Announcement 2021-18: Payments made to management companies by tax-exempt organizations, prior guidance is revoked

Revokes Announcement 2001-33, effective for annual information returns required to be filed for tax years beginning on or after January 1, 2022

Payments made to management companies by tax-exempt organizations, prior guidance revoked

The IRS today released an advance version of Announcement 2021-18 concerning how tax-exempt organizations report payments made to management companies.

Announcement 2021-18 [PDF 109 KB] revokes Announcement 2001-33 which deemed tax-exempt organizations under section 501(a) to have reasonable cause for purposes of relief from the penalty imposed under section 6652(c)(1)(A)(ii) if tax-exempt organizations reported certain compensation or amounts paid to a management company on the Form 990 in the manner described in that announcement instead of in accordance with Form 990 instructions. 

Background

According to Announcement 2001-33, a tax-exempt organization had reasonable cause for purposes section 6652(c)(1)(A)(ii) penalty relief if the organization reported, in the compensation section of the Form 990 series return, the amount paid to a management company (or other entity or person) for services, rather than reporting the compensation paid to the person(s) who provided services to the tax-exempt organization on behalf of that management company.

Subsequently, the IRS repeatedly revised the Form 990 instructions on reporting compensation paid to management companies. Presently, the Form 990 instructions provide that, if a tax-exempt organization has delegated management  duties to a management company (or other entity or person), then the tax-exempt  organization must report the details of the arrangement on Form 990, Schedule O, including the name(s) of any of its current or former officers, directors, trustees, key employees, or highly compensated employees that were compensated under the arrangement, and the amount(s) received by the management company for the services provided to the tax-exempt organization. The instructions also require that employees of a management company be reported as the tax-exempt organization’s own employees if they are common law employees of the tax-exempt organization under state law.

Announcement 2021-18

Announcement 2021-18 states that the IRS and Treasury Department determined that it was no longer appropriate for tax-exempt organizations that file Form 990 series returns to rely on Announcement 2001-33, rather than follow the specific instructions to the Form 990, Form 990-EZ, and Form 990-PF.

Today’s announcement further states that changing the process so that all tax-exempt organizations report compensation in accordance with the specific Form 990 series instructions will “improve transparency and compliance by making it easier for the public and the IRS to understand the financial operations, including compensation arrangements, of tax-exempt organizations that file Form 990 series returns.”

Accordingly, Announcement 2021-18 reports that the current instructions for Form 990 explain how a tax-exempt organization is to treat employees of an employee leasing company, a professional employer organization (PEO) (whether or not a certified PEO) or a management company.

Announcement 2021-18 revokes Announcement 2001-33, effective for annual information returns required to be filed for tax years beginning on or after January 1, 2022.


For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | +1 202 533 8817 | ruthmadrigal@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com

 

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