Within the past month, we’ve seen a significant number of tax-exempt organizations receive notices from the IRS for a multitude of reasons, many of which are no fault of the organization. The notices often provide little to no explanation as to why the agency has assessed penalties and interest, or why they’re sending a refund. This leads to much confusion and the need to contact IRS for additional guidance, which in most cases is not received.
One instance we encountered recently involved the reporting of multiple trade or business activities on Form 990-T. The IRS had significantly updated the Form 990-T, Exempt Organization Business Income Tax Return, for 2018 to reflect law changes that resulted from passing of the Tax Cuts and Jobs Act (Act). One of the changes included the requirement for tax-exempt organizations to silo each of their trade or business activities, and the Form was updated to include Schedule M, Unrelated Business Taxable Income for Unrelated Trade or Business. Organizations are now required to list a single trade or business on the face of Form 990-T and file a separate Schedule M for each subsequent trade or business.
Recently, an organization received a refund for a 2018 return that included multiple trade or business activities. Upon further review, it was discovered that the IRS didn’t factor in the activities reported on the Schedules M filed with the return. The organization should not have received a refund, and are now required to return the check with correspondence of the calculation. Although the IRS has updated the forms to apply the new laws as they relate to the Act, it doesn’t appear their systems have been updated accordingly.
Another issue we’re seeing is with organizations that have filed their Forms 990-T by the extended due date of November 15, but are being required to pay unrelated business income tax at this time. These organizations receive notices assessing late filing and payment penalties and interest indicating that returns were filed late and payment was not received until December 15. In each instance, the organizations have proof of payments and filings prior to November 15. Again, an apparent error in the IRS system.
These are just a couple of the instances we’ve seen recently. To the extent you receive a notice or check, ensure the refund or payment due is appropriate before taking any action. Schneider Downs has a dedicated tax-exempt tax practice that’s well versed in handling these matters. If you receive correspondence do not hesitate to reach out to our team.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.