Angela Fidler

Employment tax has recently been a focal point for the IRS. However, exempt organizations have the same payroll obligations as for-profit businesses, such as proper classification of workers and the reporting and payment of employment taxes.

For the next three years, the IRS will analyze data from audits of 500 randomly selected exempt organizations to determine whether they properly comply with employment tax law and reporting requirements, specifically focusing on worker classification, fringe benefits, officer compensation, employee expense reimbursement and nonfilers. The IRS has indicated that many of these exams have already started.

The second IRS EO initiative examines charitable funding sources and their relationship to the accomplishment of charitable purposes. The study will look at revenue sources, particularly fundraising, public contributions, grants and revenues from related or unrelated trades or businesses, as well as unrelated business income expenses, officer compensation, fundraising expenses, program service activity spending and the effect of these expenditures on charitable spending.

The first phase of the charitable spending analysis will focus on organizations with unusually high levels of fundraising expenses and organizations with low levels of program service expenses but high unrelated business activity.

The IRS continues to concentrate on the EO standards of inurement, private benefit and the execution of activities in alignment with the exempt purpose. The charitable spending initiative is intended to ensure that EO spending complies with these standards.

As part of BKD’s tax compliance for exempt organizations, functional expenses are reviewed and analyzed for reasonableness and relationship to the exempt purpose. Contact your BKD advisor if you have questions or concerns about your organization’s charitable spending.