October 6, 2017 IRS Exempt Organizations 2018 Work Plan highlights compliance efforts The IRS Tax Exempt and Government Entities division (TE/GE) has released its 2018 Work Plan (the Work Plan), outlining compliance-related strategies and other plans for FY 2018, as well as highlighting several changes implemented in the last year. Commissioner's message An opening message in the Work Plan from TE/GE Commissioner Sunita Lough and Deputy Commissioner David Horton highlights TE/GE's effort to realign and improve its services with the intent to more effectively utilize its limited resources. They note that in May 2017 TE/GE launched a new Compliance Planning & Classification (CP&C) unit to consolidate certain exam functions previously housed within each subset of TE/GE (Exempt Organizations, Employee Plans, and Government Entities). For example, the CP&C unit now identifies and monitors compliance risks using data analytics for all of TE/GE. In the coming year, they added that TE/GE plans to launch a "Compliance Strategy Tool" and an "Internal Submission Portal" to collect input into areas of noncompliance. They also noted that these initiatives will shape compliance efforts in the coming years. FY 2017 changes The Work Plan highlights several changes implemented in FY 2017, including: 1. Modifying the eligibility criteria for Form 1023-EZ (Revenue Procedure 2017-5, see Tax Alert 2017-60), limiting the form to organizations exempt under Section 501(c)(3) 2. Realigning the cross-functional Employment Tax Knowledge Network (K-Net) with the other five EO K-Nets that provide analysis and resources on technical tax issues for IRS Exempt Organizations employees 3. Issuing proposed adverse determination letters to organizations that did not provide complete responses to requested information As part of its realigning, TE/GE now includes the Federal, State and Local Governments (FSLG) and Federal, State, and Local/Employment Tax (FSL/ET) units. FSLG was previously under Government Services, and is now housed under EO to focus on employment tax issues. FSL/ET examiners will continue to focus on compliance by federal, state and local governments with employment tax obligations. These examiners will also assist with the examination of tax-exempt entities with complex worker classification and/or complex fringe benefit issues. The Work Plan also highlights the IRS's processing in FY 2017 of Form 8976, Notice of Intent to Operate Under 501(c)(4). Form 8976 serves as the notification process for the recently enacted Section 506, which requires organizations intending to operate under Section 501(c)(4) to notify the IRS within 60 days of formation. The Work Plan notes that, since implementation, 17% of the Form 8976 notices have been rejected — with the most common reasons being nonpayment of the user fee and preexisting exemptions (such that no notification was required). FY2018 strategies and plans Rulings & agreements The Work Plan announces that in FY 2018 the IRS will implement additional revisions to Form 1023-EZ, including adding a required activity description section (see Tax Alert 2017-141), as well as new questions on gross receipts, asset thresholds and foundation classification. As a result, the IRS anticipates processing times for Form 1023-EZ applicants will increase. The IRS also plans to continue predetermination reviews of a statistical sample of Form 1023-EZ applications, as well as analyses of data from applications. With respect to Form 8976, the IRS plans to implement enhancements to the submission platform to reduce the number of rejections due to nonpayment of the user fee. Knowledge management The IRS plans to produce additional exempt organization knowledge management products, with planned topics to include gaming, unrelated business income, Section 501(r), and organizational test requirements. The Work Plan states that IRS Exempt Organizations also plans to move certain technical information out of the Internal Revenue Manual and onto the publicly available Audit Technique Guides (ATGs) for Exempt Organizations webpage. Compliance program Compliance strategies. The Work Plan lists three exempt organization "compliance strategies" for FY 2018, with a focus on examining organizations that: (1) filed Form 990-N and stated that they are supporting organizations, (2) previously operated as for-profit entities before converting to Section 501(c)(3) organizations, and (3) show indicators of potential private benefit or inurement to individuals or private entities Data-driven approaches. The Work Plan states that the IRS plans to continue to work on its data-driven compliance models for Forms 990, 990-EZ and 990-PF. It adds that the IRS plans to continue to examine private foundations based on potential anomalies in their Form 990-PF filings. Referrals. The Work Plan states that the IRS will continue to pursue referrals alleging noncompliance by exempt organizations from both internal and external sources. Claims: The IRS will continue to address requests for refunds or credits of overpayments of amounts already assessed and paid, including an adjustment of tax paid or credit not previously reported or allowed. Post-determination compliance. The IRS plans to examine organizations that received exemption through either Form 1023-EZ or a streamlined review of their Form 1023. Compliance checks. The IRS plans to continue to use compliance checks to determine whether organizations are following recordkeeping and information reporting requirements. These compliance checks will focus on: (1) tax-exempt employers that had discrepancies between Form W-2 and Form 941/944; (2) exempt organizations that are required to file Form 940 but failed to do so; (3) Section 501(c)(7) organizations that reported investment income on Form 990/990-EZ but did not file Form 990-T; and (4) tax-exempt hospital organizations that did not comply with Section 501(r)(4). Tax-exempt bonds The work plan mentions certain FY 2017 accomplishments in the Tax Exempt Bonds (TEB) function, including using data collection tools and data analytics to improve case selection and to improve audit efficiency. TEB also conducted K-Net events for employees on recent changes to regulations affecting arbitrage, safe harbors for management contracts, and issue price. The Work Plan notes that TE/GE combined the TEB function with the Indian Tribal Governments function in FY 2017. With respect to TEB plans for FY 2018, the Work Plan notes that topics identified for knowledge management products include: hedge terminations, economic life and weighted average maturity (WAM), safe harbors for guaranteed investment contracts, and rules for qualified hedges. The Work Plan further announces the IRS's plan to continue to streamline the process for the tax-exempt bond voluntary closing agreement program (VCAP). This includes a plan for a self-remediation mechanism to help resolve certain arbitrage violations. The IRS's tax-exempt bond compliance strategies for FY 2018 include examining: 1. Tax-advantaged bonds with guaranteed investment contracts and/or qualified hedges as well as bonds with investments beyond a temporary period 2. Private activity bonds with respect to satisfaction of the rehabilitation requirement 3. Dispositions of financed facilities and/or excessive private business use 4. Bonds issued with a deep discount 5. Private activity bonds with excessive weighted average maturities Implications TE/GE's FY 2018 Work Plan describes its compliance focus areas for its 2018 fiscal year and the actions it intends to take within those focus areas. The Work Plan provides exempt organizations with valuable insight into issues on the IRS's radar and affords some specifics regarding the nature of initiatives the IRS plans to undertake in the coming year. Some highlights of the Work Plan include: 1. To increase efficiency in light of its reduced resources, TE/GE is taking a hard focus on using statistical models and data analytics for case selection. This is evidenced throughout the Work Plan, including the introduction of the new CP&C unit to monitor compliance risks using data analytics. 2. Form 1023-EZ has seen, and will continue to see, updates to increase efficiency. The IRS plans to update the form to require additional information, which will decrease abuse, but will likely increase processing time. However, the IRS clarified it has limited the form to organizations applying for Section 501(c)(3) exemption, which may help increase timeliness for those applications. 3. Organizations and practitioners can continue to utilize irs.gov for technical guidance and understanding. TE/GE will continue to develop K-nets and issue snapshots as a resource, and will move much of its technical information onto the Audit Technique Guides (ATGs) for Exempt Organizations webpage. 4. Section 501(c)(4) organizations must continue file Form 8976 as a notice of an intention to operate as a social welfare organization. Form 8976 will also receive enhancements to its online submission platform. 5. Organizations that may be targeted for examination include supporting organizations filing Form 990-N, organizations converting from for-profit to nonprofit status, and organizations that recently gained exempt status through a streamlined procedure. 6. Section 501(c)(7) social clubs that report investment income but do not file Form 990-T should also expect heightened scrutiny. See Tax Alert 2017-1350. 7. Tax-exempt hospitals should ensure they are in compliance with the requirements of Section 501(r), in particular the rules regarding financial assistance policies. See Tax Alert 2017-1316. 8. The combination of the Indian Tribal Governments and Tax-Exempt Bonds sections of TE/GE suggests a shortage of resources, which could lead to increased data mining for case selection. 9. Organizations that utilize tax-exempt financing should monitor dispositions of tax-exempt bond financed facilities and certain financing arrangements that may suggest investing and potential arbitrage. Organizations should evaluate the potential implications that each of the areas identified by the IRS in the Work Plan may have on their organization. Please contact your EY professional for further information. ——————————————— — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg ———————————————
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