The IRS Advisory Committee on Tax Exempt and Government Entities (ACT) has issued its 2016 Report of Recommendations (the Report), offering detailed recommendations to the IRS on tax guidance and administration in the areas of tax-exempt organizations, government entities, Indian tribal governments, tax-exempt bonds, and employee plans.

ACT is an organized public forum for discussing issues relevant to the responsibilities of the Tax Exempt and Governmental Entities Division (TE/GE) and enables the IRS to receive regular input on the development and implementation of tax administration issues affecting the communities served by TE/GE. Through its annual report, ACT presents the interested public's observations about current or proposed IRS policies, programs, and procedures and suggests improvements. ACT consists of external stakeholders and representatives experienced with employee retirement plans, tax-exempt organizations, tax-exempt bonds, and federal, state, local and Indian tribal governments.

This Alert highlights some of the recommendations in the 2016 ACT Report.

Exempt Organizations (EO) division

(1) Equip EO division staff to carry out their responsibilities

In the Report, the ACT urges the IRS to ensure that its EO staff is equipped to carry out the responsibility of the EO division. The ACT emphasizes the significant reduction in the number of EO staff members since 2009 and the 2015 realignment, which resulted in the transfer of tax law specialists out of the EO division. As a result, according to the Report, the number of EO audits dropped from 2010 through 2014, and there has been a reduction in the availability of expertise to answer questions from the EO community.

The ACT suggests that the IRS could strengthen the expertise of the remaining EO staff through internal continuing education training programs and enabling staff to attend external professional development programs outside the federal government.

(2) Provide leadership and guidance on current and anticipated major issues for the EO sector

The ACT states that the public needs leadership and guidance from the IRS on major and complex issues that affect the EO sector today and are likely to affect the sector in the future. The ACT describes a number of areas in which the IRS may be compromising its relevancy by not clarifying what may be perceived as "institutional inconsistencies" in enforcing the tax code. The ACT notes that some of these areas have been on the IRS Priority Guidance for years, including donor advised funds and Section 7611 regulations regarding church examinations. Other examples of areas that the ACT believes need clarification include:

— Unrelated business income issues

— Church (or church-related entity) status and the treatment of these organizations

— Political activities of Section 501(c)(4) organizations

— Religious organizations and their continuing qualification for tax-exempt status in the wake of the Obergefell v. Hodges decision

Further, the ACT cites areas in which guidance and resources are scattered in many different forms in various places, including requirements and filings for international tax compliance. The Report includes an outline of potential international filings for tax-exempt organizations.

(3) Provide the EO sector with needed tax compliance tools

The ACT encourages the IRS to provide exempt organizations (EOs) with tools to comply with federal tax law. Interviews that members of ACT performed with stakeholders revealed that EOs endeavor to comply with the tax laws but need additional resources and responsive assistance from the IRS. To provide responsive service in the coming decades, the ACT recommends that the IRS focus on: (1) clearly communicating with the sector; (2) providing more useful guidance; and (3) "ensuring that there is an 'ease of use' in all that it does."

To help educate the EO sector in a cost-effective manner, the ACT recommends that the EO division release more information about compliance problems raised in EO audits. Additionally, the release of this information may help deter wrongdoing and reassure the donating public that there is oversight by the EO division. Although mindful of the Section 6103 restrictions on releasing tax return information, the ACT recommends that TE/GE release detailed audit information that is not taxpayer specific but includes: (1) the number and type of EOs reviewed on audit; (2) the issues that most frequently result in tax assessment and penalties; and (3) outcome statistics, encompassing modifications of exempt status, revocations, and average tax assessment per return and per organization examined.

The ACT also stresses the necessity for TE/GE to provide more easily accessible, easily understood guidance, particularly in light of limited resources. According to the ACT, one means of providing quasi-guidance would be to revive the annual EO Continuing Professional Education (CPE) Text, which has not been published since 2004. The ACT expects little formal guidance in the future because the IRS has shifted responsibility for formal guidance from the EO division to the Office of Chief Counsel and has raised the user fee for a private letter ruling request to $28,300.

In addition, the ACT also urges TE/GE to improve its website to make it easier for EOs to navigate and use, and to provide updates to the nonprofit sector on current developments.

(4) Ensure 'cyber integrity' through technology tools, data collection and secured cyber storage

The ACT highlights growing cyber security challenges and notes that the increasing need for secure technology is at odds with declining IRS resources, noting that funding for cyber security dropped more than 20% at the IRS between 2011 and 2015. The ACT recommends that the IRS refrain from over collecting sensitive and personally identifiable information and encourages the IRS to make targeted investments in IT enhancements and personnel, especially cyber security personnel.

(5) Release and share data when appropriate

The ACT urges the IRS to continue to strongly advocate within states for amendment of IRC Sections 6103 and 6104 to allow sharing of information with state charities officials without criminal penalties attaching. The ACT notes that the current restrictions on information sharing between the IRS and states create difficulties and inefficiencies for state offices in protecting charitable resources. The ACT also recommends that the IRS release in electronic format all information it has received electronically, such as Form 990 data, which the ACT believes will serve as an invaluable resource to researches, regulators and the public. The ACT points out that the IRS has pledged to begin releasing such electronic data to the public sometime in 2016. (In fact, shortly after the ACT Report was released, the IRS issued a press release announcing that publicly available data contained in information returns (Forms 990, 990-EZ, 990-PF) filed electronically will now be available in a machine readable format through Amazon Web Services (AWS).)

(6) Foster two-way communication between IRS EO division and EO sector

In its Report, the ACT recommends that TE/GE take advantage of the Industry Issues Resolution program (see Revenue Procedure 2016-19) to obtain input from the nonprofit sector before issuing guidance. Further, the ACT encourages TE/GE to ensure that small nonprofits can access all guidance and quasi-guidance easily and free of charge. The ACT notes that the 2016 ACT interviewees perceive that IRS staff and other resources are only accessible to the largest nonprofits and their advisors. The Report urges the IRS to identify appropriate resources to increase smaller nonprofits' access to EO guidance.

The ACT also proposes in its Report a revised determination letter to help TE/GE better educate new public charities. The educational information in the proposed letter includes a description of limits on lobbying and political campaign activities, descriptions of private inurement, private benefit and unrelated business income, and disclosure requirements.

Lastly, to improve the communication between the EO division and the EO sector, the ACT recommends that the IRS begin using email as a tool to communicate with EOs, and suggests that the EO division consider providing online live chat assistance to supplement phone assistance.

Employee Plans (EP) division

The Report cautions the IRS against eliminating periodic determination letters for employee plans under the Employee Plans Determination Letter Program (see Announcement 2015-19). Noting that the ACT's EP Subcommittee "recognizes that the IRS is not likely to accept this recommendation," the Report stresses that "it is a recommendation with which all members of the EP subcommittee strongly concur." Assuming "there will be no IRS change of heart," the ACT recommends that the IRS:

— Make determination letters available to as much of the EP community as feasible

— Look for ways to make the pre-approved program more flexible

— Reduce the user fees for document sponsors of pre-approved plans

— Modify the Employee Plans Compliance Resolution System so it can be used by plan sponsors without current determination letters and for issues identified on audit

— Expand the plan provisions that can be incorporated by reference to sections of the code or regulations, to simplify plan documents

— Allow leniency for "immaterial" flaws in plan document language found on IRS examination

— Confirm that protection under Section 7805(b) continues for any plan document language that remains unchanged from issuance of a prior determination letter, and further consider the feasibility of accepting an independent private review as "good faith" compliance extending Section 7805(b) protection

— Provide sponsors with a safe harbor approach for converting an individually designed plan into a pre-approved plan, or establish a program to review and approve these conversions

— Publish model amendments along with the Cumulative Lists and List of Required Modifications

— Provide adequate time to adopt all interim amendments

— Ask Congress to increase and dedicate user fees for the Determination Letter Program and dedicate the amounts received for use by, and on behalf of, the Determination Letter Program

Tax-Exempt Bond (TEB) division

Regarding tax-exempt bonds, the ACT recommends: (1) more regular communication between the ACT Bond Subcommittee and the TEB division; (2) more targeted outreach by the TEB division and further review of TEB publications to enhance their effectiveness; (3) revision of Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues, so that TEB could obtain better information regarding the characteristics of certain bonds; (4) more targeted, focused examinations; and (5) greater TEB participation with industry associations and market participants.

Government Entities division

The ACT's recommendations on federal, state and local government (FSLG) entities focus on training and a project to better achieve outreach and education to small local governments. Additionally, the ACT's FSLG subcommittee reviewed and made recommendations on the FSLG Phase Training, which is the internal program providing specialized knowledge to IRS FSLG employees on compliance issues for state and local government employees.

Implications

The ACT indicates in its Report that there is a perception that the role and function of the IRS EO division has been fundamentally affected over the years due to a number of factors, including decreasing resources, declining budgets and loss of expertise. Accordingly, the ACT recommends changes that are focused on the long-range future of the EO division. For instance, the Report emphasizes the need to improve communication between the EO division and EO sector, and provide more EO resources to the public.

The IRS is not bound by the ACT's recommendations. Although some of the ACT's past recommendations have been adopted by the IRS, many others have not. Now that the IRS has officially received the recommendations discussed in the ACT's Report, the IRS likely will consider those recommendations. Whether the IRS adopts any of the ACT's proposals will depend on the IRS's available resources, priorities and input from other external stakeholders such as associations, state regulators and Congress.

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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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