In June, the IRS Tax Exempt and Government Entities (TE/GE) Division published three new technical guides aimed at enhancing compliance among tax-exempt organizations.
These resources offer clear guidance to help organizations fulfill obligations, avoid frequent errors, and ensure operations align with IRS standards. The summary below provides an overview of each guide and its key insights.
TG 3-8: Inurement and Private Benefit, Taxes on Excess Benefit Transactions, and Enhanced IRS Examination Techniques
The Tax Exempt and Government Entities (TE/GE) division released Technical Guide TG 3-8, which addresses issues related to inurement, private benefit, excess benefit transactions, and IRS examination techniques. A summary of key concepts is below.
Inurement and Private Benefits Explained:
Both inurement and private benefit can jeopardize an organization’s tax-exempt status.
Inurement occurs when a tax-exempt organization’s net earnings improperly benefit an insider. Examples of this are unreasonable compensation or payment of excessive rents.
Private benefit occurs when there is a benefit to individuals outside of the organization. While inurement is strictly prohibited, private benefit may be permitted if the benefit is incidental, both qualitatively and qualitatively, and stems from furthering the organization’s tax-exempt purpose. . Private benefit can result from grants, awards, scholarships, or research that creates benefits for a particular business interest.
Taxes Excess Benefit Transactions:
Section 4958 imposes an excise tax on disqualified persons and organization managers who engage in excess benefit transactions. An excess benefit transaction occurs when a disqualified person or organization manager receives a benefit exceeding fair value. The initial tax is 25% of the excess benefit on each transaction. If the excess benefit transaction is not corrected within the taxable period, an additional 200% tax on the excess benefit is imposed. An additional 10% tax. limited to $20,000 per transaction, is imposed on any organization manager who knowingly participated in the excess benefit transaction.
IRS Examination Techniques
TG 3-8 outlines IRS methods for identifying violations. Some of these methods include reviewing Forms 1023 and 990, analyzing compensation, contracts, and fundraising agreements, and assessing insider status.
TG 3-27: Foundation Classification
TG 3-27 provides detailed guidance on miscellaneous public charity foundation classifications that are rarely encountered during the exemption application and examination processes. The guide defines classification rules for organizations receiving tax-exempt status under IRC Sections 509(a)(1) and 170(b)(1)(A)(iv),(v), (ix) which includes organizations for the benefit of state and municipal colleges and universities, governmental units, and agricultural research organizations. The guide also addresses organizations that test for public safety classified under Section 509(a)(4).
This guide provides step-by-step instructions for completing Form 1023, Application for Recognition of Exemption under Section 501(c)(3), and Form 8940, Request for Miscellaneous Determination.
TG 70: Charitable Trusts
TG 70 provides guidance on the classification, requirements, and tax obligations of non-exempt charitable trusts (NECTs)and split-interest trusts. Both NECTs and split-interest trusts are subject to certain excise taxes under Chapters 41 and 42 pursuant to Section 4947.
For any questions regarding the previously discussed Technical Guides, please contact Schneider Downs.
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