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From: "William L. Thomson Jr." <wlt@...>
Subject: Re: Tax return and accounting discrepancies
Date: Fri, 25 Mar 2011 22:14:52 -0400
On Fri, 2011-03-25 at 21:56 -0400, Rich Freeman wrote:
>
> So, I would definitely consult with professionals before doing
> anything,

It can't hurt, other than any costs. Also it helps to pass on liability
if they are the ones signing their name to the financial statements,
doing the filings. They become responsible for the accuracy and
correctness of the filing. Doesn't mean you won't get audited by the
IRS. Just means someone else has signed off on it, and they are liable
for inaccuracies, fraud, etc.

Its why there are few CPAs who operate in gray areas, usually stick to
just black and white.

>  but from the little reading I've been able to do so far it
> seems like organizations can go ahead and start filing taxes like they
> are exempt before they get official recognition as such.

Sort of, in a sense there is a probationary period, which seems to be
5yrs. After which they the IRS does an audit, and if you fail. You get
classified as a non-charitable tax exempt organization. Just not a
charitable one. Gentoo would still be tax-exempt. But no one can write
off donations as charitable contributions. Which is how its basically
always been. Though anyone contributing can write off the contributions
in other ways, just not as a charitable donation.

Now the failure to file in 3yrs in a row can still cause you to lose
non-exempt status either way. But that is likely much harder once passed
the initial 5yrs. That would be like the 8th year... :)

> Now, I'm sure that makes you subject to penalties/etc if it turns out
> you aren't exempt.  However, I doubt it costs a dime more than what
> you'd be subject to for not filing taxes at all once they catch up
> with us (and unless we're raking in a lot of cash after expenses that
> may not actually be much - it looks to me that unless criminal charges
> are filed the liability is whatever we'd pay in taxes anyway, interest
> at a rate that isn't that bad, and a penalty of up to 25% more - so
> you basically pay what you should have paid all along plus enough of a
> fine to make it not worth your while to delay).

Correct

>   As others have said I
> doubt criminal charges are likely unless somebody is pocketing funds
> or using the organization to launder money or something - if you pay
> your penalties the IRS is probably happy to cash the check and wait
> for your next return.

No criminal charges, as this is not a breach in any law. You do not have
to be a non-profit/tax exempt. Worse case you just get classified and
treated as for profit.

> The terminology used in the IRS publications/etc is "recognition of
> tax-exempt status."  The logic is that tax-exempt organizations are
> tax-exempt by virtue of law, and not because they are certified as
> such (tax deductions for contributors are probably a different story).
>  So, basically you're just asking the IRS to acknowledge what is
> already true.

In a nutshell, and also on the other end allowing the IRS to count
others contributions to Gentoo as charitable. If someone claims an
expense is charitable, to an entity that is not classified as a charity.
The IRS could take minor action against the entity/person claiming the
expense as a charitable contribution. Really does not effect Gentoo,
just anyone who donated money.

There are several forms of tax-exempt entities. The different statuses
really just apply to the donors.

> That said, I have no doubts that issues from the past will make
> getting this recognition more difficult.

To an extent, but I believe worse case can just dissolve the current
entity and form a new one. Which is really only a change as far as the
State and IRS is concerned. Doesn't have any effect on anything else
really. But I could be wrong there. I am more familiar with for profit
companies there.

>   Even so, the sooner we get
> squeaky-clean with the paperwork the sooner we can move back in that
> direction.  I'm sure the IRS looks differently at an application by an
> organization that has had the forms in on time for 5 years in a row
> than one that is struggling to show compliance, regardless of the
> history of either.

Yes, and if things are not in order for 5yrs, you cannot be classified
as 501c3. That does not mean you lose tax exempt status. You just do not
get charity status, donations cannot be deducted from the donors taxes
as a charitable expense.

> I've been slowly working my way through the IRS website as their
> publications aren't actually all that bad and of course they are
> official.

Excellent, and its basically no different than reading technical
documentation. Its just on tax laws vs code, etc.

Difference between like a CPA and us, is they are familiar with the
stuff. Kinda like a Gentoo dev making an ebuild, vs someone new to
Gentoo. It can be done, but a bit harder, more time, than someone
experience and in the know.

> If somebody is aware of a good place to find trustworthy
> tips/etc for NFPs/etc let me know.

There quite many resources if you google. Most information should be
accurate. I came across many more other sites providing more straight
forward information than the IRS. I am sure the IRS provides the same
information, but much more detailed and in more locations.

I did not provide links to that stuff, since the potential does exist
for it to be inaccurate. Thus stuck to just IRS links, short of the one
regarding the 5yr audit. I can not find that on the IRS site for some
odd reason, though recall coming across it before. I am unable to find
it in past emails sent as well :(

-- 
William L. Thomson Jr.
Obsidian-Studios, Inc.
http://www.obsidian-studios.com




References:
Tax return and accounting discrepancies
-- William L. Thomson Jr.
Re: Tax return and accounting discrepancies
-- Rich Freeman
Re: Tax return and accounting discrepancies
-- Matthew Summers
Re: Tax return and accounting discrepancies
-- Alistair Bush
Re: Tax return and accounting discrepancies
-- William L. Thomson Jr.
Re: Tax return and accounting discrepancies
-- Rich Freeman
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Updated Jun 18, 2012

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