Learning from IRS Audit Closing Letters to Land Trusts
We know that the IRS is interested in whether land trusts – and other nonprofits –comply with the tax code. If IRS audits your land trust, please let us know – and consider sharing the Closing Letter they send to conclude your audit. These letters reveal how the IRS views the details of running a land trust.
To help land trusts understand what the IRS is looking at, here are some examples and guidance in the event the IRS audits your land trust.
A Closing Letter may also state conditions for a nonprofit organization to retain its tax exempt status and it may also give advice without making that a condition. These letters are windows into the IRS interpretation of the Code and the Treasury Regulations as applied to land trusts. While it’s unlikely that every land trust will be audited, it’s helpful to be prepared. At least a dozen land trusts around the country have been audited and the IRS will almost assuredly conduct more. The IRS 2009 Strategic Plan promised continued oversight of the tax-exempt sector. See http://www.irs.gov/pub/irs-pdf/p3744.pdf page 23.
Studying the closing letters shared by two land trusts shows that the IRS is doing just that. In the two real life examples below you will see extraordinary attention to detail. Both of the land trusts that shared their IRS closing letters did retain their tax exempt status. The closing letters reveal land trusts that are well managed with a few areas where some improvements would be beneficial.
The first details three pages of revenue rulings and regulation citations regarding qualified purposes of conservation easements. The last two pages list five numbered sections identifying specific conservation easements held by the audited land trust that the IRS feels need improvement. Issues identified include using an easement template, careful drafting of retained rights, definition of size and purpose of permitted structures, matching the baseline documentation report to the conservation easement restrictions and reserved rights, detailed description of the public benefit served by the easement purposes, rights and procedures of the land trust for monitoring and enforcement, and an enforcement policy.
The advice in this letter substantially mirrors Land Trust Standards and Practices and the guidance to land trusts in the Land Trust Alliance curriculum. See the books on Avoiding Conflicts of Interest and Running an Ethical Land Trust, Conservation Easement Drafting and Documentation, Conservation Easement Stewardship, and Managing Conservation Easements in Perpetuity.
The focuses on amendment practices, fundraising activities and substantiation requirements. On amendments the IRS comment was limited to admonishing the land trust to avoid impermissible private benefit in easement modifications, which is always good advice. The threat of losing its tax exempt status was explicitly reiterated however for future non-compliance where modifications do not serve a public benefit.
On substantiating donations, the IRS offered many points of advice, some of which are not required but are good practices such as keeping copies of form 8283 and the acknowledgement letters. Many of the points made by the IRS clarify substantiation questions such as there being no need to state the claimed value of the easement deduction; only the description of the non-cash property is required.
On fundraising activities, the IRS spent several pages clarifying and differentiating among types of fundraising activities such as raffles, auctions, lotteries, and casino nights.
A land trust must have a good lawyer experienced in this area to assist with any audit. In addition to providing advice, the lawyer can identify when the IRS has not followed its rules – such as the technicalities of a demand to see paperwork – or where it has mischaracterized a deficiency – such as in the July 2008 letter where no Form 8282 was required because the land trust did not sell property.
While your land trust may be the subject of a random audit, correspondence exam or compliance check, you can take steps to avoid undue notice by the IRS.
- Adopt and implement Land Trust Standards and Practices in full
- Read the entire land trust curriculum
- Continually improve your systems and policies
- Use the Assess Your Organization tool to identify areas of improvement
- Become accredited
- Get regular training
- Involve your entire board, staff if any and volunteers in making your land trust compliant with all applicable IRS requirements
- Ask your land trust attorney to do an audit to identify areas of improvement
If your land trust is audited, you can expect a lengthy, time-consuming and expensive process. Each of the land trusts below reported a minimum of 18 months to complete the process and obtain a closing letter. If the Alliance starts the conservation defense insurance program, it does not cover IRS audits or other government regulatory actions against land trusts, so be prepared with sufficient resources including funds to respond to audits and other oversight activities.
The process often starts with an . We have an example below with approximately 80 questions including a directive to amend the organization’s Articles of Incorporation to address a perceived deficiency and a list of possible easement violations that the IRS felt were not correctly addressed by the organization. Be prepared!
If your land trust experiences an audit, please tell Sean Robertson at the Land Trust Alliance at email@example.com. For more guidance and suggestions on dealing with an IRS audit of your land trust see:
- by Jay Erickson
- Alliance website at http://www.landtrustalliance.org/policy/taxincentives/990s/990s