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Article Author:

IRS Exams of Trade Associations Planned

An IRS official recently stated that the IRS will be initiating 650 examinations of 501(c)(5) and 501(c)(6) organizations. The IRS official indicated that the exams would cover all 501(c)(6) organizations, but would be limited to only 501(c)(5) agricultural organizations. The IRS has not undertaken any systemic review of these types of organizations in more than a decade.

These remarks were made March 11, 2010 by Fred Kluss, IRS EO Examination Manager for Illinois, Indiana and Wisconsin at a meeting of the Exempt Organization Division of the Chicago Bar Association Federal Taxation Committee. 

Mr. Kluss indicated that the exams would focus on “all applicable requirements pertaining to 501(c)(5) or 501(c)(6).” Translation: almost anything is fair game. In addition, Mr. Kluss indicated that issues of specific interest included:

• Prohibited inurement – is the organization favoring benefits to insiders over benefits to the industry it supports?  Inurement in a (c)(6) often focuses upon egregious compensation or over-reliance on unrelated business activities.  An excessive amount of prohibited inurement can lead to a loss of exemption.
• Particular services provided to members or nonmember which do not benefit the common business interests of the trade association.  Many trade associations sell products to members and nonmembers, which benefit the recipient of the sale more than the common business interest of the organization.  Unfortunately, it is often very difficult to discern services which benefit individuals over services which promote or benefit common business interests. 
• Advertising and other exploited activities (such as on line job boards) – Mr. Kluss mentioned that the Service is analyzing cost allocation structures in the context of college and university audits.  We suspect that similar scrutiny would be applied in this context.
• Employment tax – Mr. Kluss highlighted a separate employment tax initiative of the Service with regard to tax exempts.  It would be reasonable to expect these issues to be scrutinized as well.

What to do?
Based on prior experience, we believe the IRS will give further information about its plans in the coming weeks and months. We will be providing additional information about this vital issue as it becomes available. We will also be available to help you understand your organization’s risk with regard to IRS scrutiny.

Please contact David Lowenthal at dlowenthal@blackmankallick.com or 312-980-2954 or your Blackman Kallick representative for additional information.
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.