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October 20, 2016

Highlights from the IRS Tax-Exempt and Government Entities Division 2017 Work Plan (article)

The IRS recently revealed a snapshot of its compliance strategy for the 2017 fiscal year. In late September 2016, the Tax-Exempt and Government Entities Division (TE/GE) released its 2017 fiscal year work plan summarizing results from its 2016 efforts and describing its plans for 2017.

Overall, the work plan renews the commitment to the use of data-driven decision-making for compliance monitoring and improvements to the information document request processes. The TE/GE will continue to use many of the tools that have streamlined reporting processes, including the interactive Form 8038-CP for tax-exempt bonds and the Form 1023-EZ streamlined tax-exemption application.

Revisiting the areas of greatest focus for the IRS Exempt Organizations (EO) can help not-for-profit organizations meet their regulatory requirements and minimize their compliance risks.

In Fiscal year 2016, EO focused resources on five strategic issue areas. EO will continue to focus on these areas in 2017:

  • Exemption: Issues include nonexempt purpose activity and private inurement;
  • Protection of Assets: Issues include self-dealing, excess benefit transactions and loans to disqualified persons;
  • Tax Gap: Issues include employment tax and unrelated business income tax liability;
  • International: Issues include oversight on funds spent outside the U.S., exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements; and,
  • Emerging Issues: Issues include nonexempt charitable trusts and IRC 501(r).

Utilizing a data-driven case selection process helped EO to identify and address areas with a high risk

of noncompliance. EO used various methods such as compliance reviews, compliance checks and correspondence and field examinations to identify noncompliance in the aforementioned areas with great results, as noted below.

Exempt Organizations

Filing, organizational and operational and employment tax numbered among the top issues the Exempt Organizations Examinations group uncovered in its 4,984 examinations in 2016. The filing issues primarily involved verifying exempt activities and securing delinquent returns. Employment tax issues included unreported compensation, tips, accountable plans, worker reclassifications and back-up withholding requirements. EO also found issues with unrelated business income that included gaming, nonmember income, expense allocation issues, net operating loss (NOL) adjustments, rental activity, advertising, debt financed property rentals and investment income. Private inurement issues included closures with advisories on the potential for an organization’s activities to inure or provide private benefit to a disqualified person or other key individual associated with the organization, including Intermediate Sanctions.

The Affordable Care Act

Among its many provisions, the Patient Protection and Affordable Care Act (ACA) requires hospitals to comply with IRS section 501(r). EO had completed 692 reviews and referred 166 hospitals for field examination in the 2016 fiscal year, most commonly for issues that included:

  • Missing a Community Health Needs Assessment (CHNA)
  • No financial assistance and/or emergency medical care policies
  • Billing and collection requirements

Exempt Applications

Several programs EO implemented to assist with 501(c)(3) management proved successful in 2016. Between March 2015 and June 2016, the Erroneous Revocation Prevention program prevented 3,202 organizations from having their tax-exempt status revoked.

In an effort to reduce the amount of time EO would have to spend reviewing applications, EO began rejecting incomplete applications. From November 2015 to June 2016, it returned 2,588 incomplete applications. Some of the reasons for returning applications ranged from amendments to organizational documents to failure to file returns.

For the 2017 fiscal year, EO will continue to use the streamlined application process that makes it easier for EO to manage applications with its limited resources. It will also fine-tune the processes it uses to test organizations for 501(c)(3) compliance by using a statistical sampling methodology. Additionally, EO is using data sources to identify organizations with a high risk for private inurement and private benefit issues.

Fiscal Year 2017

EO continues their aggressive compliance strategy and utilization of data-driven decisions by leveraging information obtained from EO field employees. This information is used to make improvements in EO’s post-determination compliance program and develop a Referral Model for their 990, 990-EZ and 990-PF case selection models. The EO’s focus will continue to be on the five strategic issue areas mentioned above.

During fiscal year 2017, EO will include 400 returns in the work plan identified for high risk of private inurement and private benefit issues and 100 private foundation returns with anomalies detected. These returns will be picked by TE/GE Research and the Research, Applied Analytics and Statistics (RAAS) office. EO will be implementing a statistical sampling methodology to assess compliance in the Exempt Organizations population.

Employer Plans

The TE/GE’s employer plans initiatives will continue to focus on high compliance risk areas using data and the Employee Plans Compliance Unit (EPCU). Targets of scrutiny will include distributions in large employer plans, universal availability in 403(b) and 457(b) plans, allocation and contribution limitations in cash balance plans, participation in hybrid 401(k) plans and stock valuation in employee stock ownership plans (ESOPs). This will be conducted through collection of multiemployer certifications and validations, review of non-bank trustee notification and reviews of pension plan funding for plan funding deficiencies.

From its risk-based targeted program, the IRS will also examine plans for exceeding maximum annual contributions or benefits and discrimination in plan participation that favor highly compensated employees. Compliance checks conducted in coordination with the EPCU will target SIMPLE plans, merger, consolidations, transfers and spin-offs tied to Form 5310A filings, terminated or partially terminated plans, inflated assets and unusual investments, SEP plan issues and 403(b) documentation requirements.

Tax-Exempt Bonds

Previous examinations of tax-exempt bonds have found that arrangements that have had a history of noncompliance are more likely to have continued compliance issues. In 2017, the TE/GE will continue to look at referrals and claims, projects with historical noncompliance and market segmentation to monitor compliance.

Referrals in 2016 related primarily to private use of bond-financed property and arbitrage compliance failures. Claims stemmed from returns of overpayment of rebate and refund claims for direct-pay bonds. Organizations that use tax-exempt bonds can expect that these areas will be an area of focus for TE/GE in 2017 as well.

For More Information

If you have any specific comments, questions or concerns about the effect the IRS’s TE/GE work plan will have on your organization in 2017, please contact us.


Copyright © 2016, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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