Patent Application
20100010849
The present invention relates generally to methods and systems of preparing tax forms filed by individuals, corporations, and non-profit organizations to comply with the applicable tax laws. More particularly, the invention relates to a method and system for complying with tax laws as well as a method and system for providing a reasoned analysis of that compliance and risk assessment.
The U.S. government through the Internal Revenue Service requires an exempt organization to annually file an information report (Form 990). The Internal Revenue Service has made a significant revision to Form 990, entitled Return of Organization Exempt from Income Tax, a copy of which can be found in Appendix A, which is herein incorporated by reference in its entirety. This revision is far-reaching and has been made for the first time since 1979 in order to keep pace with changes in the law and with the increasing size, diversity, and complexity of the exempt sector. Form 990 was revised in part because it failed to meet the Internal Revenue Service's tax compliant interests or the transparency and accountability needs of the states, the public and local communities served by a non-profit organization. Because the Form 990 has been significantly revised, the amount of information necessary to be collected to complete the form has also been greatly increased. In addition, not only has the amount of information required to fill out the form been increased, but the scope and tenor of the type of information has also changed.
When considering a tax exempt corporation, there are two key enterprise risks to consider. The first key enterprise risk is related to public relations. Form 990 is the most comprehensive source of information regarding a tax exempt organization available to the general public. Stake holders in the enterprise as well as individuals and the media have access to an organization's information through a number of publicly available sources of information such as Guidestar of Williamsburg, Va. The second key enterprise risk for an exempt organization is related to the maintenance of an enterprise's exempt status. IRS Form 990 is no longer just an accounting report. It also includes a report of activities which the federal government considers to be important for maintaining tax exempt status. The IRS has requested, through the completed form, information regarding governance structure, enterprise policies and practices, and operations of the enterprise. The IRS and state and local taxing authorities can use the IRS Form 990 to assess compliance with the law and adherence to the missions and practices which have been adopted by the exempt organization.
The present invention relates to a system and method for assessing risks for a tax exempt organization based upon information submitted for preparation of Form 990. An analysis of the information submitted in response to requests for information and to questions of Form 990 can be used to determine key areas of risk. The information can be used to enable an enterprise to effectively manage its organization not only from a public relations viewpoint but as well as the maintenance of tax exempt status. The requests for information, questions and the provided information from Form 990 are grouped into a number of key areas of risk.
The key areas of risks which have been identified as components or categories are demographics, governance, compensation, conflicts of interest, financial analysis, compliance with federal, state, and local requirements, and activities. A weighting table includes weighted values for information and for possible answers provided by the user in response to questions grouped according to each of the key areas or components. The system assigns a weighted value to the answers and information provided by the user to establish a risk factor which can be used in discussions with the tax exempt entity to determine which potential areas of risk exist. The answers and information are also used to complete the Form 990 for reporting to the IRS as well as for determining any specific tax liability.
In accordance with one aspect of the present invention, there is provided a method of determining a risk for a tax exempt entity based upon information provided in response to questions associated with a tax form having a plurality of schedules. The method includes defining a plurality of categories of questions associated with the tax form and schedules, organizing the information into the plurality of defined categories, assigning a risk factor to information to be provided in response to each of the questions and determining a risk range for each the plurality of categories to provide an indication of risk based on the assigned risk factors.
Pursuant to another aspect of the present invention there is provided a method of determining an enterprise risk for a tax exempt entity based upon responses required to complete an electronic tax form having multiple schedules, each schedule having a request for information. The method includes organizing the requests for information into a plurality of categories, receiving responses input to an electronic questionnaire, assigning a risk factor for each of the received responses, creating a risk range for each the plurality of categories to provide an indication of risk, computing a risk score for each of the plurality of categories using the assigned risk factors, and comparing the computed risk score to the risk range.
Pursuant to still another aspect of the present invention, there is provided a tax risk assessment system for use with a computer network and for assessing a tax risk for a tax exempt entity. The system includes a computer server, coupled to the computer network. The computer server includes a software application to assess a tax risk based on information provided to complete a tax form filed by non-profit organizations, the tax form including a plurality of schedules. A computing device can be coupled to the computer network. The computing device includes a user interface to review the software application and to provide information to the software application, wherein the software application includes a program that when executed generates information to complete the tax form, a diagnostic report, and a risk assessment report.
Additional features and advantages of the invention will become apparent to those skilled in the art upon consideration of the following detailed description of the illustrated embodiments.
Aspects of the present invention are more particularly described below with reference to the following figures which illustrate exemplary embodiments of the present invention.
The embodiments of the present invention described below are not intended to be exhaustive or to limit the invention to the precise forms disclosed in the following detailed description. Rather the embodiments are chosen and described so that others skilled in the art may appreciate and understand the principals and practices of the present invention.
The risks associated with the key components can change depending on the organization's level of compliance with each component. Each of the key components has been identified based on an analysis of the type of information required to complete Form 990 and an understanding of the effect such responses can have with the Internal Revenue Service and the public. The compensation component 16 can have the biggest potential for creating an IRS problem or an adverse public reaction. For instance certain questions which can be relevant include: 1) Does an organization have compensation policies and is the organization in compliance with them?; 2) Do the compensation policies include not only base compensation, but travel and expense reimbursements, and other compensation as well?; 3) What perks are being offered?; 4) What is the approval process?; and 5) What information was used to determine compensation?.
The number of individuals for which compensation is being disclosed has been greatly expanded under the revised Form 990. For instance, the form now asks questions such as: 1) What is the number of individuals making more than $100,000?; 2) What is the number of independent contractors vs. employees and how does this relate to the calculation of FICA tax?; 3) What is the amount of donor dollars going to pay “excessive compensation?; (This amount is based on the reader's definition of “excessive”) and 4) Certain Public relations issues, such as: What's the officer to average employee salary?
For the conflicts of interest component 20, the Form 990 now requires information related to any relationship between and amongst board members as well as an “interested person” that can have a conflict. Vendor relationships with board members and arms-length transactions are also requested.
As for the compliance with the law component, the Form 990 requires information related to federal law, state tax law and international tax law. In particular, information related to federal law includes: 1) Employment taxes—analysis of independent contractors vs. employees; 2)Tax exempt bonds—determination of private use and compliance with arbitrage calculation; 3)Donor-advised fund compliance; 4)Alternative investments—compliance with disclosure requirements including Form 8865, Form 926, Form 8621, and Form 8865; 5)Nonqualified retirement plan—compliance with 409A; 6) Tax-sheltered annuity plans—compliance with 403(b); 7)Proper entity classification; and 8) Whether exempt status can be jeopardized by conducting prohibited activities.
For state tax law compliance issues, the required responses to Form 990 include state registrations, sales and use tax compliance, and unclaimed property compliance.
For international tax law compliance, the required responses include foreign activities—permanent establishment in foreign jurisdictions, foreign grants—compliance with the Patriot Act, and nonresident aliens.
For the governance component 14, the required responses can include whether the organization includes an active and engaged board and if a problem occurs, whether there is an oversight structure that would be able to self-identify the problem and correct it prior to any IRS involvement.
The financial analysis component 18 can use audited information to determine whether such information might trigger a review by the IRS or signal potential problems with public relations. Some of the information which can trigger a review or signal potential problems includes: 1) Revenue diversification—How is the organization making their money? Is it consistent with the exempt purpose? Is there too much investment or unrelated business income?; 2) Statement of functional expenses—Is a substantial portion of the organization's budget being spent to promote the mission of the organization? How much money is being spent to raise a dollar? How much management/general to overall budget? Salaries?; 3) Public support test for public charities—Is the entity still in compliance with the entity type?; 4) Are there significant changes in program services?; and 5) Review of particular expense line items for excess benefit transactions.
The activities component 24 can be used to review a variety of the organization's activities which are now required as responses to Form 990. Such activities can include: 1) Are the political/lobbying activities appropriate for the entity type?; 2) Are there unrelated business income activities? How much income? Is the income calculated correctly? Are there expense allocations to unrelated business activities?; 3) What are the fundraising activities and are the solicitations appropriate? Are the compensation arrangements appropriate for the paid fundraisers? 4) Are any special events making money? Are the fundraising activities considered to be “gaming” activities?; 5) Is the value of charitable care and community benefit (for hospitals only) commensurate with the value of an organizations exempt status?; 6) Are the grant—making activities in both the U.S. and in foreign countries in compliance?; and 7) What is the organization doing with respect to foreign activity including any relationships with Expats/Inpats/Nonresident aliens. Is the organization in compliance with foreign law and treaties with U.S.?.
The present invention includes a software based system that runs on a computer and preferably runs over a network, allowing the users of the system, administrators, and other designated individuals or groups located remotely from one another to interface through a network computer system. The present invention includes a web based application which presents a variety of user interface screens as would be understood by one skilled in the art. The present invention can be run either remotely or locally. A remote embodiment could include running the present invention as a network application through a browser interface on a local computer with the software being installed on a remote system. A local embodiment could include running the present inventive system as a local application installed on a local computer in the user's office or company or building.
Because the present invention can be embodied on a network based system, the various components 14, 16, 18, 20, 22, and 24 can be assigned by the user at step 34 to a responsible individual or group for review and completion, if necessary. For example, legal counsel can handle the governance component 14 and the conflicts component 20. A Controller can handle the financial components 18. Each of the individuals handling the various components can access the information through their personal work station and review the information contained within each component. Each of these components includes a predetermined series of tasks which the user has identified. The user can also determine whether or not each of the tasks within the various components has been completed. Once the user has designated the individuals at step 34, the user can enter the system at a later time to determine whether each review has been completed at step 36. If step 36 has not been completed by each of the assigned individuals or group, the user waits until the responsible individuals or groups have completed their review. Once each review of each component has been completed, the user distributes a conflict of interest questionnaire to interested parties at step 38. The conflict of interest questionnaire can be found in Appendix B which is part of a diagnostic report and which is incorporated herein by reference in its entirety. An interested party includes either an individual associated with the entity, an entity, or both that is a (1) current officer, director or key employee; (2) former officer, director or key employee depending on current compensation arrangements; and (3) the top five paid individuals outside of those groups listed in 1 and 2.
After completion of the conflict of interest questionnaire, a review is made at step 40 of the completed question set, the completed components and the conflict of interest questionnaire. After the review, a diagnostic report (See Appendix B) as well as an example of a risk assessment report (See Appendix C, herein incorporated by reference in its entirety) is generated. The diagnostic report of Appendix B illustrates the conflicts of interest portion of a complete diagnostic report. The complete diagnostic report can include a section for each of the key components and includes a listing of observations based on the responses given to the questionnaire. The user typically does not have access to the diagnostic report even though the user has facilitated the process of filling out the questionnaire for the completion of Form 990. Designated personnel within the company using their intimate knowledge of the client, access the diagnostics and make certain that the information provided by the user has been accurately presented.
Observations included in the diagnostic report are made in response to information received from the client. These observations can indicate that either the organization may be considered to be out of compliance with the law or that the presentation of its information will create an adverse public reaction. Some observations are generated as a result of a survey thread which is presented in the questionnaire. Other observations are formula-driven and based on the information received. Such formula driven observations can include 1) percentage of fundraising expenses to charitable contributions raised, 2) percentage of budget spent on management and general, 3) percentage of investment income or unrelated business income to the total revenue generated.
The following Table 1 illustrates a number of examples of observations and how those observations can relate to each of the six key components.
Once the assessment of diagnostics and the review of information has been made, a designated individual or group can prepare a risk assessment report, an example of which can be found in Appendix C, which is herein incorporated by reference in its entirety.
After step 40 has been completed, the applicable data is entered by the system into the tax form, which in this case is Form 990. Entry of data in the tax form can be accomplished by a data mapping system as is understood by those skilled in the art which can be used to populate the various fields within the tax form. At step 44, the tax form and risk assessment report are generated and then reviewed with the client. Once finalized and approved by the client and the reviewer, the tax form is filed at step 46. Upon filing of the tax form 46 the process has been completed at step 48 for that particular tax year and that particular organization. Later revisions are however possible as would be understood by one skilled in the art.
In
For instance, if the organization type is determined to be a 501(c)(1) organization at step 64, then that information is entered into the system at step 68. If the answer is no, then at that point the question is asked whether or not the organization is a 501(c)(2) type of organization at step 70. If the information is yes, then that information is entered at step 72. If the organization type is neither the 501(c)(1) or the 501(c)(2) type of organization, then the question is asked at step 74 whether or not the organization is a 501(c)(3) public organization. If the answer is yes, then a number of questions are asked to the user which appear in a column 76 illustrated in a central portion of
Each of these questions presented to a user are labeled as questions 78, 80, 82, 84, 88, 90, 92, 94, 96, 98, and 100. These questions will not be repeated in this description but can be seen in
Returning to
Once the part 1 questions summary has been completed at step 170 of
As illustrated in
The form 200 also can include a column indicating which of the schedules includes a certain level of risk. For instance, if a schedule is indicated as including a risk, a flag can be set by the application program to indicate a risk exists. This flag can be used to create an indicator, such as a checkmark 202, to indicate to the reviewer and entity a risk exists.
It has been found that each of the schedules and core information includes data which can be organized according to components. Consequently, the schedules, parts, information requests, and questions have each been categorized according to the component to which that particular information applies. By categorizing this information under the various components, it has been found that an accurate analysis of the entity can be made providing the risks associated with the particular components. An example of the information used to create the conflicts of interest component can be found in Appendix B.
Returning to
Once the risk analysis and presentation step 184 of
To prepare the diagnostic report and risk assessment report of step 40 of
Each of the questions as previously described which has been organized within one of the six components as well as the demographic component has also been assigned a risk number from 1, 2, 3. One example of a portion of the diagnostic report which illustrates how the questions can be organized and selected from different sections of the Form 990 for inclusion within a single component can be seen in Appendix B. Appendix B includes the question set used for the conflicts of interest component 20 of the diagnostic report. As can be seen, a few questions from page 6, Part VI, Sections A and B are included. Responses to questions are indicted in the “Response Set” column. The requirement of an observation is indicated in the “Observation” column and the risk score assigned to the question is indicated in the “Weighting Table” column. The Conflicts of Interest questionnaire includes questions based on the information requested in Schedule L.
As illustrated in
The server 214 includes the software application 222 of the present invention and as previously described. The software application 222 resides on the server 214 as would be understood by one skilled in the art. The application 214 can be accessed through one or more user interfaces 224, 226, and 228 located respectively on each of the computing devices 216, 218, and 220 as would be understood by one skilled in the art. A user located at one of the computing devices can access the application. The application 222 can be coupled to the electronic forms which include the Form 990 230, the diagnostic report 232, the risk assessment report 234, and the conflicts of interest questionnaire 236.
While exemplary embodiments incorporating the principles of the present teachings have been disclosed hereinabove, the present teachings are not limited to the disclosed embodiments. For instance, the present invention is not limited to six components and fewer or greater components are within the scope of the present invention. Instead, this application is intended to cover any variations, uses, or adaptations of the invention using its general principles. Further, this application is intended to cover such departures from the present disclosure as come within known or customary practice in the art to which this invention pertains.
