Filed under: Not-for-Profits

January 6, 2016

By Karen Dunn, JD, LLM

The IRS will be moving forward. Simota Lough, the Tax Exempt and Government Entities (TE/GE) commissioner, announced plans to build the IRS of the future with the Moving Forward Together – The Road Ahead initiative.

Each year, the IRS issues its priority work plan that outlines what the IRS accomplished in the past year as well as what its focus will be for the upcoming year for exempt organizations (EO). For the most part, the 2016 work plan continues efforts begun in 2015, to optimize resources and address significant non-compliance. These efforts will involve focus on five areas – continuous improvement, knowledge management, risk management, data-driven decision making, and employee engagement.

Most of the work plan is a bit vague, but there are some concrete projects involving the determination process to reduce the time an application for recognition of exemption (Forms 1023 and 1024) is in the system and implementing more data-driven decision-making that will result in more focused examinations.

A copy of the work plan can be found on the IRS website.

Application Process

The IRS has made some changes to the process that they claim has and will continue to reduce turnaround time. For example, the IRS now assigns determination applications directly to specialists rather than waiting for requests by agents or managers for new cases. In addition, rather than holding cases in suspense for 90 days, they now close cases within a 35-day time frame if an applicant fails to respond to a request for additional information.

Some staffing changes should also improve the application process. They anticipate having 100 determination specialists to review applications plus 25 examiners to review the Form 1023-EZ. They plan to reassign 30 determination specialists to exempt organizations examinations, but feel that other process improvements will result in a net efficiency gain. In this author’s recent experience, it appears that much improvement has been made since the log-jam prior to the introduction of the 1023-EZ. However, they still have a long way to go to get back to the more reasonable timeframe of the pre-revocation years [i].

Form 1023-EZ

The IRS plans to implement a long-term project to evaluate the Form 1023-EZ process to determine potential improvements to the application and review process. As part of the data-driven decision making plan, the IRS also will develop a process to analyze data from 1023-EZ determination process to identify trends and patterns, and to determine the percentage of Forms 1023-EZ selected for pre-determination reviews. They will also continue to review organizations that were granted exempt status through the streamlined determination process, used for reinstatement of exempt status of small organizations after revocation for failure to file Forms 990, and will begin compliance enforcement on organizations that were granted exempt status by filing a 1023-EZ.

Examinations

The examination strategy will be more focused through data-driven decisions. The goal will be to identify high risk areas of non-compliance with optimal use of available resources. The focus will be on significant compliance issues and not the number of cases closed. The IRS will use education, compliance reviews, compliance checks, and correspondence and field examinations. By stratifying exempt organizations into major subsections and asset classes, the IRS hopes to balance coverage and optimization of resources on the highest risk returns. The IRS will determine issues and risk areas of noncompliance through data mining of tax returns, the exempt organization community, and historical information as well as the usual stakeholder input, reliable outside data, and public information.

The issues identified as focus areas include:

  • Exemption: Non-exempt purpose activity and private inurement, enforced primarily through field examination
  • Protection of Assets: Self-dealing, excess benefit transactions, and loans to disqualified persons, enforced primarily through correspondence audits and field examination
  • Tax Gap: Employment tax and Unrelated Business Income Tax liability, enforced through compliance checks, correspondence audits, and field examination
  • International: Oversight on funds spent outside the U.S., including funds spent on potential terrorist activities, exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements, enforced through compliance reviews, compliance checks, correspondence audits, and field examination
  • Emerging issues: Non-exempt charitable trusts and IRC 501(r), enforced through compliance reviews, correspondence audits, and field examination, including reviews of tax-exempt hospitals’ compliance with the Patient Protection and Affordable Care Act

Knowledge Management

In choosing the points in the plan that should provide the greatest impact and interest to exempt organizations, we must mention the IRS attempt to improve the knowledge base of its employees that work in EO (Exempt Organizations). In 2015, the IRS established Knowledge Networks (K-Nets) for private foundations, hospitals, health care organizations, Section 501(c) issues, and unrelated business income tax. This program should improve the overall knowledge base of its EO employees, which should benefit exempt organizations in all their dealings with the IRS.

Although there is nothing extremely new or unexpected in the work plan, it does show a great deal of emphasis on process redesign and identification of high risk areas of non-compliance so as to better allocate resources to those risk areas.

If you would like additional information or assistance on any of these topics, please feel free to contact Karen Dunn or call her at 425-635-4548.

[i] The Pension Protection Act of 2006 created an automatic revocation of exempt status for organizations that fail to file one of the various types of Form 990 for three consecutive years. The first round of revocations began in 2010.

© Clark Nuber PS, 2016. All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.