Thursday, May 9, 2013

May 15th Filing Deadline Draws Close

As May 15th draws near next week, I want to remind our nonprofit organizations of two important deadlines. 

Forms 990, 990-EZ & 990-N
For calendar year returns, Forms 990 and 990-T need to be filed by the 15th or properly extended.  If an organization is extending Form 990-T, then it should deposit via EFTPS any tax that is due with the return to avoid late payment penalties and related interest. If the organization has less than $50,000 of gross income and less than $200,000 in fixed assets, it should file its Form 990-N by May 15th.

Form 5578
Another deadline often overlooked is the deadline for private schools that do not file Form 990 or Form 990-EZ to file Form 5578.  Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt from Federal Income Tax is also due by May 15th for schools with a calendar year end.  This return is generally required to be filed by churches that operate schools as a direct part of their activities or by church affiliated schools that do not have a Form 990 filing requirement. 

The Form 5578 certifies that the school (church) has satisfied the applicable nondiscrimination requirements as detailed in Revenue Procedure 75-50.  In general these requirements are:

  1. The governing documents contain the proper prohibition against discriminating as to admission or employment on any of the protected grounds other than based on religious discrimination;
  2. The school's handbook and other documents should also contain similar language;
  3. The school maintains records that indicate the racial make up of the student body, teaching faculty and administrative faculty; and
  4. The school/church has publicized its nondiscrimination policy using either the appropriate radio or televsion medium.  (Internet does not qualify to meet this requirement.)  There are some exceptions to this rule, but they are very narrow and do not apply to many church operated schools. 
Form 5578 may be downloaded from the IRS website at Failure to file can result in an IRS inquiry and failure to comply with Revenue Procedure 75-50 can result in revocation of the school's tax exempt status. 

Monday, March 18, 2013

Want To Buy A Raffle Ticket?

When the Form 990 was redesigned in 2008, the form was rewritten to gain additional information regarding an organization's gaming activities.  Gaming activities have to be separately reported in Part VIII of the form and in some instances, greater detail is required through Schedule G associated with the return. 

With this additional information required, we are finding that many organizations are conducting some sort of gaming activity that previously was buried as a part of a fundraiser, such as a gala, dinner or golf tournament.  What most organizations do not realize is that state laws always govern any type of gaming activity.  While most people understand that state laws may regulate professional gaming activities, they fail to realize that state laws also regulate gaming activity that is carried out as a part of a fun filled event conducted by a nonprofit organization or a church. 

At this point, I will apologize to all of my followers that are not from Texas.  I have been asked to specifically blog the Texas rules for raffles.  Realizing that some of my readers are from other states, I encourage everyone to do a little digging and determine how your state may be regulating raffles and determine if your organization is in compliance with the applicable state statutes.

In 1999, Texas passed The Charitable Raffle Enabling Act that allows for charitable raffles to be conducted by qualifying organizations.  However, there are strict rules to be followed, if an organization desires its raffle to be covered by the act.

What Is A Raffle
In general, a raffle occurs any time someone pays for the chance to win a prize. Qualifying organizations are allowed to conduct two raffles each year that comply with the state law. 

Who Can Conduct a Raffle In Texas
An organization has to be a qualified organization:
  • An association organized primarily for religious purposes that has been in existence for 10 years;
  • A voluntary EMS that does not pay its members;
  • A volunteer fire department that does not pay its members; and
  • A nonprofit organization that:
    • is at least three years old;
    • elects its governing body;
    • has 501(c) tax exemption;
    • has members;
    • does not distribute its income to its members; and
    • does not participate in political campaigns.
Any other organization is prohibited from conducting a raffle in Texas.

What Must the Organzation Do
The qualifying organization must follow a few rules:
  1. They must have possession of the prizes that are offered.
  2. Prizes may not be cash or items converted to cash.  (It is thought that this does not prohibit gift cards as long as they cannot be readily converted to cash.)
  3. If the organization purchases the prize, its value cannot exceed $50,000.
  4. It must print tickets that include the name & address of the organization, the price of the ticket, the date the prize will be awarded and a general description of each prize that is valued at more than $10.
  5. Tickets may only be sold by members or authorized representatives.  They may not be sold by compensated staff.  You also cannot pay someone to plan and conduct the raffle.
  6. The raffle cannot be advertised statewide or through paid advertisements.  This means that it cannot be advertised on the organization's website as this would be considered as "state wide."
Penalties & Enforcement
Conducting an illegal raffle is issue for the organization's local district attorney.  It is a Class A misdemeanor for conducting an illegal raffle and a Class C misdemeanor for participating in one.  This means that the people actually conducting the raffle are at risk and should take seriously the above rules.

In essence, an organization cannot have an unplanned raffle or a spur of the moment raffle.  Complying with the above rules take care and consideration.  Therefore, organizations and churches should prepare policies and procedures to guide any type of activity that can be construed as a "raffle". 

Tuesday, March 5, 2013

IRS Expands Worker Reclassification Program

As if the IRS hasn't already given a huge gift to employers with the creation of the worker reclassification program in 2011, it has now topped off that gift with a big red bow. 

In 2011, the IRS provided a means to allow employers to reclassify workers from independent contractors to employees in a fairly simple process with a very low cost.  The effective cost was approximately 1% of the worker's compensation in the year previous to the reclassification.  Compared to the fact that the traditional cost of reclassifying a worker was 10 to 15% of compensation for three years, the new program provided an easy and cost saving mechanism for solving worker classification issues.  (See my post in October of 2011 for the original details of the program.)  In December of 2012, the IRS expanded the program through Announcement 2012-45 and 2012-46. 

Announcement 2012-45 expands the program in the following manner:

Originally the program stated that if the employer was undergoing an IRS exam, it was not eligible for the program.  Now the employer will be eligible to participate in the program as long as the exam is not classified as an employment tax exam.  It also clarifies that an employer that is a part of a controlled group must look to the entire group of employers when determining this criteria.  Employers that are contesting a reclassification issue in court do not qualify for to participate in the program.  Also, an employer is still ineligible if it is going through a DOL exam or a state employment exam. 

Additionally, participation in the program no longer extends the statute of limitations on the Forms 941 that include the reclassification.  All employment returns will maintain their natural statute of limitations.

Announcement 2012-46 went on to temporarily expand the program in an even greater manner:

Under the original program, the employer has to have properly filed all Forms 1099-Misc for any workers that it desires to reclassify as employees.  If the employer failed to file the required forms in the previous 3 years, it is not eligible for the reclassification program.  The IRS has alleviated this requirement for persons who apply to the program through June 30, 2013.  This means that even if an employer did follow the law in reporting a worker as an independent contractor, it may still participate in the program through June 30, 2013.  The amount assessed in this settlement program is higher than the regular settlement program as it assesses an amount equal to approximately 3.2% of the compensation paid in the previous year.   There is a graduated penalty assessed for the nonfiling of the required Forms 1099-Misc.  In addition, the employer must file all outstanding Forms 1099-Misc for the past three years. 

This program is truly a gift to those employers who have misclassified workers.  It provides a clean slate going forward as opposed to a potentially large tax assessment for each of the past three years.  The IRS reports that nearly 1,000 employers have participated in the program to date.  However, from experience, I know there are many more employers that need to participate in this program.  If a church or nonprofit has fallen prey to bad employment classification habits, now is the time to break them and move forward into a new arena of better compliance as well as less monetary risk to the organization.