The CPA firm Clark Schaefer & Hackett has informed OSAE that in 2011, the House Ways and Means Committee requested that the IRS review a report about the AARP which requested that its exempt status be revoked. In December 2011, the same Committee provided IRS Commissioner Doug Shulman with more information about the AARP and its activities. Mainly in dispute are AARP's activities regarding product endorsements and royalties. The Committee questions whether AARP is living by its mission to enhance the quality of life for people over 50 or if it is overly focused on making and creating new revenue streams.
Although this is one isolated exempt entity which is under heavy scrutiny, it should be an eye opener to all exempt entities. This is particularly true in an era where traditional funding is drying up all together or being spread across more and more organizations. All types of non-profit organizations are being forced to consider new revenue sources for survival. When doing so, remember to proceed with caution and do not lose sight of your mission along the way. If a new revenue source is from a new program activity, this new program will need to be reported to the IRS on your next Form 990. By doing so, you provide the IRS the opportunity to review your activity in accordance with the initial reason you were granted exempt status. If a new revenue stream creates trade or business income, it should be reported as taxable income unless it meets an exception. Royalty payments are one of those exceptions. However, please consult with your CPA whenever you enter into a royalty arrangement. The fact that a payment is called a royalty will not be enough to meet the exception. True royalties involve payments for the use of your organization's name or trademark. You should not be actively involved in the activity which generates the royalty income.
It remains to be seen what will happen to the exempt status of AARP, but it is safe to say, that there is pressure on the IRS be tougher on exempt organizations. In 2008, the IRS issued a new Form 990, one of the main purposes of which was to improve transparency. They now have three years’ worth of filings, and will likely start to use some of the gathered information to assist in the audit selection process.
About Clark Schaefer Hackett
Founded in 1938, Clark Schaefer Hackett is one of the region's largest professional services firms operating five offices throughout the state of Ohio – Columbus, Cincinnati, Dayton, Springfield, and Middletown. Beyond the borders of Ohio, they are positioned as the firm of choice for countless businesses in Kentucky and Indiana, as well. The are recognized among the top 60 CPA firms in the nation.
As an OSAE Strategic Partner, Clark Schaefer Hackett will offer 10 percent off the standard rates for assurance, tax and consulting services to OSAE members. Contact Michael Borowitz at 614-885-2208 or mborowitz@cshco.com for more information.