Charles Grippo

Do you manage or administer a 501 (3) ( c) performing arts organization?

Well, congratulations. You are at greater risk than ever before of being audited by the tax people.

Yes, those friendly folks at the Internal Revenue Service have announced that in 2007 they intend to dramatically increase their scrutiny of 501 (3) (c) organizations - i.e. tax exempt corporations, which includes most performing arts institutions.

To put this in perspective, in 2006, the IRS audited 60% more 501 (3) (c) organizations than it did in 2005. The percentage rate will increase in 2007 and subsequent years.

The reason is simple: the government is starved for money. (Okay, okay, we could spend hours debating why, whose fault, etc. But we don't have that kind of time.)

More to the point, the IRS claims there is an ever increasing gap between the amount of taxes it actually collects the amount it believes taxpayers owe the U.S. Treasury.

In the non profit area, the tax people allege they have been uncovering so many instances of abuse that more audits are warranted. That means many more 501 (3) (c) corporations will come under the IRS radar.

And, of course, you know that the IRS has the right to revoke its determination letter of your tax exempt status at any time. Even if the IRS granted your organization its tax exemption as far back as --- let's pick a date here, 1955 --- it can come back in 2007 and take away that exemption.

Horrors!

So what are the major areas the IRS is looking at?

1. Excessive compensation to directors (trustees) and officers. Compensation, including benefits and perks, must be reasonable in relation to the size of the organization, the officer's duties, and its gross income. Unfortunately, the IRS does not give a specific dollar amount of what it considers reasonable.

2. The organization has strayed too far from its original purpose. This often relates to unrelated trade or business activities. Suppose you operate both a gift shop on your theater's premises. If the income from the gift shop becomes too high in relation to your exempt purposes -- i.e. presenting a play --- the IRS could decide you have become a commercial retailer instead of a producer of non profit theater.

3. The organization engages in political activities, such as lobbying or supporting candidates for public office.

4. Violation of the Civil Rights laws.

5. Filing false tax returns.

One are deserving special mention are the employment taxes you withhold and pay for your employees. The IRS and the Social Security Adminstration jointly adminster the Combined Annual Wage Reporting Program (CAWR), by which they share the data you report on your Form 941, W-2, and W-3. These data must match up. If they do not, alarms go off.

This year, the IRS will initiate a pilot project to more closely monitor all this data and identify mismatching situations, which will trigger further investigations and possibly audits. Organizations which are found not to be in compliance with the law risk losing their tax exempt status -- not to mention, heavy fines and penalties, and, in criminal cases, even jail time for their officers.

Here's my best advice: get yourself outside accountants and initiate a full audit of your operations now. Find the money, if you have to. Or, perhaps you - or a member of your board -- can get accounting services donated. It's a heckuva lot better if you find and identify any problem areas now --- and correct them promptly --- than for the IRS to do it.