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Learn about IRS compliance audit sampling and the process and requirements involved. Find out how many clubs were sampled and what information was requested from them. Understand the difference between 501(c)(3) and 501(c)(4) status, and how to accept community or corporate funds for 501(c)(3) non-profits.
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What is an IRS compliance audit sampling? • A compliance audit sampling in a group case is where the IRS requests information from a random selection of subordinates (clubs) to help determine if the clubs are truly representative of the parent organization (PI) and if they are in compliance with the 501(c)(3) requirements set by the tax code. The list of items requested from the selected clubs was to help them determine both of those answers for our group. • The IRS may also do this on an ongoing basis to confirm that an organization continues to be in compliance with the 501(c)(3) requirements both individually and as a group.
How many clubs were sampled in the compliance audit? • There were 29 clubs sampled in the audit. A few of the clubs were no longer active and so the number of actual responses was around 25. The clubs were randomly picked so the IRS could get a reading on the make up of the clubs within the group. They then used that information to formulate their opinion on the group as a whole.
**What was requested from the chosen clubs by the IRS in the compliance audit? • Items requested from the 29 IRS chosen representative clubs: • A Copy of their Articles of Incorporation or By-Laws if not incorporated. • A copy of the meeting minutes for ALL board meetings, committee meetings, and organization meetings for 2011 & 2012. • The Website address for the individual club if applicable. • ALL newsletters disseminated in 2011 and 2012 • A timeline of events and activities with a detailed description of each event from July 1, 2011 to present. • A list of how the activities are exclusively charitable and educational in nature as required for 501(c)(3) status. • A financial statement including a breakdown of total revenue and expenditures from July 1, 2011 to the present as per IRS Form 1023. • Whether or not the club administers a scholarship program. • Copies of solicitation materials for new members with an explanation of how prospective members learn about your club. • An explanation of the requirements for membership, benefits, rights and obligations of members.
If my Pilot Club was a 501(c)(3) before the group application is it’s status different now? The answer depends on whether your club was a part of the group submitted. If your club had a foundation, the foundation would not have been submitted in the group and would still have it’s 501(c)(3) status. If it was your actual club it could be that it’s status is now a 501 (c)(4) since that is what they have approved for the group. The best thing to do is to look at the IRS Exempt Organizations Business Master File. http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Business-Master-File-Extract-EO-BMF Check for your EIN and see how they have it listed. We have researched this file and have a list of all the clubs by state that you can check. If you do not find your club there, we will help you research further.
What is the difference between a 501(c)(4) and a 501(c)(3) status? • The main difference is that a 501(c)(3) is formed exclusively for charitable, educational, religious and other specific purposes and can accept contributions which are then tax deductible by the donor as a charitable donation. A 501(c)(4) is also a non-profit and does not pay tax on it’s revenue. Donations to it, however, are not deductible as charitable contributions by the donor. • There are also philosophical differences in that a (c)(4) is organized to promote social welfare and it’s earnings may also be devoted to recreational purposes in addition to charitable or educational etc. They are in essence civic organizations devoted to furthering the good of the people of their communities. While this is close to what the (c)(3) does, the (c)(4) includes activities that do not qualify as exclusively charitable in nature.
How does my club now accept community or corporate funds that are specified only for 501(c)(3) non profits? • Pilot International remains a 501(c)(3) and can accept the donations for you and then transfer them to your individual club. Due to the unforeseen circumstances Pilot will waive the usual transfer fee for a period of one year. Grants would be handled the same way as a pass-through grant again with no fee for one year.
What information should we share with our communities about our club’s 501(c) status? • When asked about your 501 (c)status you can state that your parent organization is a 501(c)(3) and can accept donations which can then be counted as charitable contributions. Any donations can be made out to Pilot International and then will be transferred to the local club for use in it’s specified purpose. When the decision is made as to how to re-apply you may then state that your individual 501(c)(3) status is in the application stage waiting on a ruling by the IRS.
What date did our clubs revert to the 501 (c)(4) status? • The letter from the IRS stating that the clubs must be a 501(c)(4) group was dated May 30, 2014. It was not actually received by PI until June 4th. The technical date of the ruling would be the May 30th date but there was no notice until June 4th.
Will PI apply again for the 501(c)(3) status for the club group? • Research is being done on that now with the help of an IRS specialist. PI’s CPA, Ken Neil, is investigating what it would take to give the IRS enough of a comfort zone to rule the group as 501(c)(3). It is possible it will take some rewording of the club Articles of Incorporation and possibly some changes in procedures at the club level. We will let the clubs know as soon as possible when we know a definitive answer to this question.
If my club wants to apply for a 501(c)(3) status independently will PI be able to offer help with the application process? • We are hoping that the new 2 page 1023 application becomes approved soon. When it does we will work up a sample after having a club successfully submit it. It will then be a guide for filling out the application for any clubs that wish to do so independently of the group application. You cannot apply individually and be a part of the group too. The results will be the same either way if approved. There is a fee for filing individually, however, and it may be prohibitive for some clubs. In the group application PI pays the filing fee.
**New information on the 1023 application!! The 1023EZ application form has been released by the IRS and is currently available for clubs to use. It is an online application only so you must go to the IRS website to access the application. We have confirmed with the PI Accountant that is will not affect PI’s ability to file for a group determination if some of the clubs file individually for their own 501(c)(3) status. There are restrictions as to who can use this application and there will be a checklist you must go through to be sure you can file this way. It is restricted to those organizations that have gross revenue of $50,000 or less and have assets of $250,000 or less. There are other restrictions on the checklist also so be sure you go through the whole list before applying. There is also a $400.00 user fee that will have to be paid at the time of application. Several clubs are going to do this and we will have more information after some of them have gone through the process.
Can a PI District become a 501(c)(3) organization? • The Districts will have the same requirements that the clubs have in that they will have to use their revenues exclusively for charitable or educational etc. purposes. Since the majority of the District funds go toward club related activities and conventions it may be hard for them to qualify. However, there is one District that has a 501(c)(3) status so it is obviously not impossible. It might be hard to justify that the majority of the activities were charitable in nature though. We will continue to research this more and get back to the districts with what we find out. It would be better for them to apply individually, however, rather than go through the group to better keep the group organizations more uniformly alike.
How do we know if our club has been revoked because of not filing the 990? • There is a place on the IRS website called Exempt Organizations Select Check: http://apps.irs.gov/app/eos/ Here you can look up your EIN to see if it has been revoked for not filing a 990 for three consecutive years. You can also look up your EIN to see if you have filed a 990N (the postcard 990) which is what most clubs file. It will show you the dates the 990N’s were filed and you can see if you are missing years and are close to having your non profit status revoked.
What do we do if our club’s non-profit status has been revoked because of not filing our 990? • Your club must submit a 1023 application for non profit status individually. You cannot be included in the group until you have an individual status. In this case you are better off to apply for the 501(c)(3) and not become a part of the group. You are going to have to pay the filing fee anyway. • This should be done as soon as possible in that you are now not exempt from paying taxes on your revenues. You may want to get the help of a CPA to help you get reinstated and to help you to know what tax return to file for this year.
**New information on applying for non-profit status if you have been revoked. In talking with some of the Governors we have found that if your non-profit status has been revoked because of non-filing you may have another way of getting reinstated. The best thing for you to do is contact a CPA that you have a connection with in your area and get them to contact the IRS for you asking for you to be reinstated. This will be a negotiation process and you may still have to pay a fine but you might not have to actually go through the re-filing process. If, however, your club is thinking about filing the 1023 EZ form to be come a 501(c)(3) you may want to just become reinstated that way.
How does my club file it’s 990 for this tax year? • You must file your 990 return as a 501(c)(4) organization since that will be what you are at the end of the fiscal year. On the 990 N postcard it does not ask for your classification ((c)(4)). The other returns, 990 and 990EZ do require you to verify your classification. On these returns you would enter 501(c)(4) for this tax year.
**What if we have issued receipts to donors saying we are a 501(c)(3)? At the time you issued the receipt it was your understanding that you were a 501(c)(3). For it to be a problem the donor would have to be audited and that particular receipt would have to be chosen to be verified. If that happens we will simply explain that at the time we understood that the club was a 501(c)(3) and that the parent is currently a 501(c)(3). In all likelihood this will not happen and will not be a problem. At this point it does not warrant going back to notify donors.
**IF my club changed it’s Articles of Incorporation with the Secretary of State do we need to go back and change them back to the way they were before? No. You do not need to change anything with the Secretary of State. Your Articles of Incorporation will still be valid and appropriate for your status now.
**What if we have changed our status with our State Tax Authority? Every state is so different it would be impossible to give an answer on this. The best thing you can do is consult a knowledgeable person in your state that is familiar with the state tax rules. Probably if it is related to sales tax you will not need to do anything but if it is related to state income tax there may be something you will need to correct. Again the best thing to do in either case is talk to someone who knows the rules within your own state.
