The District of Columbia requires business taxpayers to make tax payments over a certain threshold by electronic funds transfer (“EFT”). The most recent guidance issued by the D.C. Office of Tax and Revenue regarding EFT payments says that business taxpayers must pay EFT for all tax payments exceeding $10,000. However, over the last couple of months the Office of Tax and Revenue have been issuing notices to business taxpayers informing them that the EFT requirement has been decreased to payments exceeding $5,000. Although the Office of Tax and Revenue is authorized by statute to require EFT payments at this threshold, it has yet to issue a general notification to taxpayers or practitioners informing them of this new requirement.
According to conversations we have had with the Office of Tax and Revenue, their system will generate the 10% non-compliance penalty when a payment is submitted by check over $5,000. Although there is a reasonable cause waiver to the penalty that we think would obviously apply in these circumstances (i.e., no notice to taxpayers), the waiver requires a written request that could take some time in getting approved.
Taxpayers that suspect that they will have upcoming payments over $5,000 should register for making EFT payments on the Office of Tax and Revenue’s Electronic Taxpayer Service Center (eTSC) well advance of the payment due date. It can take 7-10 business days to receive the ID and password for the website, which are sent separately to taxpayers via regular mail. Taxpayers can call the Office of Tax and Revenue to receive their ID earlier, but the ID still may not be available for up to 7 business days after the registration is submitted.
Therefore, we would recommend completing the eTSC registration early if there is any chance that it will have an upcoming payment over $5,000. Please contact Aronson’s tax department if you have any questions.
Nonprofits with physical presence in DC are subject to collecting sales tax and remitting them to the DC government for any tangible personal property items sold.
If you find that your organization may not be in compliance with this law, Henry can help by doing a “voluntary disclosure” to come clean with the DC government and mitigate the dollar amount of damage this could cause if the District finds it first.
Sign up for a phone forum conducted by the specialists at the IRS on tax exempt organizations, to be held on July 18, 2012, at 2:00 p.m. EST, titled “Exempt Organizations and Gaming”. Here is the link to register: http://www.irs.gov/charities/article/0,,id=258086,00.html
Topics to be covered:
- Impact of gaming on tax-exempt status
- Internal controls and record keeping
- Form 990 filing requirements
- Unrelated Business Income Tax
- Filing requirements for Payments made to individuals
- Wagering/excise taxes
According to the Washington Post , roughly 8,400 nonprofits in the Washington D.C. area recently lost their tax-exempt status because of failure to file the necessary annual returns. The IRS has renewed their commitment to ensuring that nonprofits are complying with the rules and regulation that govern their tax-exempt status. Besides failure to file an annual return, non-profits can still be at risk from other potential problems such as engaging in excess benefit transactions, lobbying and deviation from exempt purpose or excessive unrelated business income.
501(c)(3) and 501(c)(4) organizations are prohibited from entering into “excess benefit transactions” with “disqualified persons”. An “excess benefits transactions” is a transaction is which an amount paid by a nonprofit to a disqualified person is more than the value of the consideration received by the organization. A “disqualified person” is any person who in the five years prior to the transaction was in a position to exercise substantial influence over the organization’s affairs.
501(c)(3) organization are not allowed to directly support or oppose candidates for public office. 501(c)(3) organizations operating as public charities (other than a church or church-related entities) can elect to file Form 5768 in order to make expenditures to influence legislation, subject to certain limits set forth by the IRS.
If an organization materially departs from its exempt status or its unrelated business income becomes a significant part of the organizations revenues the IRS may revoke its tax-exempt status.
On the heels of tax season, you may be wondering where your tax dollars are going. The White House launched an online tool that lets people see just that.
As mentioned in the Hill blog, the White House’s Federal Tax Receipt tool allows taxpayers to enter their tax information and in return provides a breakdown of tax dollars received by general areas of the government.
A look at the site reveals a breakdown of the biggest use of American taxpayer dollars, begininng with 26 percent of federal tax dollars going to national defense spending.
Healthcare spending comes in second at 24 percent, and “job and family security” comes in third at almost 22 percent, which includes unemployment insurance, food assistance programs and housing assistance programs.
The next highest percentage of federal tax dollars spent is “education and job training,” which comes in at less than 5 percent.
Try out the app on the White House website.
The Internal Revenue Service released figures in December 2010 in a new report that show that audits of charities and nonprofits have been increasing since 2008 from 7,861 to 10,187 in 2009, a jump of 30 percent and then again in 2010 to 11,449, an increase of 12 percent. The IRS also reported that it has hired an additional 100 employees since 2008 to handle the increase in audits. This follows the IRS’s stepped-up efforts to oversee nonprofits.
The report described increased IRS scrutiny of activities of nonprofits including:
- Executive compensation and loans nonprofits made to top officials and whether they paid sufficient employment taxes. In the past the IRS has found unreported loans and has assessed over $5 million in penalties. The IRS has developed a working relationship with the Social Security Administration and state regulators that have made it easier for the IRS to spot potential tax evasion.
- Consumer credit counseling agencies, with which the IRS has had numerous revocation, termination or proposed revocation of tax-exempt status after past audits.
- Supporting organizations, which are charities that typically collect and channel money to a specific nonprofit. IRS says that it has noted that some entities have been established for the financial benefit of its officials.
- The Compliance Questionnaire preliminary results of over 400 educational nonprofit institutions indicating filings for unrelated business tax income which resulted in more than 30 colleges being audited.
In addition, the IRS reports that it believes the full impact of the revised and expanded Form 990 has not yet been fully realized as many smaller organizations took advantage of the 3 year transition window.
S corporations are subject to their own unique charitable contribution rules. Exempt organizations should favor receiving contributions of property from S corporations over receiving S corporation stock. Contributed property can potentially be held, invested, or sold by the exempt organization without being subject to unrelated business income tax (UBIT), but in every case holding or selling S corporation stock will generate unrelated business taxable income. Shareholders should favor making charitable contributions of property at the S corporation level, avoiding the adverse tax consequences of nonliquidating distributions or constructive distributions. Structuring S corporation contributions to exempts using a disregarded single-member limited liability company is an innovative technique that offers benefits to both the donor and done. (A.F. Dana, 23 Taxation of Exempts, No. 2, 37 (September/October 2010).)
The Internal Revenue Service released an interim report on May 7, 2010, summarizing responses to compliance questionnaires sent to 400 public and private colleges and universities in 2008. Colleges and universities make up one of the largest nonprofit segments in terms of revenue and assets as well as the most complex organizations in the tax-exempt sector. The goal of the questionnaire is to ultimately help the IRS with enforcement and service efforts for exempt organization. Areas of focus are: unrelated business activities and tax, consolidations and controlling entities, and executive compensation. Continue reading »
The Chronicle of Philanthropy reported on IRS economist Jael Jackson’s recent study of 2006 unrelated business income tax returns. The study found that only about 40 percent of the nearly 14,200 charities that earned business income unrelated to their charitable missions paid taxes on these earnings. The IRS collected $280 million in taxes on over $6 billion that was reported as unrelated business income. You can read the full article at IRS.gov.
It’s dangerous relying on the assumption that all sources of income are exempt from federal income tax. Churches need to know the IRS code and how it applies to the various revenue generating activities of the church. For example, if a church sells coffee, is this income subject to federal income tax? The answer is, it depends. If the coffee is sold to church attendees as a matter of convenience then the income is probably not unrelated business income (UBI). However, if the church buys an advertisement promoting the coffee bar, its income could be UBI and subject to unrelated business income tax (UBIT). There is a three-part test a church should use to evaluate if a revenue generating activity is subject to UBIT.
- Is the activity generally considered a trade or business? If no, the activity would generally not be subject to UBIT. If yes, then ask;
- Is the activity regularly carried on? If no, the activity would generally not be subject to UBIT. If yes, then ask;
- Is the activity substantially related to its exempt purpose? If yes, the activity would generally not subject to UBIT. If no, there is a strong likelihood that the activity is subject to UBIT.
If you have more specific questions on UBIT, crack open the IRS code or give us a call at 301-231-6200
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