The IRS Tax Exempt and Government Entities division (TE/GE) has released its Fiscal Year 2019 Program Letter (referred to in prior years as "the Work Plan"), outlining compliance-related strategies and other plans for FY 2019.

Commissioner's message

In the opening message, Acting TE/GE Commissioner David W. Horton and Acting TE/GE Deputy Commissioner Robert S. Choi highlight TE/GE's efforts to execute compliance strategies, build better processes and provide useful information and guidance on the Tax Cuts and Jobs Act (the TCJA). TE/GE is onboarding a significant number of new employees and is cross-training employees to allow greater flexibility to direct resources to shifting needs. In addition, TE/GE seeks to advance data and analytics to drive decisions about identifying and addressing existing and emerging high-risk areas of noncompliance.

FY 2019 compliance program

The Program Letter defines six areas of TE/GE's compliance program and outlines priorities in each, as described next.

Compliance strategies

Compliance strategies are used to identify priority compliance issues and allocate resources. TE/GE employees may suggest compliance strategies, which are approved by TE/GE's Compliance Governance Board. As part of TE/GE's overall compliance program, these strategies are intended to ensure that the IRS is focused on the highest priority issues and emerging risks.

Current approved compliance strategies include:

1. Section 501(c)(7) entities: focus on investment income, non-member income and non-filers of Form 990-T, Exempt Organization Business Tax Return
2. Section 4947(a)(1) Non-Exempt Charitable Trusts: focus on organizations that under-report income or over-report charitable contributions
3. Previous for-profit: focus on organizations formerly operated as for-profit entities before their conversion to Section 501(c)(3) organizations
4. Self-dealing by private foundations: focus on organizations with loans to disqualified persons
5. Early retirement incentive plans: determine whether federal, state or local governmental entities that provide cash and other options to employees as an incentive for early retirement have applied proper tax treatment to these benefits
6. Forms W-2/1099 matches: compare payments reported on Form 1099-MISC, Miscellaneous Income, with wages reported on Form W-2, Wage and Tax Statement, and subject to Federal Insurance Contribution Act (FICA) tax and income tax withholding
7. Notice CP 2100 (backup withholding): determine whether mismatched and/or missing taxpayer identification numbers on Form 1099 indicate failure to comply with backup withholding requirements
8. Worker classification (misclassified workers): determine whether misclassified workers result in incorrectly treating employees as independent contractors
9. Cost of issuance: determine whether the cost of issuance (COI) on private activity bonds exceeds 2% of the proceeds of the issue.

Data-driven approaches

With data-driven approaches, TE/GE uses quantitative criteria to identify high-impact issues and allocate resources. These approaches use procedures and models to analyze data from returns and other historical information to identify areas of noncompliance.

Current priorities in data-driven approaches include the following:

1. Continue to improve compliance models based on Form 990-series returns
2. Test the newly developed model for Form 5227, Split Interest Trust Information Return
3. Identify returns of exempt organizations and government entities containing the highest risk of employment tax noncompliance
4. In collaboration with Research, Applied Analytics, and Statistics (RAAS), continue to review various items and activities, including private benefit/inurement, officer business partnerships, underreported credit card income, and related employees and for-profit partnerships.
5. Continue to develop models for Form 8038, Information Return for Tax-Exempt Private Activity Bond Issuers, and Form 8038-G, Information Return for Tax-Exempt Government Obligations, by sampling the results of data queries and models designed to test indicators of noncompliance.

Referrals, claims and other casework

Referrals are received from sources both inside and outside the IRS and allege noncompliance by an exempt organization. Claims are requests for refunds or credits of overpayments of amounts already assessed and paid.

TE/GE priorities in this compliance area include:

1. Continue to pursue referrals received from internal and external sources that allege noncompliance by an exempt organization
2. Pursue taxpayer and interagency referrals, including information items from sources within and outside the IRS that allege noncompliance with employment tax law by a government entity or an exempt organization
3. Continue to address requests for refunds or credits of overpayments of amounts already assessed
4. Continue to address high-dollar, complex employment tax claims filed by federal, state and local governments
5. Continue to examine entities that filed and received exemption using Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code

Compliance contacts

Compliance contacts use correspondence including "compliance checks" and "soft letters" to address potential noncompliance. A compliance check is a non-examination correspondence with an organization to ask about an item on a filed return, to determine if reporting requirements have been met, or to assess if an organization's activities are consistent with its tax-exempt purpose. A soft letter is correspondence to notify an organization of a change in law or a compliance issue; responses are not expected, but may be received and converted into a compliance check. Compliance checks and soft letters are used to determine whether an exempt organization is adhering to various recordkeeping and information reporting requirements, including:

1. Combined Annual Wage Reporting (CAWR) Employment Tax: tax-exempt employers that had discrepancies between Form W-2 and either Form 941, Employer's Quarterly Federal Tax Return, or Form 944, Employer's Annual Federal Tax Return, and exempt organizations that are required to file, but fail to file, Form 940, Employer's Annual Federal Unemployment Tax Return
2. Financial Assistance Policy (FAP): tax-exempt hospital organizations that did not comply with IRC Section 501(r)(4)
3. Form 990-T Non-Filer: IRC Section 501(c)(7) organizations that reported investment income of Form 990/990-EZ but did not file Form 990-T
4. Form 1099 Stop-Filer: entities that were required to file, but failed to file, Form 1099-MISC
5. IRC Section 501(c)(12) Mutual or Cooperative Telephone Companies: organizations that may have failed to meet the 85% member income test
6. IRC Section 4947(a)(1) Non-Exempt Charitable Trusts (NECTs): exempt organizations that are required to file, but fail to file, Form 1041, U.S. Income Tax Return for Estates and Trusts
7. Supporting Organizations: entities that state they are supporting organizations but have filed Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations

Determinations

TE/GE issues determination letters to exempt organizations on exempt status, private foundation classification and other issues. With increasing demand for determinations, TE/GE is working on developing strategies to reduce the filing burden and case processing time while also hiring and training additional revenue agents to review determination letter requests.

Voluntary compliance and other technical programs

The Employee Plans (EP) Voluntary Correction Program (VCP) enables a plan sponsor to pay a fee and receive IRS approval for correction of plan failures at any time before audit. EP is looking into implementing a fully electronic submission process for VCP.

Implications

The 2019 Program Letter provides exempt organizations valuable insight into TE/GE's priority compliance issues for the coming year and how it intends to approach these issues.

Highlights of the FY 2019 Program Letter include the following:

1. TE/GE remains committed to providing additional guidance and education on the tax implications of the TCJA for exempt organizations.

2. TE/GE continues use advanced statistical models and data analytics for case identification and selection. In furtherance of these efforts, the IRS has partnered with RAAS to design and test data-driven approaches to identify noncompliance within exempt organizations.

3. Despite the IRS's increased reliance on data-driven analytics, TE/GE continues to pursue referrals regarding noncompliance from both internal and external sources.

4. TE/GE's data-driven approach will focus on identifying returns with the highest risk of employment tax noncompliance. Exempt organizations should be mindful of the methods used to classify workers as independent contractors, especially those in executive positions, because the misclassification of employees as independent contractors can give rise to employment tax issues.

5. TE/GE continues to focus on organizations previously operating as for-profit entities, self-dealing by private foundations, and investment income and non-member income of social clubs exempt under Section 501(c)(7).

6. Organizations and practitioners can continue to use and rely on Pay.gov and secure messaging as the IRS intends to expand upon these services.

7. Organizations that under-report or over-report charitable contributions, particularly Section 4947(a)(1) non-exempt charitable trusts, will be targeted for examination.

8. TE/GE plans to increase examination of mismatched/missing reporting information, including information reported on Forms W-2 and/or 1099, wage and tax statements, and withholding statements.

9. Tax-exempt employee plans will face heightened scrutiny from TE/GE regarding their distribution processes, procedures and reporting, including excessive contributions and appropriate deductions. Simplified Employee Plans and terminated cash balance plans will also face additional scrutiny.

10. TE/GE intends to continue its FY 2018 Work Plan by focusing on tax-exempt bonds, including issues that adversely affect the tax-exempt status of bonds.

11. TE/GE is onboarding a significant number of new employees, thereby signaling a potential increase in examination and enforcement action.

Exempt organizations' management should evaluate the potential implications that each of the areas identified by TE/GE in its FY 2019 Program Letter may have on those organizations.

Please contact your EY professional for further information.

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