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2007 Issue 4
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IRS Releases Variety of New Guidance for Exempt Organizations IRS Issues New Guidance on Valuing Donated Property IRS Publishes FAQ Sheet for E-Postcard Filing IRS and Independent Sector Issue Good Governance Guidelines for Charitable Organizations IRS Releases Variety of New Guidance for Exempt Organizations In a concerted effort to reach out to exempt organizations, the Internal Revenue Service has been busy issuing new plain language resources for exempt organizations on its website. The new publications include:
By Sara Tosdal  IRS Issues New Guidance on Valuing Donated Property Publication 561 In response to the Pension Protection Act of 2006 ("PPA"), the Internal Revenue Service recently released Publication 561, Determining the Value of Donated Property. In this publication, the IRS addresses the particular issue of valuing property donated to charitable organizations for tax deductions under the new law. Fair Market Value To value non-cash donations, the IRS uses an item's fair market value ("FMV"), which is the price that the property would sell for on the open market. Donors are cautioned that there are no set rules for determining FMV, but a host of factors which must be considered, including: the cost or selling price, sales of comparable properties, replacement cost, and opinions of experts. For property whose FMV is less than $5,000, donors may follow the guidelines and claim their deductions accordingly, attaching a full description of how they obtained the FMV with their tax return. Proper and detailed record-keeping is crucial for donors. For deductions of more than $5,000, however, an appraisal by a qualified appraiser is generally required. Qualified Appraisals The new guidelines create new strict standards. Qualified appraisers are only individuals who have either earned their designation from a professional appraisal organization or ones who have met certain increased minimum education and experience requirements. For those who appraise real property, the appraiser must be licensed for the type of property being appraised in the state in which it is located. For all other property, the appraiser must have completed coursework relevant to the property being appraised, must have at least two years of relevant experience in valuing this type of property, must regularly perform appraisals for pay, and must provide a full explanation of his or her qualifications in the appraisal. Moreover, the validity of an appraisal is evaluated largely by the substance of the report. The guidelines caution, "The appraiser's opinion is never more valid than the facts on which it is based; without these facts it is simply a guess" [Publication 561, p. 9]. A qualified appraisal is one which is made less than sixty days before the contribution date, does not involve a prohibited appraisal fee, and includes all of the information required by the guidelines. Additionally, the appraiser must sign a statement that he or she understands that in the event of a substantial misstatement of value, he or she may be liable for a civil penalty. It should also be noted that under the PPA, there are stricter penalties on taxpayers who knowingly misstate the value of a non-cash donation for which a deduction of more than $5,000 is claimed. The thresholds for inflicting penalties have been lowered, and the amount of the penalties has increased. Depending on the value of the overstatement, donors may be forced to pay up to forty percent of the underpayment of tax as penalty for the misstatement. Changes in Charitable Deductions Beyond the instructions for determining and reporting an item's FMV, the guidelines also provide further explanation regarding changes in acceptable deductions for charitable contributions under the PPA. A list of some of the most relevant changes follows. In response to the possible abuses in deductions claimed for donations of clothing and other household goods, Congress limited tax deductions to those donated items which are in good used condition or better. If a deduction of more than $500 is taken for a single piece of clothing or household item, a qualified appraisal must be attached; see above. However, the $5,000 threshold for qualified appraisals still applies to jewelry, gems, collections, paintings, antiques, or other objects of art. The allowable deduction for contributions of property for conservation purposes has been raised from thirty to fifty percent of adjusted gross income. Certain farmers and ranchers who donate land for conservation purposes can deduct up to one hundred percent of their adjusted gross income, provided that the donated land can still be used for farming or ranching purposes. Details regarding permissible conservation purposes and which organizations qualify for such donations are provided in Publication 561. A contribution of a façade or conservation easement can only be made to a charity with a purpose of historical or environmental conservation; in addition, the donor and charity must provide a written agreement specifying that the charity will commit to and enforce the restrictions on their use. Furthermore, donors must include the following information with their tax return: a qualified appraisal, photographs of the building's entire exterior, and a description of all restrictions on the development of the building. A deduction of more than $10,000 will only be allowed if the donor pays a $500 filing fee. Such contributions for a building in a registered historic district are tax deductible only if there are restrictions in place which prevent the exterior of the building from being changed in any way inconsistent with its historical character. Implications for Charitable Organizations While these guidelines do not directly affect the organizations which accept contributions, it is important for them to be aware of the more stringent standards which are now being imposed on their donors. Organizations may want to make information available or refer donors to the materials provided by the IRS. By Christine Tschiderer IRS Publishes FAQ Sheet for E-Postcard Filing The Internal Revenue Service recently posted guidance, in the form of Frequently Asked Questions, for small exempt organizations that will have to file the new Form 990-N. Under the 2006 Pension Protection Act, most small tax-exempt organizations whose gross receipts are normally $25,000 or less, and who previously were not required to file any Form 990, will have to file a Form 990-N for tax periods beginning after December 31, 2006. Also referred to as an "e-postcard," the new tax return asks for basic information: the organization's name, contact information, EIN, fiscal year, and contact information for a principal officer. The form, which must be filed electronically, is due annually by the fifteenth day of the fifth month after the end of the organization's fiscal year. Note: Those 527 organizations that do not need to file a Form 990 because of size do not need to file the e-postcard. Please visit the IRS website for more information. By Sara Tosdal IRS and Independent Sector Issue Good Governance Guidelines for Charitable Organizations In the wake of recent reports of abuses by leaders of nonprofit organizations, ethics and governance have become items of central focus to those inside and outside of the tax-exempt sector. In response, both government regulators and non-governmental groups are releasing sets of guidelines on best practices for nonprofits. These guidelines, which go beyond the legal requirements for operating tax-exempt organizations, are premised on the theory that improved governance will help prevent abuses. The most publicized guidance comes from the IRS ["Good Governance Practices for 501(c)(3) Organizations"] and the Panel on the Nonprofit Sector ["Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations"]. The IRS guidance is in part a response to earlier guidelines from the Treasury Department ["U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities"], which received criticism for their inconsistency with state and federal laws governing nonprofits. The Panel on the Nonprofit Sector, which released the other set of recent guidelines, was convened by the Independent Sector at the behest of the Senate Finance Committee, and is comprised of leaders from various nonprofit organizations. It released earlier draft principles and solicited comments from the public before creating its final 33 Principles. Both sets of guidelines urge Boards of Directors of nonprofits to consider the proposals and re-evaluate their organizations' operations and effectiveness. Both documents emphasize that their recommendations are nonbinding, and encourage self-regulation with the guides as a template. They address wide-ranging issues including public disclosure, financial management, and responsible fundraising. Specific recommendations include implementing a document retention policy, posting tax returns and financial reports on the organization's website, and refraining from compensating fundraisers based on a commission or a percentage of the funds that they raise. In the Panel's Principles, many proposals also relate to governance, and specifically, to an organization's Board of Directors. The Principles recommend that, among other things, a Board evaluate its own performance at least once every three years, and that at least two-thirds of its members be independent - that is, neither compensated by the organization nor related to anyone who is directly or indirectly compensated by it. Conflict of interest and whistleblower policies, both of which have received attention in the redesign of Form 990, are also given consideration in both sets of guidelines. Many see these recent efforts as a response to recent national press reports of nonprofit scandals. Abuses of nonprofits by lobbyist Jack Abramoff and the resignation of a top Smithsonian official in response to queries about his lavish compensation have led to investigations by Congress and clouded public trust in nonprofit organizations. The flurry of released guidance is an effort to promote a gold standard of governance and ethical practice in order to protect charities' ability to continue their good work. Though adoption of the recommendations is voluntary, in many ways doing so may aid nonprofit boards in finding more efficient, effective ways to pursue their goals and protect their organizations against abuses. However, some critics have expressed concern that these "recommendations" will in effect be viewed as mandatory. Given that the IRS is responsible for determining which organizations are granted exempt status, its guidance is not often taken lightly. One organization, OMB Watch, which has been carefully following these developments, remarked, "Many in the nonprofit sector resist new requirements and greater intrusion by government" ["Panel on Nonprofit Sector Makes Final Recommendations to Senate Committee]. Some have also suggested that the guidelines may be too rigid and may hamper the ability of nonprofits to operate according to their own unique needs. Universal, "one-size-fits-all" standards are inappropriate given the complexities which differentiate one organization and its activities from the next. While adoption of these principles can be seen as a positive step, it must be understood that failure to adopt them is not inherently negative. Harmon Curran will continue to track new developments in this area. By Christine Tschiderer This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required. Newsletter Home | HarmonCurran Home | |