IRS exempt organizations audit manager Joe Kroll spoke at a program for the Bar Association of San Francisco yesterday and discussed five common ways charitable organizations jeopardize their 501(c)(3) tax-exempt status.

  1. Private inurement / private benefit.
  2. Lobbying and political activity. 
  3. Filing requirements.  Small 501(c)(3) organizations that have not previously filed Form 990 or Form 990-EZ may be required to electronically file Form 990-N.  Failure to file for three consecutive years will result in revocation of exempt status.
  4. Unrelated business activities.
  5. Employment issues (particularly the employee-independent contractor-volunteer distinctions).
You can read more about each of these issues in the IRS Compliance Guide for 501(c)(3) Public Charities.

Kroll explained that the IRS no longer conducted random audits except where an industry segment has compliance problems or a single practitioner is involved in the formation of several noncompliant organizations.  Referrals are the number one source for audit investigations.  Media stories are another substantial source.  Because of the recent expansion of the audit group, there are many new hires who will be auditing smaller organizations (e.g., under $1 million annual revenues) as they get experience.

Kroll briefly discussed the new Form 990.  He noted that this is the first time the Form has been substantially revised in 30 years and that 75 percent of the Form related to activities rather than finances.  It is truly an information return and not just a financial return.

The Form now allows no attachments other than Schedule O.  But you can submit as many Schedules O as necessary.  This will help assure that complete returns end up being imaged by Guidestar.  Note, however, that, according to Kroll, it is the IRS position that referring someone to Guidestar does not in and of itself meet the Form 990 public disclosure requirement.

Here are some great IRS resources shared with the audience:
Thanks to Joe for a great presentation!