In fiscal year 2016, the Exempt Organizations (EO) division of the IRS focused on five strategic areas: exemption, asset protection, the tax gap, international issues and emerging issues. The IRS completed 4,984 examinations. The majority were focused on two categories. Filing was the largest organization and operational subcategory (2,109 examinations), which was part of the exemption strategic area; this focused on verifying exempt activities and delinquent returns. Employment tax issues was the second largest subcategory (1,323 examinations); it focused on the tax gap, including unreported compensation, worker reclassifications and noncompliance regarding withholdings.
The IRS did 692 hospital reviews and referred 166 hospitals for field examination based on their 501(r) compliance—this will continue in FY 2017. Referrals were made due to an incomplete Community Health Needs Assessment, not having a financial assistance and/or emergency medical care policy under Internal Revenue Code (IRC) Section 501(r)(4) and not following billing and collection requirements under IRC §501(r)(6).
In 2016, the IRS also used modeling techniques, including data-driven decisions, to select returns for audit—closing 62 returns with a change rate of 90 percent. The IRS plans to continue using data-driven decisions in FY 2017 and further develop them to include modes for Forms 5227, Split-Interest Trust Information Return, and 990-T, Exempt Organization Business Income Tax Return.
Plan for 2017
For FY 2017, the EO division plans to continue moving forward many of the initiatives started in the last two years. EO research is working on ways to identify organizations at risk for private benefit and inurement issues. Four hundred returns were identified and included in the 2017 work plan for these issues. The EO division also seeks to identify anomalies on returns filed by private foundations. One hundred returns were detected for this issue.
The Employee Plans (EP) office intends to use compliance indicators to build project modes and statistical issue-based sampling to select cases for examination. It will focus on noncompliance issues with the greatest effect on the retirement community as a whole. The EP division will continue to pursue the same issues of noncompliance as FY 2016. The EP also will use a data-driven approach to identity issues that may represent aggressive or abusive behavior detrimental to plan participants. Compliance checks will focus on Savings Incentive Match Plans for Employees of Small Employers, Form 5310-A, Notice of Plan Merger or Consolidation, Spinoff, or Transfer of Plan Assets or Liabilities; Notice of Qualified Separate Lines of Business, filings, issues surrounding terminated plans, inflated and/or unusual assets, Simplified Employee Pension plan issues and IRC §403(b) plan document requirements.
The Federal, State and Local Governments (FSLG) division will focus on these areas in FY 2017:
- Data to identify cases
- Large entity examinations
- Increasing the use of limited scope examinations
- Projects based on refund claims, compliance checks and small, focused examinations
- Focused outreach education
- Enhancing technical knowledge
The Tax-Exempt Bonds (TEB) group will focus on identifying new issues and fact patterns with higher risk of noncompliance. Its priority is shifting to returns with past information indicating noncompliance. Data analytics will be used to identify returns as well as market segments.
The Government Entities Compliance Services (GECS) division closely works with FSLG and TEB to identify focus areas and cases for compliance checks. For FY 2017, GECS will focus on refund claim examinations and data-driven projects. GECS and TEB will focus on returns that show noncompliance for bonds on the face of the return.
The IRS has an effort to increase EO Knowledge Management (KM) employees’ technical understanding. It plans to present three to four educational sessions each quarter. The IRS plans to update its virtual presentations by removing old ones and adding new presentations. All divisions plan to focus on KM in FY 2017.
The IRS also plans to have a new fillable Short Form 990-EZ, Return of Organization Exempt From Income Tax, with helpful instructions. Currently, there’s a 50 percent correction rate on paper-filed 990-EZs. The IRS hopes to cut these down.
The IRS is doing an overhaul to combine Revenue Procedures; this is planned to be released January 2017.
Director Tammy Ripperda is leaving the EO division; her permanent replacement hasn’t been determined. In addition, the EO division will hire 10 new enforcement personnel to work on exams.
Please contact your BKD advisor for more information.