by Brian Mahany
According to an Internal Revenue Service report released last month, there are 1.8 million tax exempt organizations in the United States that collectively control well over $3 trillion in assets. In recent years, the IRS has increased its scrutiny of the non-profit center. The Criminal Investigation Division (IRS CID) is now jumping into the fray as well.
Earlier this year, the Treasury Inspector General, in response to a Congressional inquiry about tax exempts engaging in political activity, examined the Service’s handling of nonprofit fraud referrals. The Service acknowledged that its criminal investigations in the nonprofit center have lagged in recent years. Apparently, that is about to change. Criminal investigations are expected to increase corresponding to the Service’s overall strategy of more audits of the nonprofit industry.
According to IRS data, hospitals and non-profit colleges are particularly being scrutinized. Anecdotally, non-profits with unrelated business income and large executive compensation packages seem to be high up on the Service’s radar. Locally churches are also being scrutinized. The author is aware of a hospital in some hot water over a parking ramp that serves more as a profit center than a convenience for staff and visitors. Ditto for the attached office building it operates for physician practices.
What does this mean? Practitioners have the opportunity to provide a meaningful service to their nonprofit clients. For years, this one industry seemed to get a little extra leeway from Uncle Sam and the tax collector. No more.
CPAs should pay particular attention to smaller nonprofits in which the executives take home much of the money. Nonprofits that have ancillary nonbusiness activities and those that engage in political speech must also be carefully scrutinized.
The recent decision to have more involvement by IRS CID makes the case even more compelling for a thorough review of a client’s operation. Although the risk of criminal prosecution is still quite low, according to the TIGTA report, those that were successfully prosecuted received an average prison sentence of 4 years, 3 months. Clearly the courts are not happy with officers and directors of nonprofits that abuse their special tax status.
Mahany & Ertl is a boutique law practice concentrating in tax representation, white collar criminal cases including tax evasion, asset (fraud) recovery and select civil litigation. We are a national practice located in Milwaukee, Wisconsin. Brian Mahany and Christopher Ertl have long partnered with the WICPA to assist accountants with a variety of tax matters. Principal Brian Mahany can be reached directly at (414) 704-6731 or by email at