Hurricane season is now underway. It ordinarily lasts from June 1 to November 30 each year.
In IR-2018-132, the Service cautioned taxpayers about scammers who prey on generous donors following natural disasters. Many donors with good hearts and noble intentions plan to help victims in response to widespread media coverage of hurricanes and other natural disasters.
There are two key points to the Service's guidance. Donors should try to avoid fraudulent schemes and should ensure their gifts are made to qualified charities.
Fraudsters will usually initiate contact by phone, social media or email. They often use organization names similar to well-known and respected charities.
The scammer may direct a donor to a website with a name similar to a recognized nonprofit. In some cases, the fraudster claims to represent the IRS and asks for gifts in order to assist victims with tax refunds.
The IRS offers toll-free disaster assistance on 866-562-5227. If you have questions about disaster-related tax issues, the IRS may be able to assist you.
Donors should ensure gifts are made to legitimate charities. The IRS website has been recently updated with a new search tool. You can use the Tax Exempt Organization Search to identify a qualified charity.
After you identify a qualified charity, you may send a check or make an online contribution with your credit card. Each year, more and more donors appreciate the convenience of making online gifts for disaster relief or to their favorite charity.
Sen. Johnson and Gates Foundation Challenge Donor Disclosure
Each year tax-exempt organizations must file IRS Form 990. Schedule B of Form 990 requires the Sec. 501(c)(3) organization to list the names and addresses of donors who gave $5,000 or more.
Bill and Melinda Gates Foundation representative Natasha M. Cavenaugh is one of fifteen members of the IRS Advisory Committee on Tax Exempt and Government Entities. At a recent meeting, Cavenaugh recommended the removal of Schedule B "Schedule of Contributors." She believes the removal of the Schedule B list of donors would reduce the privacy concerns of many nonprofits. The protection of donor privacy may also increase the number of IRS Forms 990 that are electronically filed.
On May 31, 2018, Sen. Ron Johnson (R-WI) sent a letter to Treasury Secretary Steven Mnuchin and IRS Acting Commissioner David Kautter. Johnson observed that the IRS Schedule B requirement to disclose donors "may threaten the freedoms of speech and association."
Johnson stated, "If information about donors to these groups becomes publicly available, the information could be used in a way to chill future speech and association. Donor information is also susceptible to abuse by the federal government itself. In one egregious example, in 2010, the IRS sent 1.1 million pages of tax-exempt return information including donor information, in some cases to the Justice Department for potential prosecutions relating to political speech."
Several states have also demanded nonprofits disclose donors. The NAACP and other organizations have opposed these state actions because disclosure could reduce support from major donors. In a January 2017 court brief, the NAACP stated, "Forcing an organization to release [organizational membership and/or donor lists] to the state not only divulges the First Amendment activities of individual members and donors, but may also deter such activities in the first place. Specifically, individuals may legitimately fear any number of negative consequences from disclosure, including harassment by the public, adverse government action, and reprisals by a union or employer."
In response to these concerns, Johnson concluded, "Accordingly, I respectfully urge the Treasury Department and IRS to consider rescinding the regulation that requires tax-exempt organizations other than Sec. 501(c)(3) groups to submit donor information."
Sen. Johnson is Chairman of the Senate Homeland Security and Government Affairs Committee. He points out that this committee is authorized to examine "the efficiency and economy of all branches of the government."
NYSBA Recommendations on TCJA and Nonprofits
On June 7, 2018, Karen Sowell, Chair of the New York State Bar Association (NYSBA) Tax Section, sent a letter to IRS Acting Commissioner David Kautter with specific recommendations on four sections of the Tax Cuts and Jobs Act (TCJA) that apply to nonprofits. Sowell addressed the filing of losses for unrelated business taxable income (UBTI), the fringe benefits classed as UBTI, the 21% excise tax on compensation over $1 million and the 1.4% excise tax on certain college and university investment income.
- Separate Share Business UBTI Section 512(a)(6) requires all business entities of exempt organizations to separately calculate gains and losses. The losses for one subsidiary may not be used to offset gains of another entity. The NYSBA recommends that all investment entities be aggregated as one business. Partnerships should also be aggregated if they are not controlled by the nonprofit. Other entities with similar purposes should be permitted to be aggregated under rules similar to Sec. 469.
- Fringe Benefits as UBTI Under Sec. 512(a)(7), qualified Sec. 274 transportation fringe benefits are UBTI. These benefits may include vanpools, parking lots, transportation assistance and other similar items. The NYSBA asks for the IRS to clarify whether employer salary reduction arrangements constitute a "paid or incurred" item under the UBTI rules. In addition, the definition of "parking facilities used in connection with qualified parking" should be clarified. Finally, the UBTI should be based on the cost of the transportation benefit, not the fair market value.
- Compensation Over $1 Million Section 4960 assesses a 21% tax on compensation over $1 million for the top five paid employees. The NYSBA requests a statement by the IRS that this tax on excess compensation does not create a presumption of an excess benefit under Sec. 4958. The IRS must clarify whether state colleges and universities are exempt from this provision. The $1 million in compensation should be determined under a calendar year standard. The exception for medical professionals who are providing medical services must be specifically defined. Finally, many nonprofits have related organizations with staff who may receive excess compensation. The IRS needs to explain how that is calculated.
- 1.4% Excise Tax Section 4968 imposes a 1.4% excise tax on investment income of private colleges and universities with over 500 students and $500,000 of endowment funds per student. The NYSBA suggests that the definition of a "tuition-paying student" should be clarified because many institutions have multiple different types of students and statuses. In addition, some students receive full scholarships and may not be counted under this standard. If an organization is using an asset for its exempt purpose and receives income from the asset, the NYSBA suggests that income should not be included in the calculation.
As large nonprofits with complex structures and operations prepare to file tax returns, there are many questions that remain unanswered. Hopefully, the Treasury will accelerate the guidance process so that colleges, universities, medical centers and other nonprofits will be able to file accurate tax forms.
Applicable Federal Rate of 3.4 for June -- Rev. Rul. 2018-16 ; 2018-23 IRB 1 (16 May 2018)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2018. The AFR under Section 7520 for the month of June is 3.4%. The rates for May or 3.2% or April of 3.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here