Many tax-exempt entities participate in the global economy by engaging in charitable or other exempt activities overseas and/or making foreign financial investments. These activities have drawn attention from the IRS and other federal agencies as they examine the flow of tax-exempt funds around the world.
FOREIGN BANK ACCOUNTS
The first step tax-exempt organizations may take toward establishing an international presence is opening a bank account or other financial account overseas. This may trigger reporting to the Treasury Department and the IRS, including reporting indirect ownership of a foreign bank account.
Any U.S. person (including a tax-exempt organization) that has a financial interest in or signature authority over foreign financial accounts with an aggregate value that exceeds $10,000 at any time during the calendar year must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Tax-exempt organizations that file Form 990, Return of Organization Exempt From Income Tax, must report in Part V of that form whether they had an interest in or signature or other authority over a foreign financial account. The FY 2012 Work Plan for the IRS Exempt Organizations Division (EO) indicates that EO will be looking at organizations that report ownership of foreign bank accounts to determine whether the organization complies with exempt purpose, documentation, and filing requirements.
Tax-exempt organizations may engage in a variety of foreign activities, including grant-making; using agents in a foreign jurisdiction; sending employees abroad; or establishing a foreign branch. EO has used a sequential approach in reviewing the foreign activities of tax-exempt organizations: gathering additional information, increasing education and outreach, and using newly reported information in its compliance activities.
Beginning with the 2008 tax year, Form 990 requested new information about a tax-exempt organization’s foreign activities on Schedule F, Statement of Activities Outside the United States. Schedule F enables the IRS to develop a more complete picture of a tax-exempt organization’s foreign activities and investments.
The IRS believes that tax-exempt organizations have a duty to exercise reasonable care to ensure that foreign assets and expenditures are used for exempt purposes. EO stated in its FY 2012 Work Plan that it will be looking at whether an organization has maintained proper control over funds that have left the United States and whether foreign operations or grant-making further the organization’s exempt purposes.
As IRS-wide initiatives have evolved over the past few years, so has foreign investment reporting on Form 990, Schedule F. Broader IRS enforcement initiatives related to foreign investments may affect tax-exempt organizations. Beginning in tax year 2012, the IRS will require the use of Unique Reference Identification (URI) numbers for Forms 5471, 8858, and 8865. These forms collect information on a U.S. taxpayer’s interest in foreign corporations, disregarded entities, and partnerships, respectively. The URI allows the IRS to identify more easily a taxpayer’s investments in foreign entities and to compare investment activity from year to year.
For a detailed discussion of the issues in this area, see “Increased Focus on International Activities of Tax-Exempt Organizations,” by Gretchen Kurhajetz, CPA, and Eugenia Richardson in the July 2012 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Tax Adviser is the AICPA’s monthly journal of tax
planning, trends, and techniques. AICPA members can subscribe to
The Tax Adviser for a discounted price of $85 per year. Tax
Section members can subscribe for a discounted price of $30 per year.
Call 800-513-3037 or email firstname.lastname@example.org for a
subscription to the magazine or to become a member of the Tax Section.