[Regulation] IRS Work Plan Outlines Focus Areas for Exempt Organizations
The Internal Revenue Service (IRS) has a plan for 2017. Tax Exempt & Government Entities (TE/GE) Commissioner Sunita Lough and Deputy Commissioner Donna Hansberry have said that “our gold standard for each change is whether it will be transparent, efficient and effective.”
Well, those plans were announced recently. The work plan looks back at FY 2016 and gives strategy and compliance facts for that year, and also looks ahead in providing guidance on what the IRS will focus on for Exempt Organizations (EO) during FY 2017. FY 2017 will continue along the path that was set last year with the “Moving Forward Together – The Road Ahead” Initiative.
KEY COMPONENTS OF THE WORK PLAN
The EO will continue to use a data-driven case selection process designed to identify and address existing and developing high risk areas of noncompliance. To pinpoint the case selections, the EO will be working with other IRS areas including Research Applied Analytics and Statistics, Large Business and International, Small Business and Self Employed, and Criminal Investigations.
Resources will be focused on the following five strategic issue areas:
• Exemption. This comprises issues with non-exempt purpose activity and private inurement. Examples include the securing of delinquent returns, discontinued operations, and foundation status changes. As of June 30, 2016, the IRS revoked the exempt status of 43 organizations;
• Protection of assets. This contains issues with self-dealing, excess benefit transactions, and loans to disqualified persons. Examples include organizations that have revenue transactions with its disqualified persons. These transactions include rental arrangements, undocumented deferred compensation plans, and loans with a lack of sufficient fair market value interest rates;
• Tax gap. This covers issues with employment tax and unrelated business income tax (UBIT) liability. During FY 2016, the IRS examined 1,923 returns in this area and identified questions pertaining to advertising, employee worker misclassifications, NOL adjustments, and contentious allocations of indirect costs against unrelated business income;
• International. This comprises issues with oversight on funds spent outside of the United States, exempt organizations as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements; and,
• Emerging issues. These are issues with non-exempt charitable trusts and IRC 501(r). The EO intends to make improvements to the Form 990, 990-EZ, and 990-PF case selection models by leveraging feedback from field employees. Additionally, the EO will be introducing newly developed models for Forms 5227, 990-T, and the post-determination compliance program. To better integrate the next best referral case into the work stream, the EO will also be developing a Referral Model.
The EO will be implementing statistical sampling to assist in the general compliance levels of the exempt organization community during FY 2017. With the assistance of TE/GE Research and the Statistics of Income (SOI), the EO expects to create a plan for an ongoing rolling statistical sample of 501(c)(3) as well as other 501(c) organizations.
As required by Patient Protection and the Affordable Care Act (ACA), tax-exempt hospitals will continue to be reviewed to verify compliance requirements under IRC 501(r). For FY 2016, the EO completed 692 reviews and referred 166 hospitals for field examination. Common areas for field examination referrals included:
• Lack of a community health needs assessment;
• No financial assistance and/or emerging medical care policies; and,
• Billing and collection requirements.
The Post-Determination Compliance Program looks at organizations that have filed Form 1023 or 1024 and have been approved pursuant to the streamlined process. In FY 2016, 1,400 exempt organizations were selected through a statistically valid sampling process. The EO plans to continue the post-determination compliance examinations for exempt organizations that were granted tax exempt status through the use of a Form 1023-EZ.
The IRS selected 1,182 organizations during FY 2016 using a statistically valid random sampling process. Based on the results of those compliance examinations, the IRS determined that the process and implementation of Form 1023-EZ were both efficient and effective. As such, the IRS will continue to monitor the effectiveness through post-determination compliance examinations in FY 2017.
The work plan will also include 400 returns that have been identified for high risk of private inurement and private benefit issues as well as another 100 private foundation returns with anomalies that were detected.
Rulings and Agreements
A number of successful programs were initiated during FY 2016 that helped EO Determinations focus its objectives on improving the application process and enhancing customer satisfaction. In FY 2017, EO Determinations will continue with this initiative by emphasizing:
• Form 8976 Notice of Intent to Operate under 501(c)(4). As required under IRC 506, organizations that intend to operate under IRC Section 501(c)(4) must notify the IRS within 60 days of formation. EO Determinations tax examiners will process this work.
• Form 1023-EZ. Due to the user fee changes, the EO is expecting increases in the form’s adoption rate. Applicant compliance risks will continue to be eased by performing pre-determination application reviews and the evaluation of the pre-determination data.
• Knowledge Management (KM). This initiative is intended to increase the knowledge base of the EO employees, preparing and posting technical Issue Snapshots for EO employees and the general public. Five issue snapshots have already been completed including Electronic Health Records or Regional Health Information Organization, Abatement of Chapter 42 First Tier Taxes due to Reasonable Cause, and IRC Section 4946 Definition of Disqualified Persons.
More than 20 more snapshots are currently in development, including private foundation qualifying distributions, conservation easements, limited liability companies, trusts and IRC 508(a), requirements for community health needs assessments (CHNA), 501(c)(4) and determining primary activity, and a VEBA non-discrimination overview. Completed snapshots are posted to the Electronics Reading Room on IRS.gov
• EO Determinations Quality Assurance (EODQA). EODQA will continue to review and evaluate EO Determinations cases for correctness and consistency. EODQA will collaborative with KM and use this information in order to identify areas for improvement and develop future training events and materials.
• Correspondence. A modest 1 percent increase in taxpayer communications is projected for FY 2017. The EO anticipates improvements in the cycle time and open and overage inventory, resulting from increased efficiencies.
The IRS work plan consistently brings forth public charity issues like private inurement, charity mission, and program service results. This plan is also placing greater emphasis on private foundations. Some issues can be more subtle, such as self-dealing are blatant while others, such as using the proper method to obtain the fair market value on assets for purposes of the qualifying distribution calculation or issuing grants to fulfill personal pledges.
The IRS and the EO are using all of their resources to stay on top of these technical issues. Although there are no changes to the tax law, Form 990 and Form 990-PF will certainly be reviewed using a much higher level of scrutiny.
Thomas Lanning is a tax partner in Cohn-Reznick LLP’s Not-for-Profit Industry Practice. His email is firstname.lastname@example.org