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Conference Speakers Discuss How to Navigate the Changing Landscape of Exempt Organizations Taxation

By:
Emma Slack-Jorgensen
Published Date:
Jan 21, 2025

tax-exempt

The exempt tax update session at the  Foundation for Accounting Education’s 47th Annual Nonprofit Conference on Jan. 16 provided a comprehensive overview of evolving tax regulations and enforcement actions affecting exempt organizations.

The speakers Garrett Higgins and Eva Mruk, both partners at PKF O'Connor Davies, highlighted proposed legislation, scrutiny of nonprofits and compliance challenges, offering critical insights for organizations navigating this complex landscape. 

The panel spoke about the various kinds of tax-exempt organizations and the regulatory changes affecting them, particularly those related to the IRS.  The panelists underscored the need for exempt organizations to proactively address compliance risks. For instance, Higgins highlighted data-driven IRS audits and new guidance on private foundations’ governing instruments. 

“The IRS is using data-driven approaches to identify non-compliance, so it’s critical for organizations to ensure their filings are complete and accurate,” he noted. 

From proposed regulations to heightened audits, the panelists highlighted how the next few years are likely to bring substantial changes for exempt organizations.

A major focus was the scrutiny on the upcoming changes to donor-advised funds (DAFs) and private foundations. This proposal aims to ensure that funds are actively used for public benefit. While this is still under consideration, the proposal provides insight into potential future legislative priorities, especially considering the individuals behind these bills and the incoming administration.

Higgins explained how concerns over the “amassing of wealth” at these entities have led to proposed legislation like the Accelerated Charitable Efforts (ACE) Act. He noted, “The ACE Act…proposed to create two different types of donor-advised funds: one would be qualified, which must distribute assets within 15 years, and non-qualified, where deductions are only granted if and when the donor advisor passes out the funds.”

Additional requirements proposed in the ACE Act include detailed reporting on distributions and the percentage of assets distributed by donor-advised fund sponsors. The Act also addresses private foundations, proposing stricter limits on satisfying distributable amounts. For example:

• Foundations must pay out at least 5% annually, but payments to family members or their travel expenses would no longer count toward this requirement.

• Foundations controlled by a single donor may face higher excise taxes.

Additional proposed changes for private foundations include stricter limits on payouts, prohibitions on family travel expense reimbursements and increased excise taxes for donor-controlled foundations. These changes aim to ensure charitable funds directed toward public benefit rather than accumulation. 

Another topic is the intensified scrutiny on nonprofit hospitals from the IRS. In 2024, the IRS began auditing 35 tax-exempt hospitals to assess compliance with 501(c)(3) and 501(r) standards. Key areas of focus include financial assistance policies and community benefit standards. Higgins shared that lawmakers like Massachusetts Democrat Sen. Elizabeth Warren have raised concerns about hospital reporting unreimbursed medical bills as community benefits. He stated, “The IRS examinations will likely scrutinize whether hospitals are making their financial assistance policies easily accessible and whether they are consistently applying them.”

The potential implications for non-compliance are severe, ranging form penalties and repetitional damage to the loss of tax-exempt status. Higgins encouraged hospitals to review their financial assistance programs and community benefit reporting to ensure compliance. 

The panel also looked at legislation targeting university endowments, which has gained traction. Proposed bills include the Wolk Endowment Security Tax Act, which imposes a 6% excise tax on large endowments, and the Protecting Endowments from Our Adversaries Act, which restricts investments in sanctioned countries. 

“Here’s the catch, target universities with large endowments may support progressive initiatives. And that’s what it boils down to. They’re thinking these larger endowments are there in perpetuity. So the intent of those assets has changed,” Higgins noted. 

Mruk also discussed increased oversight on political organizations, particularly 501(c)(3) and 501(c)(4) groups. She emphasized the need for clear boundaries between charitable and political activities.  

“We’re going to see different targets here. When it comes to the scrutiny, it’s the 501(c)(3) organizations. The concern there is that these activist groups are lowering the lines between charitable work and political work, violating the limitations of a tax exempt entity. The IRS has been criticized for targeting conservative groups in the past. The second target is the 501(c)(4) groups, the social welfare type organizations. The concern there is that some political organizations are operating in disguise of a social welfare organization,” Mruk explained. 

Based on Mruk’s comments, 501(c)(3) organizations must avoid crossing the line into political work, while 501(c)(4) groups cannot allow political activities to exceed 51% of their operations.