The Tax Exempt & Government Entities division of the IRS sets a work plan each year that outlines its focus areas. With the passing of the Tax Cuts and Jobs Act at the end of 2017, the division may alter or delay some of these plans. The division also gives updates related to the previous year’s plan.
Fiscal Year 2017 Accomplishments
The Exempt Organizations (EO) division implemented process changes, including changes to Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and continued to use Form 8976, Notice of Intent to Operate Under Section 501(c)(4). If an organization doesn’t provide complete responses on its Form 1023-EZ, the IRS issues a proposed adverse determination letter. The organization may protest the adverse determination and exercise a right to appeal. The division also made changes to the Employment Tax Knowledge Network (K-Net) to better align with the other five exempt organizations’ K-Nets. Specialists have been added from the federal, state and local government functions to help centralize the K-Nets. In addition, they’ve created podcasts that are available now.
Fiscal Year 2018 Plan
In 2018, EO plans to make changes to Form 1023-EZ to require more information, such as activity descriptions and questions regarding gross receipts, asset thresholds and foundation classification. This will increase the amount of time it takes for the IRS to process the form. EO plans to take a statistical sample of these applications for a predetermination review to mitigate risks and identify opportunities to improve this form and its instructions.
EO also plans to make enhancements to the Form 8976 submission platform due to the number of submissions that were rejected because the organization didn’t pay the required user fee.
EO’s compliance strategies for 2018 include examinations for organizations that fit certain profiles, including supporting organizations that file Form 990-N, organizations that were a for-profit prior to converting to a 501(c)(3) organization and organizations that show indicators of potential private benefit or inurement to individuals or private parties.
Data-driven approaches will continue to be used in connection with the examination process, and the compliance models will be improved for Forms 990, 990-EZ and 990-PF. The new model for Form 5227, Split Interest Trust Information Return, will be tested. Private foundations will continue to be selected for examination based on potential anomalies found on their Form 990-PF filings.
The EO division continues to pursue referrals that allege noncompliance by an exempt organization. These referrals can come from inside or outside the IRS. Claims will continue to be addressed for refunds or overpayment credits already assessed and paid. Other casework for EO includes examining entities that received exemption using Form 1023-EZ or the streamline review of Form 1023. Also, EO will examine exempt organizations’ filed returns to create statistical samples for assessing comprehensive compliance coverage.
EO will continue to do compliance checks on tax-exempt employers that have discrepancies between Form W-2 and Form 941/944. Also, organizations that don’t file a Form 940 when required will be looked at. EO will be performing compliance checks on 501(c)(7) organizations that have investment income on their Form 990s but don’t file a Form 990-T. Tax-exempt hospitals that don’t comply with Internal Revenue Code (IRC) Section 501(r)(4) will receive compliance checks as well. IRC §501(r)(4) is a requirement for 501(c)(3) hospitals to establish a financial assistance policy to provide free or discounted care to individuals who meet certain criteria.
The employee plan’s (EP) function will focus on compliance strategies that include mergers/consolidations, discrimination, participation/coverage, distributions, trust investments in small plans, benefit accruals, contribution/earnings allocations and elective deferrals. Returns will be selected to examine the various plan types by sampling results of the data queries and models designed to test indicators of noncompliance.
For tax-exempt bonds, the ITG/TEB (Indian Tribal Governments/Tax Exempt Bonds) function has compliance strategies that include arbitrage, acquisition finance and nonqualified use. ITG/TEB plans to examine bonds with guaranteed investment contracts and/or qualified hedges and investments beyond a temporary period. The ITG/TEB function will look at private activity bonds to determine if the rehabilitation requirement was satisfied. Data-driven approaches will be used to select returns based on the data queries and models in place. Strategies related to ITG include compliance checks on tribal casino-based Bank Secrecy Act (BSA) information for casinos not selected for BSA examination, small Indian tribal entities that haven’t had any other compliance contact on a five-year rotating basis and employment tax returns of small federal, state and local governments and tax-exempt organizations.
High-quality technical products are still a focus for the knowledge management program. EO division topics that are planned for the upcoming fiscal year include gaming, unrelated business income, IRC §501(r), organizational test requirements and employment tax. Planned EP function topics include qualification requirements for defined contribution church plans, application of new regulations for qualified nonelective and qualified matching contributions, the availability of single-sum distribution options, the use of all three segment rates to credit interest in a cash balance plan and the treatment of excess contributions in Simplified Employee Pension plans. Planned TEB topics include hedge terminations, economic life and weighted average maturity, safe harbors for guaranteed investment contracts and rules for qualified hedges. The IRS website has a variety of educational information for tax-exempt entities.
Contact April or your trusted BKD advisor for more information or any questions you may have.