It is a common assumption that for-profit businesses are the primary focus of IRS employment tax examinations and that charitable and governmental organizations have little exposure. Assumptions concerning risk should change. A look at the fiscal year 2018 work plan of the IRS Tax Exempt and Government Entities (TE/GE) shows us that exempt organizations are being scrutinized in several areas including worker classification and fringe benefits. (IRS Tax Exempt and Government Entities, FY2018 Work Plan.)

Background

As a result of a three and half year development effort, in May 2017, IRS TE/GE brought online a new Compliance, Planning & Classification (CP&C) unit. The new unit has streamlined and consolidated various processes and embodies a more comprehensive approach to identify, research, and monitor compliance risks, using data analytics.

As part of the realignment, several elements of TE/GE were consolidated. Namely, Federal, State and Local Governments (FSLG) moved into Exempt Organizations (EO) and is now referred to as Federal, State, Local /Employment Tax (FSL/ET). In addition, the EO Examinations group added specialists from the Federal, State, and Local (FSL) government function to leverage and centralize TE/GE's employment tax (ET) knowledge and achieve efficiencies in examining employment tax issues within the tax-exempt and government entities sector.

Fiscal year 2018 compliance focus

In addition to assisting FSL/ET examiners with the examination of tax-exempt entities with complex worker classification and/or complex fringe benefit issues, the TE/GE fiscal year work plan includes the following compliance checks:.

— Combined Annual Wage Reporting (CAWR) employment tax. Identify tax-exempt employers with discrepancies between amounts reported on Forms W-2 and Forms 941/944.

— CAWR Federal Unemployment Tax Act. Identify exempt organizations that are required to, but fail to file Form 940.

The work plan also calls for the following compliance strategies:

— Early retirement incentive plans. Examine entities that provide cash (and other) options to employees as an incentive for early retirement to determine if the proper tax treatment was applied to these benefits.

— Form W-2/1099 matches. Examine entities where payments reported on Forms 1099 should have been treated as wages subject to Social Security and Medicare (FICA) tax and income tax withholding.

— Federal unemployment insurance (FUTA) tax. Address situations where an IRC Section 501(c)(3) organization handles payroll that includes employees of a related IRC Section 501(c)(4) organization, but does not pay the FUTA tax on the employees of that IRC Section 501(c)(4) organization.

— Notice CP 2100, backup withholding. Examine entities that failed to comply with backup withholding requirements due to mismatched and/or missing Taxpayer Identification Numbers (TINs)on Form 1099.

— Models. Identify returns filed by exempt organizations and government entities with the highest risk of employment tax noncompliance (e.g., substantial credit balances with no returns, and zero to minimal FICA wages paid compared to Form 1099 distributions).

Ernst & Young LLP insights

Exempt organizations should become familiar with areas of focus in federal employment tax audits by viewing the IRS website, Tax Exempt and Government Entities Issue Snapshots.

Also suggested is a careful internal examination of the following:

— Worker classification. Identify independent contractors and carefully consider if the IRS and well as state governments might conclude that these individuals are employees.

— Forms 941/W-2 reconciliation. For the current and preceding three years, reconcile Form 941 and Form W-2 amounts and document acceptable reasons for any differences.

— Fringe benefit taxability review. Review federal (and state, local) earnings and deduction code tax systems configurations confirming not only the correct treatment for income tax, FICA and FUTA, but also that Form W-2 reporting requirements are met for boxes 10, 11 and 12.

— Form 1099 reporting and backup tax. Review vendor files to confirm that all reporting and backup withholding requirements are met.

— Review fringe benefit plan documents. Review all fringe benefits plan documents, in particular, cafeteria plans and those dealing with retirement, to confirm conformity with IRS guidelines and that processes and practices align with plan terms.

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