Over time an organization, as well as related tax and case laws, can change significantly. These changes, although subtle on a year-by-year basis, can considerably alter the tax exposure of your exempt entity. A comprehensive tax “checkup” serves as a diagnostic tool to help identify tax exposure areas and planning strategies. A tax checkup provides a fresh perspective of your organization’s taxable position considering organizational changes, contractual relationships, and mission objectives and should be performed every 3-5 years.
So, what exactly is a tax checkup? A tax checkup is simply a review of your entity’s operations compared to its plan of operation as filed with the IRS and the latest IRS regulations. While the name may sound intimidating, tax checkups are vital to providing a safety net for your organization against significant penalties. Tax checkups can add to the success of your organization as they can lower your taxes and the cost of doing business, which could propel your entity into being more competitive in the marketplace.
The IRS has several initiatives related to tax exempt entities. Although these initiatives can be confusing at times, you can be prepared by requesting your CPA to determine potential federal income tax savings as well as to keep organizations informed as to areas of tax exposure. This can be accomplished from periodic tax checkups.
A comprehensive tax checkup includes a review of the corporate tax structure and the operations of your organization. To accomplish this, there are meetings and discussions with various members of management, a detailed review of your organization’s common transactions performed, and a thorough understanding of all the current programs and services provided to members and non-members is acquired. It also includes a review of the governing documents, licensing agreements, inter-company/program cost allocations, employee retirement benefits and executive compensation arrangements. By reviewing operations, organization structure, intercompany transactions, and state income tax returns, a tax checkup can determine if your organization is operating in the most tax efficient manner.
Considering the newly passed Wayfair Decision, the issue of being compliant with sales tax is very important. This decision has mandated that states are no longer bound by the concept of a physical presence to create nexus for sales tax. Instead, any state can enact laws that allow for the collection of sales tax from remote sellers. This adds a significant sales tax compliance burden for online businesses.
An important aspect of the tax checkup is a review of an exempt organization’s website to determine whether there are any federal and state tax implications. If your exempt organization accepts contributions from sponsors or advertising from other entities for its website as a way of raising revenue, the tax consequences are generally the same as if the transaction was not done via the internet.
The tax law has become increasingly more complex as more and more exempt organization’s look for ways to generate revenue and provide services to their members. A tax checkup will help you make sure that your organization has not only complied with the appropriate filing requirements but may help limit the potential tax liabilities facing more exempt organizations.
For more information, always consult a Certified Public Accountant. Submitted by Stacey Kolka, Senior Manager, Tax Services, Thomas Howell Ferguson P.A. CPAs. To ask Stacey a question, contact her here.