Non Profit Report - March 2014

Date: March 6, 2014

Privacy Is Now a Priority
By: Jefferson C. Glassie & Dana O. Lynch

This article was originally published in AM&P's Signature magazine, November/December 2013.

A new privacy code for apps tries to help consumers understand what is really happening with their data.

The National Telecommunications and Information Administration of the U.S. Department of Commerce announced a new Short Form Notice Code of Conduct to Promote Transparency in Mobile App Practices this summer, and industry groups are busy commenting on pros and cons. The code is voluntary, but would be applicable to apps that associations and nonprofits develop.

The code was developed by a stakeholder group of privacy, civil liberties, and consumer advocates, as well as app developers and publishers. It is intended to provide consumers with a standard form of privacy notice identifying at the point of purchase what information is collected and what is not.

The new code provides for a short-form privacy notice, though notes that some states, such as California, require app developers to post a full privacy notice for apps that are distributed into the state. Such long-form notices are encouraged under the code. According to the code, the short-form notice should state whether information in the following categories is collected by the app:

  • Biometrics (physical information, such a finger prints, facial recognition, signatures, etc.)
  • Browser history
  • Phone or text log
  • Contacts
  • Financial information
  • Health
  • Medical or therapy history
  • Location
  • User files

The code also provides for advising whether the app shares user-specific data with any third party in the following categories: ad networks, carriers, consumer data resellers, data analytics providers, government entities, operating systems and platforms, other apps, or social networks.

Certain exceptions are noted for collection and sharing of information. For example, the short-form notice is not called for if the app developers take reasonable steps to de-identify data and contractually prohibit further distribution. Also exempt are activities necessary to maintain, improve, or analyze the app functions, perform network communications, authenticate users, protect the security of the app, facilitate legal compliance, or allow the app to be made available on the user’s device.

The Online Publishers Association supported the new code as enhancing transparency for app use. The Consumers Union and Consumer Federation of America criticized the code, saying that the code and the process were flawed. The CFA said the information on a short form does not provide enough information for the consumer to be adequately informed as to “what is really happening with their data.” Also, the CFA said there was no requirement for disclosure if the entity receiving shared data is part of the same corporate structure as the app developer.

Associations that develop apps should, of course, be familiar with the code and other federal and state guidelines, but should also clearly understand that the voluntary nature of such app privacy notices may be an illusion. Since privacy has been identified as a priority issue in Congress, California, and other states, it would not be surprising to see some of the mobile app privacy guidelines become law in the future.

Also, in 2012, California initiated legal action against Delta Airlines for the failure to post a privacy policy that covers Delta’s mobile app, indicating that not only app developers but distributers will be targeted. Although this action was dismissed in May 2013, associations should consider these rules carefully when developing apps and working with vendors.

Compensation Studies: Why They're A Good Idea
By: Damien Nickle, CPA, Senior Manager, CohnReznick

Key Takeaway: Compensation found to be unreasonably high compared to compensation paid by similar organizations for like services could result in serious implications to the individuals receiving the compensation as well as the tax-exempt organization.

When determining the compensation a tax-exempt organization provides to its officers and directors, the organization needs to take precautions to ensure that the compensation arrangement is not deemed to be unreasonable by the IRS. Compensation that is flagged as an "Excess Benefit Transaction" under the Internal Revenue Code could result in serious implications to the individuals receiving the compensation as well as to the tax-exempt organization. A compensation study helps prevent this by providing the organization with market-based information related to compensation of similar organizations. 

Excess Benefit Transactions have a specific meaning under the Internal Revenue Code.  In general, these are transactions where an economic benefit is provided by a tax-exempt organization, directly or indirectly, to a "Disqualified Person" in the organization and where the value of the economic benefit provided exceeds the value of the consideration received for providing such benefit.

From a compensation perspective, Excess Benefit Transactions result when the compensation is unreasonably high compared to the services certain individuals perform for the tax-exempt organization. Some of the common individuals grouped into the term "Disqualified Persons," while not all-inclusive,include the organization's officers, directors, trustees, or any person in a position to exercise substantial influence over the affairs of the tax-exempt organization.

Reasonable compensation is a valuation standard.  Compensation received by a "Disqualified Person,"  and deemed to be in excess of the value that would ordinarily be paid by a similar organization for like services, under like circumstances, could be categorized as an excess benefit provided to the individual.  It doesn't matter if the similar organizations being compared to are tax-exempt or for-profit entities.

What Are the Consequences?

In the event there is a compensation provided to an individual that the IRS calls out as an Excess Benefit, the individual receiving the compensation could be subject to a tax in the amount of 25 percent of the value of the deemed excess benefit and an additional 200 percent tax if the excess benefit is not repaid.  In addition, the organization's managers could also be subject to an additional tax of 10 percent on the excess benefit if they knowingly provided the unreasonable compensation arrangement.

Safeguarding Against Costly Tax Assessments: The Compensation Study

In order to help avoid costly tax assessments on an organization and individuals working for the organization, compensation arrangements must be reasonable. A compensation study conducted by a qualified advisor can help determine if compensation would be deemed "reasonable" by the IRS. The compensation arrangements of organization would be reviewed in the context of adherence to the "Rebuttable Presumption of Reasonableness" provision provided in the Treasury Regulations. The  IRS can rebut the presumption of reasonableness only if it develops sufficient contrary evidence to show otherwise.

Compensation must meet three criteria in order to address The Rebuttable Presumption of Reasonableness provision:

  1. The compensation/transaction must be approved in advance by an authorized body of the organization composed of individuals who do not have a conflict of interest concerning the compensation arrangement.
  2. The authorized body obtained appropriate data for comparability. 
  3. The authorized body must adequately document the basis for its determination.

There is a special rule for compensation paid by organizations with annual gross receipts of less than $1 million.  If a tax-exempt organization falls into this category, the authorized body will be deemed to have appropriate comparability data if it has data related to compensation paid by three comparable organizations, in the same or similar communities, that provide similar services.  For larger organizations, the authorized body would need to show that, given the knowledge and expertise of its members, it had sufficient information to determine whether the compensation arrangement in its entirety is reasonable. While not required, a compensation study can help a tax-exempt organization  meet the second criteria established for The Rebuttal Presumption of Reasonableness provision.

What Does CohnReznick Think?

When determining the compensation made to its officers and directors, a tax-exempt organization can utilize a compensation study to assist in determining if this compensation is reasonable. By also adhering to the "Rebuttable Presumption of Reasonableness" provisions, an organization can shift the burden of proof to the IRS to demonstrate that the arrangement is unreasonable.

New IRS Form 8822-B
By: Eileen Morgan Johnson

Has your organization moved, changed your mailing address or had a change in the responsible party for filing tax returns? The IRS wants to know and there is a new form you must use to provide this information.

The new rule went into effect on January 1, 2014. The IRS is trying to do a better job of keeping track of taxpayers and tax-exempt organizations. Any entity with a federal Employer Identification Number (EIN) must report changes to its mailing address, location or responsible party within 60 days of the change. Organizations that experienced such a change and have not yet reported it to the IRS have until March 1, 2014 to file Form 8822-B. Going forward, be sure to file Form 8822-B within 60 days of any change in your organization's address or responsible party. You can find the form on the IRS website here.