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NOT-FOR-PROFITNEWSLETTER

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ABOUT MOSS ADAMS

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Status CheckOne of your highest priorities as a tax-exempt organization has to be protecting and maintaining your tax-exempt status. In our summer e-newsletter, we look at several important, status-related issues for not-for-profits, including Blue Shield of California’s recent status revocation, how to set and document your executive compensation to reduce risk, and how the exempt application process is changing. We also cover a recent case that could lead more states to require disclosures of charities’ donor information and a reporting change surrounding the fair value of your investments.

Forgetting to File California’s Form SI-100 Comes with Consequencesby Patty Mayer, Director, Not-for-Profit Practice

How much trouble can a one-page form cause? Quite a lot.

Several California not-for-profit organizations have been suspended by the California secretary of state for neglecting to file Form SI-100, Statement of Information. Others that didn’t file Form SI-100, in addition to being suspended, have had their exempt status revoked by the California Franchise Tax Board (FTB).

Filing Basics

Form SI-100 is a one-page informational form that asks for information about corporate officers, processing agents, and addresses. One of the reasons organizations struggle with Form SI-100 filings is the due date. Since it’s based on incorporation date and required only every other year, it tends to slip from an organization’s radar.

Here’s how it works: The form must be filed within 90 days after an organization initially files its articles of incorporation in California and biennially for each filing period thereafter during the applicable filing period. Credit unions and consumer cooperative corporations, however, are required to file annually instead of biennially. The applicable filing period is determined based on the month in which the articles of incorporation were initially

IN THIS ISSUE

Forgetting to File California’s Form SI-100 Comes with Consequences

Look to the Right Peers When Setting Executive Compensation

Sidebar | Six-Month Extensions Now Available on Form 990 Filings

Court Ruling: Donor Listing Must Be Provided to California Attorney General

Revisit Your California Tax-Exempt Status Qualifications in Light of Blue Shield Revocation

Accounting Standards Update Aims for Consistency in Fair-Value Disclosures

Latest Developments Regarding Tax-Exempt Status Applications

S U M M E R 2 0 1 5

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filed. It includes that month and the preceding five months.

For example, if ABC Corporation filed its articles of incorporation with California on August 15, 2014, the organization would have 90 days from that date to file an initial SI-100—making the initial filing deadline November 13, 2014. ABC Corporation would then have to file SI-100 again by August 15, 2014, or during the preceding five months.

Form SI-100 carries a filing fee of $20. It can be filed electronically via the California secretary of state Web site, which also provides additional information about the form.

Ramifications

So, what happens if you do forget to file Form SI-100? If it’s not filed in a timely manner, the California secretary of state may assess a penalty in the amount of $250. Worse, it may suspend your organization, and worst yet, FTB may revoke your tax-exempt status for failure to file.

You can check on the status of your organization at http://kepler.sos.ca.gov. Search using your corporation name or California entity number. If your organization is listed as suspended, call FTB’s exempt organizations unit at (916) 845-4171 to ask for an explanation of the suspension. FTB’s Web site also provides a list of exempt organizations whose status has been revoked.

What Should You Do If You’re Penalized?

Whether you’ve been assessed a penalty, suspended, or had your status revoked, you can always contact your organization’s tax advisor for help filing the appropriate paperwork and taking the right steps to remediate the problem. If your organization has been suspended:

• File Form SI-100 with the California secretary of state as soon as possible via the filing Web site.

• File Form 3500A, Submission of Exemption Request (the short version), along with a copy of your IRS determination letter. Note that in order to use Form 3500A, your California Forms 199 or 199N and 109 for all applicable tax years must have been filed, and any associated filing fees or taxes must have been paid.

If in addition to being suspended your organization’s tax-exempt status has been revoked, call your tax advisor for assistance, or start by filing Form SI-100, just as you would above. Second, file Form 3500, Exemption Application (the long version). This application must include the following informational attachments:

• Any amendments made to your governing documents (that is, your articles of incorporation or bylaws).

• Your last three years of filed federal Forms 990, 990-EZ, or 990-PF

• Your IRS determination letter

• Your FTB determination letter

Be Proactive

As you can see, failure to file this one-page report every other year can lead to additional filings and costs. It can also hold up possible grant receipts or applications, preventing you from accomplishing your mission. As an easy fix, we recommend you calendar the due date for your Form SI-100 submission and assign a specific person at your organization to make sure the form is filed on time each filing period.

If you need help, call us. We can calendar your SI-100 filing for you and prepare the form on your behalf to help you steer clear of penalties and potential suspensions. If you have questions about the form or other state and federal filings relevant to your not-for-profit organization, or if you’d like assistance navigating the filing process, contact a Moss Adams not-for-profit professional.

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Look to the Right Peers When Setting Executive Compensation by Patty Mayer, Director, Not-for-Profit Practice

For organizations of any type, leadership matters. As a not-for-profit, you want to attract the best and brightest executives, individuals with a deep understanding of the not-for-profit sector and the skills to successfully operate and grow your organization. Your executive compensation package is part of what makes your positions competitive in the marketplace, enabling you to bring in and retain the right personnel. But as you well know, it’s not as simple as offering up the ritziest package you can muster: Executive compensation is also a topic that’s fraught with regulation.

Executive compensation is an area of concern for regulators, including both the IRS and state attorney generals. Other stakeholders, such as government funders, significant contributors,

members, and the media, also play a role in a not-for-profit organization’s compensation choices. Not-for-profits that are exposed as paying excessive compensation to their executives can face severe detriments to future funding or the removal of board members. In the worst cases, they jeopardize the entire existence of their organization.

So how can your organization protect itself from these hazards while still offering a competitive compensation package? In the context of a tax-exempt organization, no amounts of the net earnings or assets of the organization can benefit a private person. What can you offer to executives that’s robust enough to compensate them for successfully running the organization while keeping your not-for-profit safe from bad press and regulatory action?

What Compensation Is Reasonable?

Tax-exempt organizations must ensure their executive compensation packages are “reasonable.” Since this term is somewhat subjective, Internal Revenue Code Section 4958 contains a safe harbor available to 501(c)(3) organizations (excluding private foundations) and 501(c)(4) organizations. Other exempt organizations should consider adopting the standards set forth in Section 4958 as best practices for establishing compensation approval and processes.

Under the Section 4958 safe harbor, compensation is presumed to be reasonable (that is, it meets the requirements for what’s called the “rebuttable presumption of reasonableness”) if the organization meets all of the following three requirements prior to the actual payment of compensation:

• The compensation is approved by an authorized board or board committee that is composed of independent individuals, that is, individuals that have no conflict

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of interest regarding the compensation arrangement at issue.

• The board or board committee relies on appropriate comparability data (more on that below) to set the compensation amount.

• The process for setting the compensation amount is contemporaneously documented.

As long as a not-for-profit organization meets these three requirements, it’s the IRS that must bear the burden of proving the compensation is unreasonable should the package be challenged.

What Is Comparable Data?

The IRS challenged comparability data in its Colleges and Universities Compliance Project Final Report, issued April 25, 2013. In this report, the executive compensation component of the examinations focused mainly on compliance with Section 4958, which provides that organizations may pay no more than reasonable compensation to their disqualified persons (officers, directors, trustees, and key employees).

Most of the private colleges and universities the IRS examined attempted to meet the rebuttable presumption standard, but about 20 percent failed because of problems with the comparability data. These problems included:

• Comparable institutions weren’t similarly situated because their schools differed in at least one of the following areas: location, size, revenue, total net assets, or number of students.

• Their compensation studies neither documented the selection criteria for the institutions included nor explained why those institutions were deemed comparable to the school relying on the study.

• Their compensation surveys didn’t specify whether the amounts reported included only salary or salary plus all other

compensation, as required by Section 4958.

Appropriate comparability data for purposes of establishing the rebuttable presumption of reasonableness comes from appropriate peer group selections.

Peer Groups

Through the IRS’s Colleges and Universities Compliance Project, we’ve learned the focus is on peer group selection for comparability data. All organizations—not just colleges and universities—need to focus on peer groups. An appropriate peer group is one that represents similar organizations with similar executive-level positions (that is, the duties conducted by the executive are similar). Both not-for-profit for for-profit entities may be included in the peer group selection.

In establishing an appropriate peer group, the board or board committee must take steps to define the criteria for the peer group selection, identify the data sources that will provide the appropriate comparables, and ultimately make sure the recommended compensation is competitive and reasonable. Criteria that should be considered include:

• The complexity of the executive’s roles

• The size of the organization

• The talent market, when specialized education or experience is needed

• Geographic location

Some positions may require you to “customize” the selected peer group. For example, you may need to include investment or development executives if the role you’re evaluating will include similar responsibilities.

Peer group data can be gathered from published surveys, custom surveys performed by a third party, or compensation information provided on other organizations’ Form 990 filed with

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the IRS. Keep in mind that a data source that suits one organization might not suit another. For some, published surveys may be appropriate and a good comparable. However, if the position is unique or a specific skill set is necessary, a custom survey may be needed.

Pointers and Best Practices

Your compensation study should be a written document that includes the methodology for the analysis, the findings (which should address total compensation, including benefits, pension contributions, etc.), business judgment factors, and opinion as to the reasonableness of the proposed compensation package. If a consulting firm performed the study, it should also include certification of the consulting firm’s qualifications to provide the opinion as a valuation expert.

It’s important that your not-for-profit’s board or board committee reevaluate the data sources used and the peer group selection on a regular basis. How often you reevaluate your data sources will vary based on how rapidly the job duties,

size of your organization, or other factors change. This reevaluation should also be documented and should include an explanation of any changes needed or reasons to continue relying on the existing comparability data.

Step Forward with Confidence

While it’s true executive compensation can be a challenging issue, not-for-profit organizations can pay competitive salaries and benefits while protecting themselves and their reputation. In addition to ensuring your total compensation package is reasonable, all organizations should also establish compensation approval processes that follow the safe harbors of Section 4958, including the documentation and establishment of appropriate peer groups.

For questions on the compensation approval process, comparability studies, or best practices for documentation and compensation, contact one of our not-for-profit or valuations professionals.

Six-Month Extensions Now Available on Form 990 Filings

On July 31, President Obama signed into law House of Representatives

bill 3236, a short-term highway funding extension that modifies

filing due dates for the Form 990 series. Rather than filing for an

automatic three-month extension and then requesting an additional

three-month extension, not-for-profits will now be able to request a

single six-month extension. The effective date for this change will be

for taxable years beginning after December 31, 2015. To learn more,

contact your Moss Adams professional.

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Court Ruling: Donor Listing Must Be Provided to California Attorney Generalby Tracy Paglia, Partner, Not-for-Profit Practice

A May 2015 ruling by the United States Court of Appeals for the Ninth Circuit could signal a trend toward state attorneys general requiring the names and addresses of organizations’ significant donors.

Naturally, this is closely held information that most organizations are reluctant to share. While it’s required on the Schedule B that organizations file with the IRS, Form 990 filers (excluding Form 990-PF filers) aren’t required to disclose this information to the public. Both California and New York have required organizations to provide their donor list to their attorneys general for some time, and neither discloses the information to the public. Still, the ruling broadens the sphere of those who have access to this information, which could have an impact on some organizations.

Background

The California attorney general requires charities soliciting donations in California to provide donor names and addresses as part of their annual Form RRF-1 filing. Failure to include donor listings with the Form RRF-1 an organization files with the California attorney general may result in an incomplete filing and penalties.

The Center for Competitive Politics—a Virginia-based not-for-profit registered with the California attorney general—challenged this requirement, arguing that the disclosure violates its and its supporters’ First Amendment rights to freedom of association and that certain nondisclosure rules under federal law preempt the state requirement. However, the court sided with the attorney general, agreeing there was a compelling law enforcement interest in the disclosure of names of significant donors.

Impact

It’s possible this case could drive a trend in which increasing numbers of state attorneys general demand this sensitive donor information from charitable organizations.

Given the penalties that can result from incomplete filing, organizations filing annual solicitation reports with states should carefully review form instructions to see whether donor information is required. If you solicit donations in a state that doesn’t currently require it, watch for updates to the instructions in future years in case that changes.

Contact Us

To learn more about what requirements accompany your not-for-profit’s operations within a particular state, or for more information about the ruling, contact your Moss Adams not-for-profit professional.

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Revisit Your California Tax-Exempt Status Qualifications in Light of Blue Shield Revocationby Renié Burbank, Senior Manager, Health Care Practice

Blue Shield, the third-largest health insurer in California, has lost its state tax-exempt status. The California Franchise Tax Board (FTB) made the decision to revoke Blue Shield’s status in March 2015.

Blue Shield had been criticized for its higher-than-necessary reserves to pay future claims, extravagant executive pay, and purchase of a luxury box suite at Levi’s Stadium, the new home of the San Francisco 49ers in Santa Clara, California.

Given the high-profile nature of this revocation and the fact that tax-exempt status is of primary importance to not-for-profit organizations, it’s important to review the factors required for California exemption and understand what actions may put your organization at risk. We’ll discuss these below—but first, let’s begin with some background.

Background

More than 70 years ago, Blue Cross Blue Shield (BCBS) plans were organized under federal law as social welfare organizations under Internal Revenue Code (IRC) Section 501(c)(4). The plans were subsidized by members in exchange for health care benefits, and this became an integral way for their members to pay for health care. The plans are independently operated and controlled on a state-by-state basis. Various regulations control the plans in each state, and Blue Cross Blue Shield has implemented a variety of techniques to function under them.

For-profit, commercial insurers challenged the tax-exempt status of BCBS in the early 1980s, at which point the federal government created a special tax class for BCBS organizations under IRC Section 833. The California Revenue and Taxation Code didn’t conform and doesn’t offer the same reduced tax rate as the IRC. So despite the elimination of their federal tax-exempt status, many plans, like Blue Shield of California, continue to maintain their tax exemption under state and local laws.

In the 1990s, Blue Cross of California was a not-for-profit insurer, but it later converted to a for-profit company. Some of the assets held by Blue Cross of California were used to create two grant-making health foundations: California Endowment, a 501(c)(3) private foundation; and the California HealthCare Foundation, a 501(c)(4) entity. To date, many not-for-profit organizations receive grants from these foundations. At the time, creating the two new entities allowed BCBS to distribute its assets, reducing its own taxable income while also benefiting from a tax deduction for the contributions made to the newly formed exempt entities.

An Industry-Wide View

Though the rationale for a health care insurer’s tax exemption differs from that of a hospital, the bottom line is that both types of health care organizations are subject to scrutiny.

Charitable hospitals, for example, are now subject to federally mandated reporting requirements under IRC Section 501(r), which sets out four key provisions with which charitable hospitals must comply. These provisions cover financial assistance policies, billing calculations for uninsured patients, certain collection practices, and community health needs assessments to maintain their exemption. Under the final regulations, which were issued December

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28, 2014, not-for-profit hospitals have been required to report statistical information related to charity care, bad-debt expenses, and unreimbursed costs for services provided through government programs.

The high-profile nature of these regulatory requirements underscores their importance: The IRS is required to report to Congress every three years on private tax-exempt, taxable, and government-owned hospitals. The IRS issued its first report of this nature on January 28, 2015, in accordance with IRC Section 9007(e)(1) as a result of the Patient Protection and Affordable Care Act.

If you think your organization may be subject to these reporting requirements, reach out to your tax advisor for help assembling the required information and updating policies to conform to final regulations.

Could Your Status Be Challenged?

FTB’s revocation of Blue Shield of California’s tax exemption requires the company to file corporate returns dating back to 2013 and could potentially cost the company tens of millions of dollars. Though Blue Shield states it still meets the requirements for state income tax exemption and has challenged the state’s ruling, the facts uncovered by FTB tell a different story.

To protect your organization from status revocation, it’s important to understand the factors that put Blue Shield at risk. Blue Shield capped its net income to 2 percent of its revenue—more than likely a product of its high expenses. Second, it ended 2014 with financial reserves of $4.2 billion. Third, the company has been criticized for extravagant executive compensation, with its former CEO earning $4.6 million. Fourth, it contributed $325 million to charitable foundations. Furthermore, the organization offers insurer rates comparable to its for-profit

competitors. These factors all point toward Blue Shield functioning as a for-profit rather than not-for-profit entity.

Though the facts in Blue Shield’s case seem fairly clear, it’s still worth noting that the following will go far toward protecting your organization from a similar loss of status:

• Have a public service mission, fulfill it, and operate accordingly.

• Ensure your organization’s activities are permitted by the state section under which exemption was granted.

• If your organization is in the process of changing its activity or has changed its activity to something that may or may not be tax-exempt, consult your tax advisor.

• If your organization is exempt under state and local laws but doesn’t qualify for exemption from federal income tax, consult your tax advisor—this could signal a vulnerability.

Also worth noting are the penalties and interest your organization could be subject to if its status is revoked; these vary by state. In California, entities that have their status revoked will be subject to a tax rate of 8.84 percent and a California interest rate of approximately 3 to 4 percent. If it’s determined that there were filing errors on previously filed returns, the state can also impose an accuracy-related penalty and a penalty for failure to pay tax by its due date.

Be Proactive

If you’re concerned that your organization’s status may be in danger, address those concerns now. To learn more about how you can protect your organization’s tax-exempt status or what factors might put you at risk of losing your California tax exemption, contact your Moss Adams not-for-profit professional.

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Accounting Standards Update Aims for Consistency in Fair-Value Disclosuresby Danielle O’Connor, Senior Manager, Not-for-Profit Practice

An Accounting Standards Update (ASU) will impact how your not-for-profit organization reports on its investment holdings.

In April, the Financial Accounting Standards Board (FASB) issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or Its Equivalent), to address diversity in practice regarding reporting certain kinds of investments.

Many not-for-profit organizations have invested in a wide range of investments, and often these investment portfolios make up the majority of the assets held by the organization. If your organization has an investment portfolio that includes debt and equity securities, hedge funds, private

equity, or limited partnerships (to name a few), it’s highly likely you use net asset value (NAV) to measure their fair value. As a result, this accounting standards update will directly impact your organization’s financial statement disclosures.

About the Preexisting Standard

The fair-value guidance in FASB Accounting Standards Codification® (ASC) Topic 820, Fair Value Measurement, permits entities, as a practical expedient, to measure the fair value of certain investments using the NAV per share of the investment. Before organizations had the ability to use NAV as a practical expedient, determining the fair value of certain investments required the organization to analyze and adjust the NAV provided by fund managers or partnerships. This was usually a complex, difficult, and time-consuming process. Using NAV as a practical expedient has eliminated many of the complexities investors faced in determining the fair value of their alternative investments.

Under current guidance, investments valued using the practical expedient are categorized within the fair-value hierarchy based on whether they’re redeemable at NAV on the measurement date, never redeemable at NAV, or redeemable at NAV at a future date. If your not-for-profit holds investments that are redeemable at a future date, you must take into account the length of time until those investments become redeemable to determine their level within the fair-value hierarchy as either level two or three. This is where the diversity in practice has arisen.

What Does the ASU Change?

The ASU removes the requirement to categorize within the fair-value hierarchy all investments for which fair value is measured using the NAV-per-share practical expedient. Investments for which

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you don’t apply the practical expedient—even if they calculate NAV per share or its equivalent—will continue to be included in the fair-value hierarchy.

This means that the types of investments that are included in levels two and three in the fair value hierarchy will be more consistent from organization to organization. In the past, one organization may have presented a specific investment as level two while another organization presented it as level three.

For financial statement preparers, this amendment eliminates the analysis and estimation that has been necessary to determine whether investments measured at NAV (as a practical expedient) are a level two or level three. While a change in disclosures always requires more of your time in the year of adoption, this amendment should reduce the time you’ll need to spend preparing your financial statement disclosures in future years. Depending on the types of investments held by your organization, this ASU may even greatly reduce the length of the fair-value disclosures in your financial statements.

Now’s a good time to look at your investment portfolio and segregate investments that are measured using NAV as a practical expedient. This will help you gauge the impact this amendment will have on your financial statements.

When Does the ASU Take Effect?

For public business entities, the ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within that year. For all other entities, the ASU is effective for fiscal years

beginning after December 15, 2016, and interim periods within those years. Note that neither a not-for-profit entity nor an employee benefit plan is a “business entity” as defined by FASB.

The amendments should be applied retrospectively to all periods presented. Under the retrospective approach, investments for which fair value is measured using NAV as a practical expedient should be removed from the fair-value hierarchy in all periods presented in your financial statements.

Early adoption is permitted, and it’s most likely to be beneficial for entities whose only assets or liabilities measured at fair value are their investments for which fair value is measured using the NAV practical expedient. For these entities, early adoption will result in wholly eliminating fair-value hierarchy tables. Entities that hold other types of investments in addition to those addressed by the ASU won’t see as much of an impact from early adoption.

What Will the New Disclosures Look Like?

Note that although investments measured using NAV as a practical expedient will be removed from the fair-value hierarchy and instead have their fair values shown separately, you’ll still be required to disclose the class of these investments. This can be done in tabular format or it can be done through a description in the notes.

The following sample document demonstrates what you can expect the disclosures to look like once the ASU is adopted in your financial statements.

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FAIR VALUE MEASURMENT AT JUNE 30, 2015 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL

NEW PRESENTATION - EXAMPLE 1

Fixed-income securities:

Domestic debt securities $150,000 $40,000 - $190,000

Government debt securities 86,000 - - 86,000

Equities, funds:

Domestic equity securities 28,750 74,000 - 102,750

Emerging-market equity securities 128,000 136,000 - 264,000

TOTAL $392,750 $250,000 - $642,750

Investments measured at net asset value (NAV) $332,000

Investments at fair value $974,750

NEW PRESENTATION - EXAMPLE 2

Fixed-income securities:

Domestic debt securities $150,000 $40,000 - $190,000

Government debt securities 86,000 - - 86,000

Equities, funds:

Domestic equity securities 28,750 74,000 - 102,750

Emerging-market equity securities 128,000 136,000 - 264,000

Marketable alternatives:

Absolute-return hedge funds measured at NAV - - - 116,500

Long/short hedge funds measured at NAV - - - 51,500

Nonmarketable alternatives:

Venture capital measured at NAV - - - 108,000

International private equity measured at NAV - - - 56,000

TOTAL $392,750 $250,000 - $974,750

PRIOR PRESENTATION

Fixed-income securities:

Domestic debt securities $150,000 $40,000 - $190,000

Government debt securities 86,000 - - 86,000

Equities, funds:

Domestic equity securities 28,750 74,000 - 102,750

Emerging-market equity securities 128,000 136,000 - 264,000

Marketable alternatives:

Absolute-return hedge funds - 18,500 98,000 116,500

Long/short hedge funds - 5,500 46,000 51,500

Nonmarketable alternatives:

Venture capital - - 108,000 108,000

International private equity - - 56,000 56,000

TOTAL $392,750 $274,000 $308,000 $974,750

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The ASU doesn’t change the requirement that an entity disclose information that helps users understand the nature, characteristics, and risks of the investments by class and whether the investments, if sold, are probable of being sold at amounts different from NAV per share (or its equivalent).

Stay Ahead of Change

Not-for-profits that currently use the practical expedient in their financial reporting should start examining whether early adoption could streamline the cost and complexity of their financial reporting. Even if you decide not to adopt early, start looking at which investments are impacted by this amendment. Once your organization adopts this ASU, the changes must be applied retrospectively. Taking the time now to segregate the investments measured using the practical expedient can save you the headache of doing it when you’re busy with year-end financial close and reporting.

To learn more about the ASU or fair-value disclosure requirements in general, contact your Moss Adams not-for-profit professional.

Latest Developments Regarding Tax-Exempt Status Applicationsby Tracy Paglia, Partner, Not-for-Profit Practice

For several years, applying for tax-exempt status has been a waiting game, one that hopefuls for exempt status have come to expect will take more than a year to complete.

This has been due to several converging factors, including the already-large volume of new applications requesting tax-exempt status, an influx of requests for reinstatement by organizations that lost their status due to autorevocations, the debacle concerning exemption applications with lobbying and political activities, and the reduction in staffing at the IRS. The result is what feels like a black hole for many exemption applicants. As of April 2014, the IRS reported a backlog of 75,000 applications pending, of which 55,000 were over 275 days old.

Here, we give an overview of what’s happening with tax-exempt status applications.

Clearing the Backlog

The IRS has instituted several measures to cope with its application backlog, including a streamlined Form 1023-EZ and optional expedited processing for certain section 501(c)(4) organizations.

Today, the IRS reports that 91 percent of the old inventory was cleared through September 2014, and new applications are being processed faster: 90 percent of the over 20,000 applications received in the last six months have been approved, and Forms 1023-EZ are now processed in approximately 14 days.

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The material appearing in this communication is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.

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Form 1023-EZ Applications

Because Form 1023-EZ requires much less information than the full Form 1023, the IRS plans to follow up with 1,500 of the 2,000 organizations that have filed Form 1023-EZ through correspondence audits to confirm the organizations are functioning appropriately under Section 501(c)(3).

In the event your organization is contacted for a correspondence audit, contact your tax professional to discuss your approach to the response. Doing it right the first time can save money and headaches later.

Requirement for Some Organizations to File for Tax-Exempt Status

Under present law, organizations planning to operate as not-for-profits under Sections 501(c)(4), (5), or (6) aren’t required to request tax-exempt status, but they may file Form 1024 if they want assurances that their activities will qualify. This option may change in the future.

Originally referred to as the IRS Bureaucracy Reduction and Judicial Review Act, HR 1295 was passed by the House of Representatives on April 14 and the Senate on May 14; however, in the process of passing the bill, it was revised to address trade issues instead of this tax-exempt status issue. If passed as originally proposed, the bill would have required that Section 501(c)(4) social welfare organizations intending to operate as tax-exempt entities notify the IRS of their identity and purpose within 60 days of being established. It would also have allowed such an organization to seek a declaratory judgment concerning its initial or continuing classification as a tax-exempt organization.

More Updates to Come

The issue of requiring an application for exemption isn’t included in current legislation but could be reintroduced in the future. If your organization is considering forming a new Section 501(c)(4) organization, we can help navigate the pros and cons to requesting exemption.

Moss Adams routinely monitors the regulatory landscape for not-for-profit and other tax-exempt organizations. We’ll continue to follow this issue and other developments, so check back regularly for additional news and insight on changes that may impact your organization.

If you have questions or want more information on the exempt status application process or new legislation, reach out to your Moss Adams not-for-profit professional.