on the
tax return?
Answer: Stock on balance sheet that increase or
decrease in value each year. Put it in at cost
and
. If not then you must tell the IRS of
increases and decreases.
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10. How do the new rules concerning 501(c)(3)
donations affect us if we are a (c)(3)
Organization?
Answer: When you write a receipt to the donor you
must add a statement to that receipt that says,
"The donor did not receive any consideration
for this donation." If you did give something
(example: T-shirt, mulch, DVD's, Books,
Newsletters (PBS Items)), for this donation
then your receipt should deduct the fair
market value of the item(s) given to the
donor.
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IV. Conclusions
I spend 60 % of my time in this area, and my
daughter, Keri, who is my partner, now works in
this area with me. The government is looking for
more money, and this area could be a gold mine for
them. They thought that a lot of organizations were
cheating, and not filing returns. We are awaiting a
report on the results.
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