June 28, 2017 IRS Exempt Organization officials provide updates on coming changes IRS Exempt Organization officials have announced several upcoming changes that tax-exempt organizations will want to be aware of, including: (1) the development of online taxpayer accounts for exempt organizations, (2) changes to Form 1023-EZ, (3) increased hospital examinations and (4) rejection of incomplete or inaccurate paper-filed returns. Online taxpayer accounts IRS Exempt Organizations Director Margaret Von Lienen announced that the IRS is considering developing online taxpayer accounts for tax-exempt organizations. Von Lienen made the comments at a June 21 AICPA Not-for-Profit Industry Conference in Maryland, as reported by Tax Analysts (2017 TNT 120-6). The online accounts would enable tax-exempt organizations to go online to update certain organization information. Changes to Form 1023-EZ Speaking at the same June 21 AICPA conference, Von Lienen also announced coming changes to Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The changes address concerns raised by the National Taxpayer Advocate and external stakeholders. Von Lienen said that Form 1023-EZ will ask filers about their assets and income, as well as if they are a church, school or hospital — questions which are already on the Form 1023-EZ eligibility checklist. In addition, Form 1023-EZ will include a 250-character box for filers to use to describe their organization's purposes and planned activities. Von Lienen added that the IRS hopes to integrate the changes in early 2018. Von Lienen also noted that the IRS has closed more than 400 out of about 1,100 examinations of Form 1023-EZ filers that began last year as part of its post determination compliance program. Of the 400, 86% closed with "no change" or "no change with advisory." The remainder resulted in the organizations needing to amend organizing documents or make changes to related returns. The advisories issued related to self-dealing, lack of charitable activities, high percentages of unrelated business income (UBI) and failure to report UBI on Form 990-T. Hospitals being selected for examination Von Lienen reinforced prior IRS FY17 work plan comments that hospitals are increasingly being selected for examination. She stated that more than 400 hospitals which were the subject of IRS non-contact reviews have been referred for examination for non-compliance with Section 501(r). The issues she specifically noted were lack of community health needs assessments and the absence of financial assistance or emergency medical care policies. Incomplete paper returns to be rejected Maria Hooke, Director of Exempt Organization Examinations with the IRS Tax-Exempt and Government Entities (TE/GE) Division, announced that the IRS plans to begin rejecting inaccurate or incomplete tax-exempt organization returns filed on paper. Hooke spoke at a June 16 Gulf Coast Area TE/GE Council program, as reported by Tax Analysts (2017 TNT 116-6). Hooke noted that the IRS already rejects and returns inaccurate and incomplete information returns that are filed electronically, but it has worked with paper filers to correct the mistakes on their returns. However, the IRS plans to begin rejecting and returning faulty paper-filed returns, requiring filers to correct and resubmit the forms before the due date to avoid late filing penalties. The change is planned to take effect January 1, 2018. Implications The statements of these senior members of the IRS TE/GE Division provide helpful insight to the tax-exempt organization community on what the IRS has been doing and plans to do in the future. Tax-exempt organizations should carefully consider these announcements and plan accordingly. The implementation of online taxpayer accounts should be a welcome addition to the tax-exempt community as the IRS continues to improve its online capabilities and features. The IRS representatives did not expand on what attributes these accounts may feature, but they should be helpful if they compare to other IRS online accounts (e.g., those existing for individuals that allow taxpayers to view and manage their balance). Adopting something similar for tax-exempt organizations would help increase transparency and communication between the organization and the IRS. The changes to the online Form 1023-EZ, including two new questions regarding assets and income and requiring the filing organization to expand on its mission and significant activities, moves the Form 1023-EZ slightly closer to the full Form 1023. While the online Form 1023-EZ has seemingly been a success thus far, the IRS promised in its FY17 work plan that it would continue to update the relatively new Form 1023-EZ streamlined process. These recent updates will likely go into effect in the early part of 2018. Tax-exempt hospitals should ensure they fully comply with Section 501(r) and have all required documents available online and in an accurate state. The IRS has been performing an increasing number of "non-contact" reviews, meaning that examiners visit the website of the hospital and search for the documents indicated by the filer's Form 990, Schedule H, that should be posted on its website or another hospital organization's website. Noncompliance with Section 501(r), gleaned from information on the website or in the organization's Form 990, or the presence of inaccurate or incomplete information therein, will likely lead to an IRS examination. The future change to IRS policy on correcting improperly submitted paper information returns provides another incentive for organizations to file their information returns with the IRS electronically. Presently, if a paper-filed return is rejected by the IRS as being inaccurate or incomplete, the IRS will work with the organization to resolve any issues. After December 31, 2017, the IRS will require a tax-exempt organization that files an inaccurate or incomplete paper return to correct the filing error and resubmit the return before the filing deadline or risk late-filing penalties. This change in policy could cause more organizations that file paper returns to be subjected to late-filing penalties, whereas they previously could have worked with the IRS administratively to resolve the filing error. Clearly, electronic submission of information allows a quicker means of correcting inaccuracies than exists with paper-filed returns since the organization knows right away that the return has been rejected for filing. Please contact your Ernst & Young LLP professional or further information. ——————————————— — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg ———————————————
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