Early in October, the IRS’s Tax Exempt & Government Entities Division (TE/GE) released its work plan for the 2016 fiscal year. The work plan serves two purposes: to review the accomplishments of the prior fiscal year and to communicate where TE/GE will be focusing its efforts and resources going forward. This recap covers the division’s key externally facing areas of focus.
Over the past year, TE/GE took measures to speed the process of issuing exemption determination letters. These measures include directly assigning applications to specialists and shortening the time applicants have to respond to requests for additional information from 90 days to 35 days.
In the 2016 fiscal year, TE/GE indicated it will work on several long-term projects related to this topic, including:
- Evaluation of the Form 1023-EZ process to determine potential improvements to the application and review process
- Publishing materials to help organizations understand technical areas that affect them, including topics related to Indian tribal governments and the Affordable Care Act
- Developing a program to make the Form 990 series available in modernized electronic filing format
- Simplifying tax forms and enhancing their digital functionality
- Refining information document requests (IDRs, which are used to request information during an audit) to reduce the length of the examination process
Data-Driven Decision Making
During fiscal year 2015, TE/GE took several steps to integrate data-driven decision making into its processes. These include:
- Focusing exam plans on strategic areas or issues where TE/GE believes there may be a greater risk of noncompliance.
- Developing a pilot process to analyze data from Form 1023-EZ applications to identify trends and patterns.
- Using change-rate data and statistical sampling in tax-exempt bonds to identify market segments with a higher risk of noncompliance. TE/GE can now screen for possible investment limitation violations using filters related to minimum issue size, remaining term of bond issue, and yield-curve analysis—an important development to note for not-for-profits with tax-exempt bonds.
More generally speaking, this focus on data-driven decision making isn’t likely to go away: as the IRS budget and personnel count continue to shrink, TE/GE will continue to rely on it in the exam selection process. Organizations filing the Form 990 series should consult with qualified tax advisors prior to filing their annual returns to be aware of the data points of interest to the IRS.
Employee Plans (EP)
EP will focus resources on large-case employee plans, multiemployer plans, and Section 403(b) and 457(b) plans. These areas have been selected for increased attention because they have a historical pattern of noncompliance and also allow for greater coverage of the retirement plan participant universe. The remaining resources will be applied towards cash balance plans, 401(k) plans, and employee stock ownership plans.
The Employee Plans Compliance Unit anticipates starting several new compliance projects during fiscal year 2016. These will be based on EP’s analytical review of data, past projects, law changes, and newly released guidance. Stay tuned for future Alerts as details about the projects develop over the next year.
Similar to fiscal year 2015, five strategic areas will apply to exempt organizations in fiscal year 2016:
- Exemption. TE/GE will focus on private inurement and activity not related to an organization’s exempt purpose, enforcing compliance primarily through field exams.
- Protection of assets. Compliance regarding self-dealing, excess benefit transactions, and loans to disqualified persons will be enforced primarily through correspondence audits and field exams.
- Tax gap. Identification of employment tax and unrelated business income tax issues will be sought through compliance checks, correspondence audits, and field exams.
- International. TE/GE will increase oversight on funds spent outside the United States, including funds spent on potential terrorist activities, exempt organizations operating as foreign conduits, and foreign bank account reporting requirements. Corresponding regulations will be enforced through compliance reviews, compliance checks, correspondence audits, and field exams.
- Emerging issues. TE/GE will focus on nonexempt charitable trusts and the regulations under IRC Section 501(r), enforcing the regulations through compliance reviews, correspondence audits, and field exams.
Additional resources will be devoted to hospitals’ IRC Section 501(r) compliance and post-determination compliance by organizations granted tax-exempt status though Form 1023-EZ. TE/GE will also devote resources to a customer service–focused process that helps prevent erroneous revocation of tax-exempt status.
Exams in this area cover all sizes of government entities, but 75 percent of the exam closures will be for entities with gross wages of $10 million or more. Resources are being shifted from smaller entities to those with greater than $100 million in gross wages. High-risk employment tax issues identified in these organizations include:
- Early retirement incentive plans
- Rapid-growth governments
- Entities with a reduction of payroll reporting and an increase in Forms 1099-MISC issued
This unit is expecting personnel attrition approaching 18 percent in fiscal year 2016, so TE/GE is focused on developing internal knowledge-sharing tools, such as virtual case studies, to train the largely new workforce that will be responsible for this area.
External activity will be focused on:
- Referrals and claims, such as whistleblower referrals. These will account for 20 percent of the exam work.
- Market segment programs. In the past, each market segment (for example, private activity bonds and 501(c)(3) bonds) was covered through exams at least every three years. However, this process didn’t produce the information needed for the tax-exempt bonds unit to focus its future resources on high-risk issues. In fiscal years 2015 and 2016, the tax-exempt bonds unit will focus its attention on analyzing data to predict fact patterns and issues that warrant further exams, education, and voluntary compliance efforts.
The unit is also reinstituting a compliance check or soft-letter program to focus on problems it identifies solely by looking at information returns filed when bonds are issued (Form 8038).
To address customer education and outreach, the unit plans to pursue the following in 2016:
- Revising the Form 8038 series
- Creating a publication on arbitrage rules for infrequent issuers and improving the management contract training materials
- Producing webinars that will be recorded and posted on the IRS Web site
For more on TE/GE’s priorities in 2016, read TE/GE’s full work plan, which is posted on its Web site. For insight on how your organization may be impacted by any of the areas of focus mentioned above, contact your Moss Adams professional.