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Earlier this year, the Internal Revenue Service's
("IRS") Exempt Organizations ("EO") division
unveiled its annual work plan. The plan highlights EO's
priorities for the year and is the best indicator of what the staff
will be focused on in its determinations and examinations
activities. These areas of focus were recently reiterated in
remarks at a tax-exempt organizations conference attended by IRS EO
staff.
One of the plan's six general work areas is of special interest
to credit and housing counseling agencies.
The plan calls out the increasing challenges confronted by the IRS,
as residential foreclosures have mounted and the number of exempt
organizations involved in foreclosure assistance activities has
increased. See page 11 of the IRS's FY 2012 Work Plan
available on the IRS website by clicking here.
According to the report, in FY 2012, both EO's Determinations
and Examinations offices will focus on the activities of mortgage
foreclosure assistance organizations to determine whether they are
fulfilling their exempt purpose, and whether they are complying
with the requirements of section 501(q) of the Internal Revenue
Code (the "Code").
Section 501(q) of the Code, added by the Pension Protection Act of
2006, establishes additional standards that a credit counseling
organization must satisfy to qualify for exemption under section
501(c)(3) or 501(c)(4). Of particular relevance, in 2010, the
IRS Office of Chief Counsel issued a memorandum concluding that
organizations that engage in housing counseling may be subject to
Code section 501(q).
The FY 2012 Work Plan and recent off-the record comments by IRS
staff confirm that the IRS will be closely reviewing applications
of would-be exempt organizations and the ongoing operations of
existing groups that provide mortgage foreclosure assistance
services.
Beginning in 2004, the IRS began scrutinizing tax-exempt credit
counseling agencies in a manner and scope it never had
previously. Since then, the IRS has initiated over 254 audits
of credit counseling agencies. While the credit counseling
compliance project is nearly complete and many organizations
survived the process with their tax-exempt status intact, the IRS
is now poised to focus on the activities of housing counseling
agencies. Many of the same organizations that were audited as
part of the credit counseling compliance initiative may be
scrutinized all over again, along with several that escaped
scrutiny due to their non-involvement in areas related to debt
management plans for repayment of unsecured credit card
debt.
In an audit, the IRS examines Form 990 returns to verify the
correctness of the income or gross receipts, deductions, and
credits, and to determine that the organization is operating in the
manner stated and for the purposes set forth in its application for
recognition of tax exemption.
Fortunately, a well-informed housing counseling agency can go a
long way toward preparing for an IRS audit. While the advice
and guidance of counsel is recommended in formulating and
implementing an audit response and ongoing compliance with the
Code, existing IRS-provided guidance in this area – which
is quite extensive – and the lessons learned during the
credit counseling compliance initiative can help a mortgage
foreclosure assistance service provider conduct a "mock"
IRS audit to identify areas of weakness from a tax-exemption
perspective, as well as to suggest corrective measures.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Internal Revenue Service has recently published an IRS Large Business & International Directive, which updates an earlier directive to field agents addressing the examination of capitalization and repair costs issues.
A state cannot include income in the apportionable base and then exclude the receipts and related factors that generated that very same income from the apportionment formula.
and
Gary D. Hailey 
What Do Mid-Market Organizations Need To Know About Tax Reform?
