The notice sends shivers down your spine — the IRS has called or written to inform you that your organization has been selected for an audit. Now what? Understanding the nuts and bolts of IRS reviews can help reduce your risk of running into trouble.

Types of IRS reviews

The IRS conducts three types of reviews of not-for-profit's:

1. Field audit. If your initial contact letter schedules an agent to visit your premises, the IRS is conducting a field, or in-person, examination. Field audits are done at an organization’s location, the organization’s representative’s office or an area IRS office. It usually takes place where the not-for-profit’s books and records are located.

Field audits fall into two categories. A general program exam usually is conducted by a single IRS agent. A team examination program audit focuses on large, complex organizations and may involve a team of examiners.

2. Office /correspondence audit. If the initial letter asks you to deliver documents to an IRS office by mail, you are undergoing a correspondence audit. An agent generally conducts the audit using letters and phone calls to work with the organization’s officers or a representative.

But a correspondence audit can expand to become a field audit if the issues grow more complex or the not-for-profit doesn’t respond. Both correspondence and field audits can expand to include prior and subsequent tax years.

3. Nonaudit. The contact letter might indicate that the IRS is conducting a compliance check, which isn’t an audit but may include a checklist with specific questions. Or the compliance check may ask about information and forms that your not-for-profit is requred to file or maintain, such as Forms 990, W-2 or W-4.

Compliance checks are an accountability tool, like audits, but are simpler and less burdensome and don’t directly determine a tax liability for any particular period. They can, however, lead to an audit.

Selection of organizations

Not-For-Profit's are chosen for reviews based on several methods, including:

Form 990 plays a strong role in the selection process. In its FY 2012 Annual Report & FY 2013 Workplan, the IRS delivered this “bottom-line message” to not-for-profit's: “The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”

General process

An audit begins with the initial contact and continues until audit findings are discussed in a closing conference (in person or by phone) and a closing letter is issued. Both the conference and the letter will explain your appeal rights.

A compliance check also starts with the initial contact letter, and the IRS may contact your organization again if it needs more information or you don’t respond. The agency typically issues a closing letter at the end of a compliance check.

During a field audit, the agent will tour your office and interview an officer or representative. For a correspondence audit or compliance check, IRS personnel will review requested items submitted via mail and follow up as needed. They may request additional information.

Don’t go it alone

This can be serious business – worst-case audit findings include adjustments to tax liability or tax-exempt status. If you get a call or letter from the IRS, contact your CPA immediately.

Here are some ways Stockman Kast Ryan + CO can help:

Feel free to contact us with questions, clarifications, or assistance with any IRS dealings.

In a slow economy, many nonprofit leaders worry about having enough money to meet their organizations’ financial obligations each month. But those who effectively monitor their nonprofits’ cash flow can successfully predict when the money coming in will balance with the money going out, when they’ll have a surplus of cash, and when they’ll have a shortage. They can plan — and take actions — accordingly.

What’s cash flow management?

Cash flow management involves analyzing cash inflows and outflows based on the timing of receipts and payments. It’s more than taking your annual budget figures and dividing by 12 to come up with a static, monthly amount — this won’t give you an accurate snapshot of your cash flow.

Take an annual event. If it’s a holiday dinner, costs rise in November and December as you plan, and pay for, the event. Costs also may bump up noticeably in, say, January if you publish an annual membership directory then. In fact, costs can vary significantly from month to month for a variety of reasons — for example, as heating and cooling costs rise and fall or staffing needs change.

Where do you begin?

To begin managing your not-for-profit’s cash flow, create a cash flow report using a simple grid. Along the top, list all 12 months and label them either “actual” or “projected.” Going down the page, create rows for the following information:

Beginning balance. This line shows the amount of cash you had at the start of the month.

Cash coming in. Create line item entries for the largest income categories you’ll have for each specific month. Total all the individual entries to calculate the amount of incoming cash.

Cash going out. Make line item entries for the largest categories of expenses, combining as necessary. Total all individual entries to calculate the amount of outgoing cash.

Net inflow/outflow. Subtract your cash going out from your cash coming in to determine your net inflow or outflow.

Ending balance. Add the beginning balance to the net inflow/outflow number to get an idea of your cash position for each month.

Use historical data in addition to what’s on your calendar for the year ahead to help create your projections. Remember, you’re creating a time-based report, not simply averaging expenses and income over 12 months.

Be realistic about when cash will actually come in. If your big fundraiser is cash-based, you’ll have the money in the month of the event. But if you’re executing a fundraising campaign, donations can come in months after your initial mailings. Reflect that in your projections.

Other information to collect?

To complete your cash flow report, compile a total of your cash on hand and estimates of cash receipts and their due dates. You’ll also need to enter into the report payment amounts and schedules for personnel expenses (including salaries, wage increases, taxes and benefits).

Other data you’ll need includes consulting and professional services fees, occupancy charges (including rent and insurance), and office charges (including telephone service, equipment rental, service contracts and supplies). Last, be sure to include financing costs and all other expense categories (including travel, postage and printing).

Get help, if needed

We can help you devise your cash flow report and review maiden entries. We can walk you through the analysis process to help ensure that your reports are used to your nonprofit’s best advantage. Over time, the ability to successfully project and manage cash flows and positions — along with effectively managing the budget and having sufficient liquidity — will be key to your organization’s viability. 

Your status with the IRS as a tax-exempt “public charity” gives you significant benefits — paying no federal, state or local income taxes is the most obvious advantage. And the good news doesn’t stop there.

The designation also enables you to receive donations, may qualify you for special grants and government funding, and can entitle you to special rates for services, such as mail delivery. In short, the status better enables your organization to apply its financial resources toward its mission and goals than if it were a for-profit entity.

But keeping your 501(c)(3) status isn’t automatic. Here are some important dos and don’ts to follow if you want to retain the privilege:

The "Dos"

Do comply with reporting obligations. Your nonprofit is required to file some type of IRS Form 990 — Form 990, Form 990-EZ or Form 990-N, depending on the amount of your total annual receipts and total assets — each year. If you fail to do so for three years in a row, your tax-exempt status will be revoked.

If you’re required to file the full Form 990 or Form 990-EZ, be sure to annually complete Schedule A, Part I (“Reason for Public Charity Status”) to identify why you aren’t a private foundation. Check the box that coincides with the reason that you’re a public charity for the current tax year.

You also must file all required payroll tax returns for your employees and 1099 forms for independent contractors, and answer related questions about these workers on your Form 990.

Do maintain the required level of public support. As detailed on Schedule A to the 990, if your nonprofit is primarily supported by a government unit or the general public or is a community trust (Box 5, 7 or 8 on Schedule A, Part I), you’ll also need to pass the public support test on Part II of Schedule A. If your organization is exempt because it receives more than one-third of its support from contributions and activities related to its exempt function, as outlined in IRC Section 509(a)(2), you’ll need to pass the public support test on Part III of Schedule A each year.

Do pay employment taxes and properly withhold from employees’ paychecks. Even though your organization doesn’t pay income taxes, you must still pay applicable employment taxes, such as the employer portion of each employee’s Social Security and Medicare taxes. And you must withhold from your employees’ paychecks the employee portion of employment taxes, as well as federal, state and local income taxes where applicable — and remit the withheld amounts to the appropriate governmental agency.

Do use a formal process to approve compensation. The salaries and benefits you pay your executive director and “key employees” are available to the public on your Form 990 and have been identified as a primary focus of exempt organizations’ audits by the IRS. Even more important than the compensation total is the process you use to determine that the compensation is reasonable and comparable to amounts paid by organizations of similar size and activity. The IRS sees this review and approval as a responsibility of your board of directors or one of its committees.

The "Don'ts"

Don’t operate for the benefit of private interests. No part of a 501(c)(3) organization’s earnings or equity can benefit individuals, such as the organization’s founders, executives or board members — or their family members. Your nonprofit was granted its tax-exempt status to benefit the public, not private parties or interests.

Don’t generate excessive unrelated business income (UBI). UBI is income from a trade or business activity that is regularly carried on and is unrelated to your exempt mission. Although the Internal Revenue Code is silent as to how much is too much, excessive UBI has been interpreted as spending a “significant” amount of time on the unrelated activity.

For example, if an organization has more expenditures for the unrelated activity than program expenses, the IRS likely will consider terminating its exempt status. But courts have considered an organization spending even as little as 10% of its total efforts on a UBI activity to be too much.

Don’t pay more than market rates for goods and services. Ensure you’re using your organization’s resources wisely by getting at least three quotes before purchasing a significant asset or establishing a service contract or a standing order for supplies. If you ever decide to do business with related parties (board members, founders, executives or their businesses), the other quotes will support the “going rate” in your market and show you aren’t providing an excess benefit to the related party.

Should the IRS determine that you’ve provided excess benefits, your organization and its leaders will be subject to penalties as well as the possibility of losing the nonprofit’s exempt status.

Don’t engage in substantial lobbying or any political campaign activities. Two methods can determine whether lobbying activities are “substantial.” One considers the time spent by compensated employees and volunteers on lobbying activities. The other is the expenditure tests.

Your nonprofit can elect to use the latter option — called a 501(h) election — by filing Form 5768. (Churches are ineligible.) The 501(h) election sets a defined limit on the amount of resources an organization can use to influence legislation before losing its exempt status, based on a percentage of its total expenses.

Political campaign activities include making contributions to a political campaign fund or making public statements for or against a candidate (either written or verbal). Participating in any of these activities can result in the IRS either revoking your exempt status or imposing certain excise taxes on your organization.

3 significant developments in outreach technology

One of the top priorities for nonprofits is engaging with their supporters and building relationships. It’s no surprise, then, that interest is surging in technology that can help nonprofits do just that. How can your organization maximize the potential of current technology tools and avoid wasting time with passing fads? Let’s look at what’s working.

Going mobile

According to the Pew Internet and American Life Project, 58% of American adults had a smartphone as of January 2014, and 42% had a tablet computer (a dramatic jump from only 4% in September 2010). As of May 2013, Pew reports, 63% of adult cell phone owners used the Internet on their phones —  twice as many as four years earlier. And 34% of the cell Internet users said that they mostly use their phones to go online, as opposed to using a desktop or laptop computer.

With mobile Internet access poised to surpass that of conventional computers in the coming years, some nonprofits are wisely taking steps now to develop mobile websites and apps. Why do you need a mobile-specific website? Imagine a supporter who receives an e-mail call to action on his phone and immediately clicks through to your regular site, only to find that it’s difficult to read and use on his phone’s small screen. That’s a lost opportunity — one that will only multiply as users increasingly rely on phones for their online communications.

Mobile websites and apps provide your supporters with information at their fingertips and allow them to act, including donating, on the go. As with any type of online transaction, of course, it’s important to establish strong internal controls to protect users’ data and privacy and prevent the fraudulent misappropriation of funds.

Leveraging social networks

Mobile websites and apps also can help nonprofits leverage their supporters’ social networks. The past few years have taught many organizations the critical role that social networks can play in spreading their missions to wider audiences than ever and attracting new supporters and donors.

Some may have initially scoffed at the idea that Facebook or Twitter could provide real value. But few can argue with the power of social media at this point, particularly for nonprofits. It’s an indisputable fact that people are much more likely to engage with organizations endorsed by friends, families and trusted sources.

That’s one reason why peer-to-peer fundraising has taken off in recent years. Thanks to social media, it’s much easier for participants in your 5K race, cycling event or dance-a-thon to drum up financial support for their efforts. By providing social media tools as part of your registration materials, you empower your participants to personalize their pitches and meet or surpass their — and your — fundraising goals. Again, though, you’ll need to have proper internal controls in place, such as firewalls, encryption and other protections for credit card data.

Social media also allows nonprofits to easily and cost-effectively participate in back-and-forth, multiparty conversations, rather than just one-way communications. A single posting might elicit numerous enthusiastic responses that can snowball as the posting is passed along by readers with a click of a button.

Expanding Web presence

Engaging in social media doesn’t mean you can afford to neglect your existing website, though. Instead, savvy nonprofits are expanding their Web presence.

Your website visitors should find a simple, secure way to donate, as well as a range of compelling content that will bring them back again and again. Online videos, for example, offer effective, inexpensive opportunities to tell your organization’s story and mobilize viewers. Partnering with an experienced Web-design firm to improve your online presence can be an investment with results measuring far greater than the cost.

Sink or swim

The tools listed above are by no means the only technological advances that can pay off for your organization or enhance your outreach efforts. Nonprofits are also turning to cloud computing, social analytics and software that produce solid financial metrics. Such advances are no longer a luxury — they’re a matter of survival. If your organization has lagged behind, now is the time to jump into the water. 

How to treat the real gems of your organization

Has your nonprofit frozen wages or awarded minimum pay increases over the last few years while asking employees to take on new responsibilities? Are they being asked to contribute more to your benefit plan, or take a benefits cut?

Such organizational moves often are necessary during tough economic times. That said, don’t lose sight of the importance of your staff, from hiring and training them to rewarding them for their performance, and providing motivation to stay.

Recognize your greatest wealth

When asked to list their organization’s assets, nonprofit leaders are likely to name investments, facilities, real estate, cash and other tangible assets. Too often, personnel are left off the list.

But without a knowledgeable and canada goose black friday sale 2015  committed staff, you stand little chance of delivering program services or raising enough money to fund them. And when you consider the cost of hiring, training and mentoring staff, not to mention the losses your nonprofit incurs when an experienced employee leaves, it’s easy to see why you should assign a high value to your people.

Add to staff wisely

Finding and keeping good staff starts with smart hiring. Just as you wouldn’t buy a mutual fund without researching its performance and strategy, don’t hire staffers without thoroughly vetting them for potential rewards and risks.

Experience, education, canada goose black friday sale  skills and employer recommendations are merely a starting place. Good hiring requires employers and job candidates to honestly assess their respective objectives. Don’t hire someone simply because you’re desperate to fill an empty position. Shaky starts rarely lead to long-term success. Similarly, don’t court a candidate who seems likely to jump ship when a “better” offer comes along — no matter how impressive his or her resumé.

Instill “buy-in”

When a new employee comes aboard, ensure he or she receives comprehensive training — not only related to job responsibilities, but also about your not-for-profit’s culture and ethics. Staffers need to buy in to your mission and support the programs you’ve established.

Also ensure that employees understand your evaluation and compensation system — and feel like full participants. Often, they leave a job claiming their employment expectations weren’t met and the employers are left scratching their heads about what went wrong. Staffers must be able to voice perceived obstacles to their successful long-term employment without fear of reprisal. If you want to keep them, listen and try to find ways to help them succeed.

Be creative with nonmonetary rewards

Although financial compensation is generally the best way to reward and retain people, there are other ways you can let employees know you value them — without busting your budget. For example, consider tangible rewards other than money. You could write a personal “thank you” note and enclose a small gift card when a staff member achieves something special. Or you could reward that person with an extra vacation or personal day. Another idea: Offer the employee more flexible hours, such as earlier starting and leaving times or the option to telecommute.

And don’t forget the value of praise and recognition. Acknowledge employees for a job well done at staff meetings or in your nonprofit’s newsletter. Or invite “star” employees to be introduced at a board meeting, or to represent your nonprofit at an industry conference. All of these actions reflect your confidence in those individuals and indicate their importance to the organization.

Value them anyway

Your nonprofit may be unable to compensate employees quite as well as its for-profit counterparts. But, if your focus is on valuing and growing your assets — that is, your employees — all you need is a little creativity in order to reward them in many other ways.

The Financial Accounting Standards Board (FASB) has issued new guidance that permits private companies following Generally Accepted Accounting Principles (GAAP) to, in some circumstances, elect not to consolidate the financial reporting from variable interest entities (VIEs) that lease property to them. It may apply in situations where an owner of a private company is also an owner of a second business entity that leases property to the company.

The guidance, Accounting Standards Update (ASU) 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, is a consensus of the Private Company Council (PCC). It’s intended to improve private company financial reporting regarding consolidation of lessors.

Private company GAAP alternatives

The Financial Accounting Foundation, FASB’s parent organization, established the PCC in May 2012. Its purpose is to improve the process of setting accounting standards for private companies that prepare their financial statements in accordance with GAAP.

Among other things, the body was tasked with working with FASB to determine whether alternatives to existing GAAP standards can ease the burden on private companies of preparing GAAP-compliant financial statements while better addressing the needs of users of those financial statements. Earlier this year, FASB issued the first two private-company GAAP alternatives, ASU 2014-02 and ASU 2014-03, addressing goodwill and interest rate swaps, respectively. ASU 2014-07 is the third private company alternative that FASB has issued.

GAAP approach to VIEs

Under GAAP, a company must consolidate the financial reporting from an entity in which it has a controlling financial interest. Two models are typically used to determine whether a company has a controlling interest in an entity: the voting interest model or the VIE model.

Under the VIE model, a company is deemed to have a controlling financial interest in an entity when it has 1) the power to direct the activities that most significantly affect the entity’s economic performance, and 2) the obligation to absorb losses, or the right to receive benefits, of the entity that could potentially be significant to the entity. To determine whether the VIE model applies, a company must determine whether it has an explicit or implicit variable interest in the entity and whether that entity is a VIE.

An explicit variable interest stems from contractual, ownership or other financial interests in the entity that directly absorb or receive the variability of the entity. An implicit variable interest involves the absorbing or receiving of variability from the entity indirectly. The identification of such interests is a matter of judgment based on the relevant facts and circumstances.

A VIE generally is a corporation, partnership or any other legal structure that is used for business purposes and either doesn’t have equity investors with voting rights or has equity investors that don’t provide sufficient financial resources for the entity to support its activities.

Leasing scenario

The new guidance specifically applies to leasing arrangements. Private companies commonly lease facilities from separate lessor entities owned by one of the company’s owners. The lessor entity usually is established for tax, estate planning or legal liability purposes — not to structure off-balance sheet debt arrangements. Typically, the lessor entity’s only asset is the leased facility, and the lease is the only contractual relationship between the lessee company and the lessor entity.

Existing GAAP guidance requires the lessee company to determine whether it holds a variable interest in the lessor entity (for example, a guarantee of the lessor’s debt). If it does, and the lessor is a VIE, the lessee company must assess whether it holds a controlling financial interest in the lessor under the VIE model. If the entities are under common control, the lessee generally must consolidate the financial reporting from the lessor.

The PCC found that, despite the cost and complexity of applying the GAAP VIE guidance in such a case, most users of private company financial statements consider the consolidation of the lessors under common control irrelevant. These users tend to focus on the cash flows and tangible worth of the stand-alone lessee entity, not the cash flows and tangible worth of the consolidated group presented under GAAP.

Moreover, consolidation of the lessor distorts the lessee’s financial statements. As a result, users who receive consolidated financial statements often request a consolidating schedule that they can use to reverse the effects of consolidation.

New alternative for private companies

Under ASU 2014-07, a private company lessee can elect an alternative not to apply the GAAP VIE guidance to a lessor if:

  • The private company lessee and the lessor entity are under common control,
  • The private company has a leasing arrangement with the lessor, and
  • Substantially all of the activity between the private company and the lessor is related to the leasing activities (including supporting leasing activities, such as issuance of a guarantee or providing collateral on the obligations related to the leased asset) between those two companies.

In addition, if the private company explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, the principal amount of the obligation at inception can’t exceed the value of the asset leased by the private company from the lessor.

If a private company elects to apply the accounting alternative, it should apply the alternative to all current and future leasing arrangements satisfying the above conditions.

Electing the alternative would also free a private company from providing GAAP-compliant VIE disclosures about the lessor entity. The private company won’t be totally off the hook, though. It must disclose the following information:

  • The amount and key terms of liabilities (for example, debt, environmental liabilities and asset retirement obligations) recognized by the lessor entity that expose the private company to providing financial support to the entity, and
  • A qualitative description of circumstances not recognized in the lessor entity’s financial statements (for example, certain commitments or contingencies) that expose the private company to providing financial support to the entity.

These disclosures are required in combination with the other GAAP-required disclosures about the private company’s relationship with the lessor entity, such as those for guarantees, leases and related party transactions.

Effective date

A private company that elects the accounting alternative must apply it retrospectively to all periods presented on financial statements. The alternative will be effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted for any period for which the company hasn’t yet issued financial statements.

If you have questions regarding how this guidance affects the preparation of your financial statements, please give us a call. We’d be happy to answer your questions.

In light of Monday’s discovery of a major flaw in a key internet security system affecting two-thirds of websites on the web, we have checked our secure client sites and they have proven to remain secure and unaffected.

This means you may continue to use our Secure Email and Client Portal without fear of compromise through this recent threat.

Keeping your personal and financial information secure and confidential remains a top priority for us. Please contact us with any questions or concerns.

Business Owners – Did you know?

You may not be aware of some of the services local CPA firm, Stockman Kast Ryan and Company of Colorado Springs provides that could benefit you and your business. Here is just a partial list:

  • Business Valuation
  • Bookkeeping and QuickBooks consulting
  • Compilation, review and/or audit of financial statements
  • Internal Controls
  • Start-up entity selection
  • Cash-flow projections


The U.S. Department of the Treasury and the IRS have issued what is expected to be their final significant package of regulations implementing the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions (FFIs) — including foreign banks, brokers, insurance companies and investment funds — to disclose to the IRS certain information about their U.S.-owned accounts. The law is intended to combat offshore tax evasion.
Although the new regulations are targeted primarily at FFIs and U.S. financial institutions that deal with them, they demonstrate the heightened scrutiny the federal government is putting on foreign accounts and, in turn, the need for individual taxpayers holding such accounts to comply with their own reporting obligations.

Self-reporting requirements

FATCA requires certain U.S. taxpayers holding specified foreign financial assets with an aggregate value that exceeds $50,000 at the end of the tax year ($100,000 for joint filers) or with a total value of more than $75,000 at any time during the tax year ($150,000 for joint filers) to report certain information about those assets on Form 8938, “Statement of Specified Foreign Financial Assets,” along with their annual tax returns. The threshold is higher for those living outside the United States.
The term specified foreign financial assets is more broadly defined than many taxpayers realize, which may cause them to inadvertently understate the aggregate value of such assets for purposes of determining whether a filing obligation exists.
The following is a non-exhaustive list of foreign financial assets that may be subject to Form 8938 reporting:
  • Financial accounts maintained by a foreign financial institution
  • Foreign mutual funds, hedge funds, and private equity funds
  • Stock issued by a foreign corporation
  • A capital or profits interest in a foreign partnership
  • An interest in a foreign trust or foreign estate
  • A note, bond, or other form of indebtedness issued by a foreign person
  • Foreign-issued life insurance or annuity contract with cash-value
  • Foreign pension or deferred compensation plans
Taxpayers that have a Form 8938 filing obligation and fail to file the form by the extended due date may be subject to a penalty of $10,000. Additionally, if a taxpayer underpays tax as a result of a transaction involving a specified foreign financial asset that was not properly disclosed, a penalty equal to 40% of such underpayment may also be imposed.
The IRS has indicated that it will issue future regulations requiring a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the total asset value exceeds the appropriate reporting threshold. Until that time, only individuals must file Form 8938.
Both individuals and entities, however, may need to file Financial Crimes Enforcement Network (FinCEN) Form 114, “Report of Foreign Bank and Financial Accounts (FBAR),” which supersedes the former Form TD F 90-22.1. “U.S. persons” must file FBARs with the Department of Treasury by June 30 of the following year for each year that:
  • The person had a financial interest in or signature authority over at least one financial account located outside of the United States, and
  • The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
The term “U.S. person” includes U.S. citizens, residents, entities (including, but not limited to, corporations, partnerships and limited liability companies), and trusts or estates. A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income.
Note that the FBAR must be received by the U.S. Department of the Treasury by June 30th of the year immediately following the year being reported. The June 30th deadline may not be extended. A person subject to FBAR reporting who fails to timely file the form may be subject to a civil penalty of $10,000.  If the failure to report an account or an account identifying number is willful, the civil penalty equal to the greater of $100,000 or 50% of the balance of the account may be imposed.
The Form 8938 and FBAR filings often contain seemingly duplicative information, but the filing of one does not relieve a person of an obligation to complete and file the other. (See the IRS’ Comparison of Form 8938 and FBAR Requirements here.) Additionally, information that is reported on a Form 8938 may also be reported elsewhere in the same annual tax return. In some instances, specified foreign financial assets reported on another form included with the annual tax return (e.g., Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”) may be excepted from Form 8938 reporting.
As information about foreign financial assets increasingly makes its way to the IRS from FFIs, the odds of falling in the agency’s crosshairs by neglecting to file Form 8938 or FBAR will become greater, as will the likelihood of incurring a costly penalty.

Protect yourself

If you hold offshore financial accounts, it’s essential that you properly report the required information to the IRS. This latest round of regulations, along with the coming effective date for the withholding requirements, signals an ever tighter focus on foreign assets on the horizon. To ensure you’re in compliance, or if you have questions regarding FATCA regulations or reporting requirements, please contact us at (719) 630-1186 or through our Secure Email.
The IRS has released final regulations implementing the Affordable Care Act’s (ACA’s) information reporting provision for large employers. The new rules — which begin to phase in in 2015 — significantly streamline the required reporting and should make it easier for covered employers to comply with these ACA requirements.

ACA’s reporting requirements

The ACA enacted Section 6055 of the Internal Revenue Code (IRC), which requires health care insurers, including self-insured employers, to report to the IRS about the type and period of coverage provided and to furnish this information to covered employees in statements. The information must be reported by Jan. 31 (March 31, if filed electronically) of the year following the calendar year in which the coverage is provided. Employee statements must be provided by Jan. 31.
The ACA also enacted IRC Sec. 6056, which requires applicable large employers (generally those with at least 50 full-time employees, including full-time equivalent employees) to report to the IRS information about what health care coverage, if any, they offered to full-time employees. Employers must report this information no later than Feb. 28 (March 31, if filed electronically) of the year following the calendar year to which the Sec. 6056 reporting relates.
The IRS will use this information to determine whether a penalty will be assessed under the ACA’s employer shared-responsibility (also known as “play or pay”) provision because a large employer either 1) didn’t offer “minimum essential” health care coverage to its full-time employees (and their dependents), or 2) the coverage offered wasn’t “affordable” or didn’t provide “minimum value” — and at least one full-time employee received a premium tax credit for purchasing coverage on an insurance exchange.
Sec. 6056 also requires large employers to furnish related statements to employees that the employees can use to determine whether, for each month of the calendar year, they can claim a premium tax credit. The statements must be provided by Jan. 31 of the calendar year following the calendar year to which the Sec. 6056 reporting relates.

New reporting form

The final regs provide for a single, combined form (Form 1095-C) for the information reporting to the IRS. Employers that have fewer than 50 full-time employees (or the equivalent), and thus are exempt from the employer shared-responsibility provision, also are exempt from the Sec. 6056 employer reporting provision. (If these “small” employers are self-insured, they will, however, still be subject to Sec. 6055 reporting. This will be done on a different form.)
Form 1095-C will have two sections. The top half will collect the information needed for Sec. 6056 reporting, and the bottom half will collect the information for Sec. 6055. Self-insured employers subject to the shared-responsibility provision will complete both parts of the form. Employers that are subject to the shared-responsibility provision but don’t self-insure will complete only the top section. Electronic filing is required for employers filing 250 or more reports.
The ACA requires the reporting of some information that isn’t relevant to individual taxpayers or the IRS for purposes of administering the premium tax credit and the play-or-pay penalty. The final rules omit these requirements, as well as requirements for providing certain information that is already provided through other means. The omitted information includes:
  • The length of any waiting periods for coverage,
  • The employer’s share of the total allowed cost of benefits provided under the plan,
  • The monthly premium for the lowest-cost option in each of the enrollment categories (for example, self-only coverage or family coverage) under the plan, and
  • The reporting of months, if any, during which any of the employee’s dependents were covered under the plan. (The rules require reporting only regarding whether the employee was covered under a plan.)
These omissions are intended to minimize the cost and administrative steps associated with the reporting requirements.

The simplified alternative

The final rules also include a simplified reporting option for employers that provide a “qualifying offer” to any of their full-time employees. A “qualifying offer” is an offer of minimum-value coverage that provides employee-only coverage at a cost to the employee of no more than 9.5% of the federal poverty level (about $1,100 in 2015), combined with an offer of coverage for the employee’s dependents.
If an employer provides a qualifying offer, it need only report the names, addresses and taxpayer identification numbers of those employees who receive qualifying offers for all 12 months of the year, as well as the fact that they received a full-year qualifying offer. The employer also must provide the employees a copy of that simplified report or a standard statement indicating that the employees received a full-year qualifying offer. For employees who receive a qualifying offer for fewer than all 12 months of the year, employers can report to the IRS and employees for each of those months by simply entering a code indicating that the offer was made.
In additional welcome news for employers, the final rules provide a phase-in for the simplified option. Employers that certify that they’ve made a qualifying offer to at least 95% of their full-time employees (plus an offer to their dependents) can use an even simpler alternative reporting method for 2015. Specifically, they can use the simplified reporting method for their entire workforce — including any employees who don’t receive a qualifying offer for the full year. Such employers will provide employees with standard statements relating to their possible eligibility for premium tax credits.
The final regulations also give employers the option to avoid identifying in the report which of its employees are full-time and instead include in the report only those employees who may be full-time. This option, however, is available only to employers that certify that they offered affordable, minimum-value coverage to at least 98% of the employees on whom they’re reporting.

Transitional relief

Although the final regulations apply to calendar years beginning with 2015, they also provide some short-term relief from penalties for employers that can show they have made good-faith efforts to comply with the information reporting requirements. Please let us know if you have any questions about information reporting compliance or other questions related to the ACA.