The IRS Tax Exempt and Government Entities division (TE/GE) has released its Fiscal Year 2020 Program Letter, outlining compliance-related strategies and other plans for FY 2020.

Commissioner's message

In the opening message, new TE/GE Commissioner Tamera Ripperda introduces herself, highlighting her prior work helping to lead the IRS's efforts to implement the Tax Cuts and Jobs Act of 2017 (TCJA). (Ripperda succeeded Sunita Lough, who became IRS Deputy Commissioner for Services and Enforcement on September 1, 2019.)

For TE/GE, FY 2019 included further implementation and additional guidance related to the changes made to the tax law under the TCJA and an initial assessment of the likely impact of the Taxpayer First Act, enacted in July 2019. Ripperda characterizes this new legislation as changing both IRS tax administration processes and, potentially, the future operating structure of the agency. As a result, FY 2020 will "provide us opportunities to refine our programs and improve the overall customer experience," she states.

In keeping with the IRS's general ambitions to "improve efficiency, modernize its systems and business processes, and find ways to better serve taxpayers," TE/GE is working to improve customer service, implement mandatory e-filing for exempt organizations, make requisite forms available online, make it easier to pay taxes via Pay.gov, offer secure electronic correspondence for taxpayers and fairly enforce the tax laws, Ripperda explains.

FY2020 compliance program

The Program Letter defines six areas of TE/GE's compliance program and outlines its priorities: (1) compliance strategies; (2) data-driven approaches; (3) referrals, claims and other casework; (4) compliance contacts; (5) determinations; and (6) voluntary compliance and other technical programs.

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 compliance strategies address:

1. Hospital organizations with unrelated business income (UBI) — focusing on unrelated business taxable income (UBTI) reported on Form 990-T that shows expenses materially exceeding gross income
2. IRC Section 501(c)(7) entities (i.e., social clubs) — focusing on investment and non-member income
3. IRC Section 4947(a)(1) non-exempt charitable trusts (NECTs) — focusing on NECTs that under-report income or over-report charitable contributions
4. Former for-profits — focusing on organizations that operated as for-profit entities before converting to IRC Section 501(c)(3) organizations
5. Self-dealing by private foundations — focusing on organizations with loans to disqualified persons
6. Notice CP 2100 (backup withholding) — determining whether mismatched and/or missing taxpayer identification numbers on Form 1099 indicate failure to comply with backup withholding requirements
7. Forms W-2/1099 matches — comparing payments reported on Form 1099-MISC with wages reported on Form W-2 and subject to Federal Insurance Contribution Act (FICA) tax and income tax withholding
8. Small employer employment tax — determining whether exempt organizations are complying with FICA and income tax withholding requirements
9. Sinking fund over-funding bonds — determining whether over-funding causes bonds to be arbitrage bonds, negatively affecting their qualification as Tax Credit Bonds
10. Variable rate bonds — determining whether the issuances comply with rebate and yield restriction rules under IRC Section 148, bond and investment yields were properly computed, and rebate or yield reduction liability was correctly determined

Data-driven approaches

TE/GE employs data-driven approaches 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:

• Query sets — continuing to improve compliance query sets based on information reported on Form 990-series returns and Form 5227, Split Interest Trust Information Return
• Research, Applied Analytics, and Statistics (RAAS) collaboration — continuing to review various items and activities, including private benefit/inurement

Referrals, claims and other casework

TE/GE receives referrals from sources both inside and outside the IRS that allege noncompliance by exempt organizations. TE/GE also handles claims from tax-exempt organizations requesting refunds or credits of overpayments of amounts already assessed and paid.

TE/GE priorities in this compliance area include:

Referrals

• Continuing to pursue referrals from internal and external sources that allege noncompliance by an exempt organization and taxpayers and other agencies, including information alleging an exempt organization's noncompliance with employment tax law requirements
• Continuing to prioritize referrals from inside and outside the IRS that allege possible noncompliance by a bond issuer

Claims

• Continuing to address requests for refund or credits of overpayments, including tax, penalties, interest or adjustments of tax paid or credits not previously reported or allowed
• Continuing to address claims for overpayment of rebates and claims for credit payments on Direct Pay Bonds

Other casework

• Continuing to examine entities that received exemption after filing a streamlined exemption application on Form 1023-EZ; and supporting IRS-wide compliance efforts regarding IRC Section 4980H (shared responsibility for employers regarding health coverage) with respect to certain tax-exempt employers

Compliance contacts

One means TE/GE uses to address potential noncompliance involves corresponding with exempt organizations through "compliance checks" and "soft letters." 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 notifies an organization of a change in law or a compliance issue; responses are not expected but if received may be 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) — 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. Credit balance non-filer — entities with credit balances that fail to file employment tax returns
3. Financial Assistance Policy (FAP) — tax-exempt hospital organizations that did not comply with IRC Section 501(r)(4)
4. Form 990-T non-filer — IRC Section 501(c)(7) organizations that reported investment income on Form 990/990-EZ but did not file Form 990-T
5. Form 1099 stop-filer — entities that were required to file, but failed to file, Form 1099-MISC
6. IRC Section 501(c)(12) mutual or cooperative telephone companies that may have failed to meet the 85% member income test
7. IRC Section 4947(a)(1) NECTs that are required to file, but fail to file, Form 1041, U.S. Income Tax Return for Estates and Trusts

Determinations

TE/GE issues determination letters to exempt organizations on exempt status, private foundation classification and other issues. Anticipating a "large volume" of determination applications, TE/GE continues to focus on process efficiencies and expects to hire additional revenue agents.

Voluntary compliance and other technical programs

The Employee Plans (EP) Voluntary Correction Program (VCP) enables a plan sponsor to pay a fee and receive — any time before an audit — IRS approval for correction of plan failures. In FY 2020, EP will train new hires for Voluntary Compliance function, and focus on actuarial letter rulings, 60-day rollover waivers, and technical assistance work for EP taxpayers. TE/GE will continue to resolve tax-exempt bond noncompliance issues through its voluntary closing agreement program.

Implications

The FY 2020 Program Letter provides exempt organizations with 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 2020 Program Letter include the following:

1. TE/GE remains committed to improving and refining existing programs implemented based on the tax implications of the TCJA for exempt organizations.
2. TE/GE has implemented a specific compliance strategy to examine hospitals with continued losses from unrelated business activities.
3. 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).
4. Organizations that under-report or over-report charitable contributions, particularly IRC Section 4947(a)(1) non-exempt charitable trusts, will be targeted for examination.
5. TE/GE continues to examine mismatched/missing reporting information, including information reported on Forms W-2 and/or 1099, wage and tax statements, and withholding statements.
6. TE/GE plans to investigate the requirement of exempt organizations' compliance with FICA and payment of the small employer employment tax.
7. TE/GE continues use advanced statistical models and data analytics for case identification and selection. Query sets are continuously being developed to improve the recognition of misreporting on the Form 990-series returns.
8. TE/GE continues to pursue referrals regarding noncompliance from both internal and external sources.
9. TE/GE is working to implement the mandatory e-filing requirements and continuing to make forms available on their online platforms.

Of particular importance, hospital organizations should note the IRS's focus on Forms 990-T that report expenses significantly exceeding gross income. This addition to the Program Letter for 2020 signifies the IRS's increased interest in this area as a potential source of noncompliance. Coupled with the enactment of IRC Section 512(a)(6), the allocation of significant expenses to one particular trade or business may result in additional IRS scrutiny even if other unrelated trades or businesses are generating taxable income.

Exempt organizations' management should evaluate the potential implications that each identified area in TE/GE's FY 2020 Program Letter may have on those organizations.

Please contact your EY professional for further information.

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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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