Tax Exempt & Government Entities Division Releases 2020 Program Letter

By Joyce Underwood, CPA

The IRS Tax Exempt and Government Entities (TE/GE) division functions to help organizations and entities understand and comply with applicable tax laws and to protect the public by applying them with integrity and fairness.

The TE/GE division reports it has been busy carrying out its 2019 program activities with the added task of navigating and implementing changes resulting from the 2017 Tax Cuts and Jobs Act and recent legislation from The First Act enacted in July 2019. TE/GE reports that it has been hiring and building teams, and announced that Edward T. Killen joined Tamera Ripperda, TE/GE commissioner, as the team’s deputy commissioner.

The TE/GE released its Fiscal Year 2020 Program Letter on Oct. 8, 2019, summarizing its upcoming plans. The Program Letter outlines the projects and priorities for fiscal year 2020 for tax-exempt organizations, employee plans, Indian tribal governments, and tax-exempt bonds. This article focuses on those projects and priorities related to tax‑exempt organizations.

The TE/GE division works to carry out its plans while striving to improve efficiency and modernize processes to best utilize government resources. The current program letter focuses on six areas of its compliance program, as described below.

Compliance Strategies

Compliance strategies are issues approved by TE/GE’s Compliance Governance Board to identify, prioritize and allocate resources within the TE/GE filing population. Using a web-based portal, TE/GE employees submit suggestions for consideration by the board. Once approved, these issues are considered priority work. As more issues are developed and approved, those with a higher priority may potentially replace compliance strategies currently approved to include:

• Hospital organizations with unrelated business income– The focus will be on unrelated business taxable income reported on Form 990-T, Exempt Organization Business Income Tax Return, where expenses materially exceed gross income.
• IRC (Internal Revenue Code) Section 501(c)(7) entities – The focus will be on investment and nonmember income by tax-exempt pleasure, social and recreation clubs.
• IRC Section 4947(a)(1) Non-Exempt Charitable Trusts (NECTs) – The focus will be on organizations that under-report income or over-report charitable contributions.
• Previous for-profit entities – The focus will be on organizations formerly operated as for-profit entities prior to their conversion to IRC Section 501(c)(3) organizations.
• Private benefit and inurement – The focus will be on organizations that show indicators of potential private benefit or inurement to individuals or private entities by way of private foundation loans to disqualified persons.

Data-Driven Approaches

Data-driven approaches use data and queries to select work based on quantitative criteria, which allows TE/GE to allocate resources that focus on issues that have the greatest impact. TE/GE is committed to integrating data into its processes and procedures and will use return data and historical information to identify the highest risk areas of noncompliance. Two examples include:

• Query sets (previously referred to as models) – Allow TE/GE to continue to improve compliance query sets based on information reported on Form 990, Return of Organization Exempt From Income Tax; Form 990-EZ, Short Form Return of Organization Exempt From Income Tax; Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation; and Form 5227, Split Interest Trust Information Return.
• Research, Applied Analytics & Statistics collaboration – Allow TE/GE to continue to review various items and activities, including private benefit/inurement.

Referrals, Claims and Other Casework

Referrals allege noncompliance by a TE/GE entity and are received from internal and external sources . Claims are requests for refunds or credits of overpayments of amounts already assessed and paid; they can include tax, penalties and interest, or an adjustment of tax paid or credit not previously reported or allowed. Other casework includes examining entities that filed or received exemption using Form 1023-EZ. The focus of these three areas will be as summarized below.

• Referrals – pursue referrals received from internal and external sources that allege noncompliance by an exempt organization and pursue taxpayer and interagency referrals, including information items from sources within and outside the IRS that allege noncompliance with an employment tax law by an exempt organization.
• Claims – address requests for refunds or credits of overpayments of amounts already assessed and paid, including taxes, penalties, interest or an adjustment of tax paid or credit not previously reported or allowed.
• Other casework – examine entities that filed and received exemption using Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Additionally, support IRS-wide compliance efforts on IRC Section 4980H with respect to certain exempt employers.

Compliance Contacts

Compliance units are employed to address potential noncompliance, primarily using correspondence contacts known as “compliance checks” and “soft letters.” These contacts allow TE/GE to establish a presence in the taxpayer community in a manner that reduces the cost to the IRS while limiting taxpayer burden. TE/GE will continue educating taxpayers via compliance checks and soft letters while seeking to improve return filings and filing accuracy on issues of noncompliance, including but not limited to:

• Determining whether an exempt organization is adhering to recordkeeping, return filing and information reporting requirements, including:
  • Combined Annual Wage Reporting – Federal Unemployment Tax Act: exempt organizations that are required to, but fail to file Form 940, Employer’s Annual Federal Unemployment Tax Return.
  • Credit Balance Nonfiler: entities that have credit balances but fail to file employment tax returns.
  • Financial Assistance Policy: tax-exempt hospital organizations that did not comply with IRC Section
    501(r)(4).
    Form 990-T Nonfiler: IRC Section 501(c)(7) organizations that reported investment income on Form 990/990-EZ but did not file Form 990-T, Exempt Organization Business Income Tax Return.
  • Form 1099 Stop Filer: entities that were required to file, but failed to file Form 1099-MISC, Miscellaneous Income.
  • IRC Section 501(c)(12) Mutual or Cooperative Telephone Companies: organizations that may have failed to meet the 85% member income test.
    IRC Section 4947(a)(1) Non-Exempt Charitable Trusts (NECTs): exempt organizations that are required to file, but fail to file Form 1041, U.S. Income Tax Return for Estates and Trusts.

Determinations

Determination letters are issued to exempt organizations on exempt status, private foundation classification and other determinations relating to exempt organizations and to retirement plans that satisfy the qualification requirements of federal pension law.

TE/GE expects a continued increase in the volume of determination application receipts. The TE/GE continues to look at process efficiencies, as well as expects to hire more revenue agents to address the work and offset anticipated attrition losses.

Voluntary Compliance and Other Technical Programs

The Voluntary Correction Program applies to employee plans and tax-exempt bonds and works to ensure the quality and consistency of technical positions, provide timely assistance to employees and preserve and share TE/GE’s knowledge base.

Management of exempt organizations should be aware of the role TE/GE plays, consider the potential implications the plans outlined in the Program Letter may have on their organizations, and consult with their tax advisors as necessary.

For more information, contact Joyce Underwood, director, Nonprofit Tax Services, at .