According to recent comments by IRS officials reported by Tax Analysts (2016 TNT 39-12), the IRS plans to revise its approach to information document requests (IDRs) during examinations of exempt organizations.

Donna Hansberry, Deputy Commissioner with the IRS Tax-Exempt and Government Entities (TE/GE) Division, stated that the aim in revising the IDR process is to reduce burdens on organizations under examination through clearer and timelier requests. Speaking at a TE/GE Joint Council Meeting on February 26 in Baltimore, Hansberry acknowledged that this is not something that is always easy to do, but it is something that the IRS is working to improve.

Speaking at a later session in the same meeting, Margaret Von Lienen, TE/GE Acting Director for Exempt Organizations, stated that customer surveys, as well as internal reviews, have identified the current IDR process as a burden for organizations. She added that a team has been working on revising the process for the past year and that the IRS is preparing to roll the new process out. In addition to ensuring IDRs are clear and concise, the new process seeks to ensure the requests are tailored to the organization under examination, and that the IRS is communicating with the organizations to confirm they understand the information the requests are seeking and why.

In addition to reducing burdens on organizations, Von Lienen added that the new IDR process will also include an enforcement tool for dealing with non-responsive organizations. The new IDR process will be similar to the restructured IDR process recently put in place by the IRS Large Business & International (LB&I) division (for a discussion of the LB&I IDR revisions, see Tax Alerts 2014-502 and 2014-2053). TE/GE Division Counsel Thomas Kane noted, however, that, due to the different nature of TE/GE and LB&I's taxpayer base, the processes will not be identical, so TE/GE plans to implement a less rigid approach.

Other TE/GE examination developments

Hansberry also stated that the IRS has finalized a case selection model that uses Form 990, Return of Organization Exempt From Income Tax, and accompanying forms to identify possible issues of noncompliance for examination. The model aims to identify compliance risks in an objective manner based on multiple factors. The IRS plans similar models for reviewing Forms 990-PF, Return of Private Foundation, and 990-EZ, Short Form Return of Organization Exempt From Income Tax.

According to Hansberry, the IRS is also shifting some resources towards its review of tax-exempt hospitals to ensure compliance with the Affordable Care Act and corresponding Section 501(r) requirements. These reviews could lead to examinations in some cases, and Van Lienen stated that it is expected that such examinations will begin this year.

The IRS officials mentioned several additional examination developments:

— The post-determination compliance program is being expanded to include organizations that received recognition of exemption after filing Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

— The IRS EO Division has set a goal of completing 7,000 examinations in 2016 — more than the 6,300 completed last year, but less than the 8,000 completed in 2014.

— In an effort to enhance review of organizations after they have been operating for a while, the IRS has shifted 30 TE/GE agents and their managers from exempt organization determinations to examinations.

Implications

Taking its cue from LB&I, the TE/GE division of the IRS is in the process of revamping its IDR enforcement process. The IDR process is the formal method that the IRS uses to gather financial and other information from an organization under examination for purposes of identifying possible issues of noncompliance. The revised IDR process will result in changes to the requirements for issuing IDRs and introduce new procedures for IDR enforcement. TE/GE believes that implementing these changes will improve its ability to gather information in a timely manner, while making the examination process more efficient and transparent.

Additionally, a case selection model for Form 990 will be used by TE/GE to identify issues for examination and conduct more focused examinations. TE/GE has concluded that this model is highly effective in identifying possible issues of noncompliance. Specifically, returns selected for examination by this model during the past two years realized an overall change rate of more than 90%. Lastly, TE/GE has made it clear that tax-exempt hospitals may now be subject to examination for purposes of determining compliance with the new Section 501(r) requirements.

Please contact your EY professional for additional details.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg

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