The IRS Tax Exempt and Government Entities division (TE/GE) published its annual Accomplishments Letter on March 23, 2020 (attached as a PDF, below). In an introductory message, TE/GE Commissioner Tamera Ripperda highlights the division's accomplishments for FY 2019, including:

• Expanding the use of Pay.gov
• Establishing an Employer Shared Responsibility Payment compliance program for Applicable Large Employers under the Affordable Care Act
• Collaborating with IRS business partners, including the Small Business/Self Employed (SB/SE) Lead Development Center, to counter fraud and abuse
• Expanding educational efforts, soft letters and compliance checks
• Releasing additional educational videos and informational articles and participating in outreach events
• Significantly increasing hiring, investing in employee training and strengthening the Knowledge Management program
• Expanding the Employee Plans (EP) Self-Correction Program under the Employee Plans Compliance Resolution System
• Expanding the EP determination letter program

TE/GE reported hiring 200 people in FY 2019, representing a nearly 5% increase in staffing over the prior year. To identify problem areas in need of stronger compliance, TE/GE operates a four-part compliance program, focusing on: (1) compliance strategies; (2) data-driven approaches; (3) referrals, claims and other casework; and (4) compliance contacts. Each platform uses data to identify and address current and emerging high-risk noncompliance areas. Other TE/GE activities include processing applications for tax-exempt status, voluntary correction requests for employee plans, and voluntary resolution of tax-exempt bond rule violations.

TE/GE reported making "great strides in leveraging the Lean Six Sigma (LSS) program office" to identify aspects of the examination process that could be improved. An LSS exam team pilot program was launched in FY 2019, utilizing 140 agents, tax law specialists and managers to test the TE/GE Exam Process/Handbook and system improvements — their feedback is currently pending.

TE/GE partnered with IRS information technology, regarding the IRS modernization plan, and worked on a Robotics Processing Automation product that will automate certain manual processes when it is delivered to the TE/GE Referrals Unit in 2020. TE/GE worked with the SB/SE, Large Business & International, and Criminal Investigation divisions on syndicated conservation easements. Also in FY 2019, TE/GE established procedures to manage casework for tax-exempt churches' Employee Shared Responsibility Payments, allowing letters to be sent to churches to help them comply with this requirement of the Affordable Care Act. The program is expected to continue through FY 2020.

Examinations

The Exempt Organizations subdivision completed 3,675 examinations in FY 2019, focusing on Form 990 series returns and the employment and excise taxes associated with them. Exempt status was revoked without protest for 60 organizations as a result of the exams.

Compliance strategy examinations addressing noncompliance by exempt organizations focused predominantly on:

• IRC Section 501(c)(7) entities, specifically the taxation of investment and nonmember income
• Formerly for-profit entities
• Private benefit and inurement
• IRC Section 4947(a)(1) non-exempt charitable trust organizations that underreport income or overreport charitable contributions

Although TE/GE closed only 21 compliance strategy examinations in FY2019, several hundred examinations are underway. The most prominent issues are: unrelated business income (UBI), foundation status, operational issues, and the IRC Section 4941 tax on self-dealing and filing requirements.

Data-driven examinations

The focus of current data-driven examinations includes exempt organizations selected through compliance query sets, based on information provided on the Forms 990, 990-EZ and 990-PF. Examination targets were identified by collaborating with the IRS Research, Applied Analytics and Statistics office to research noncompliance clues of private benefit or inurement, related employees and for-profit partnerships, officer business partnerships, and under-reported credit card income. The most prevalent topics found in these data-driven exams that resulted in a change involved: filing requirements, employee classification, unreported compensation, UBI and excise taxes.

Referrals, claims, etc.

TE/GE compliance referrals in Fiscal 2019 included those questioning hospitals' compliance with the reporting requirements under IRC Section 501(r). The Exempt Organizations subdivision also pursued promoter investigations related to conservation easements.

Determinations

The Exempt Organization function closed 101,880 exemption applications in FY 2019, granting exemption to more than 92,000 entities, with approximately 86,000 being IRC Section 501(c)(3) entities.

The Tax-Exempt Bond function (TEB) closed 315 examinations in FY 2019. Examination compliance strategies in TEB included: cost of issuance of private activity bonds; notice of defeasance; public safety bonds; and sinking fund over-funding.

TE/GE compliance contacts

TE/GE continued educating taxpayers through compliance checks and soft letters, aiming to improve return filings, filing accuracy and noncompliance, particularly with regard to:

• Discrepancies between Form W-2 and either Form 941, Employer's Quarterly Federal Tax Return, or Form 944, Employer's Annual Federal Tax Return
• Noncompliance with IRC Section 501(r)(4) Financial Assistance Policy by tax-exempt hospitals
• Failure to file:
• Form 940, Employer's Annual Federal Unemployment Tax Return, when required to do so
• Form 990-T, Exempt Organizations Business Income Tax Return, by IRC Section 501(c)(7) organizations that reported investment income on Form 990/990-EZ
• Form 1099-MISC, Miscellaneous Income
• Form 1041, U.S. Income Tax Return for Estates and Trusts, by IRC Section 4947(a)(1) Non-Exempt Charitable Trusts
• Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations, by entities that stated they were supporting organizations

TE/GE continues to focus on tax-exempt hospitals' compliance with IRC Section 501(r), reviewing approximately 3,000 hospitals on a rolling basis over three years. The most common noncompliance issues raised for the FY2019 hospital reviews and referrals related to a lack of a Community Health Needs Assessment and financial assistance policies required by IRC Sections 501(r)(3) and 501(r)(4), respectively.

TE/GE reported sending approximately 5,000 information letters to exempt organizations to remind them of certain responsibilities, including:

• The 21% excise tax added under the Tax Cuts and Jobs Act for compensation paid in excess of $1 million to any "covered employee"
• Nonmember gross receipts approaching the 15%/35% limitation permitted for IRC Section 501(c)(7) organizations
• Meeting the 85%-member income test for IRC Section 501(c)(12) organizations and filing appropriate tax returns

Outreach

Finally, TE/GE reported sending employees to 102 outreach events in FY 2019 and raising awareness of StayExempt.irs.gov, the educational site for exempt organizations.

Implications

The FY 2019 Accomplishments Letter offers a concise summary of the priorities undertaken by TE/GE during FY 2019 and supplements the 2020 Program Letter issued in October 2019. The 2020 Program Letter builds upon the TE/GE accomplishments of FY 2019 by identifying high priority issues and emerging risks going forward. Organizations should take careful account of all compliance strategies accomplished during FY 2019 and those identified for FY 2020, including the following takeaways within each program:

Compliance strategies: Priority issues per the FY 2019 Accomplishments Letter highlight TE/GE's increasing trend toward focusing on employment-related tax issues, such as Form W-2/1099 reporting, backup withholding and retirement plans as well as heightened focus on unrelated business income for tax-exempt hospital organizations and investment income earned by IRC Section 501(c)(7) social clubs. Organizations should continue to monitor compliance with these strategies as well as those areas of focus identified in the FY 2020 Program Letter, including: proper valuation of employee stock ownership plans, self-dealing transactions by private foundations, for-profit entities that converted to IRC Section 501(c)(3) tax-exempt organizations, and organizations that underreport income or overreport charitable contributions.

Data-driven approaches: TE/GE's improvements to its data-driven exam selection approach have continued to increase its success in identifying anomalies and flagging organizations with the highest risk of noncompliance. Using this approach, TE/GE opened nearly 2,000 new cases, with 37% of examinations resulting in an agreed tax or penalty change, demonstrating the continued effectiveness of this method. In its FY 2020 Program Letter, TE/GE again committed to improving compliance query sets based on information reported on Form 990 information returns by tax-exempt organizations, as well as IRC Section 4947(a)(1) trusts treated as private foundations and Form 5227 used by split interest trusts. Organizations should remain mindful of TE/GE's ability to review the data provided on an increasing number of forms submitted to the IRS and should avoid discrepancies in the information that might trigger a data-driven exam.

Referrals, claims and other casework: As evidenced by more than 1,600 new cases started and nearly 1,700 cases closed in FY 2019, referrals, claims and other casework continues to be a successful identifier of noncompliance for TE/GE.

Compliance contacts: The accomplishments achieved by TE/GE in FY 2019 indicate a continued trend by TE/GE to focus on employment-related issues as well as tax-exempt hospital facilities compliance with IRC Section 501(r). TE/GE will continue to review hospital websites for compliance with IRC Section 501(r) and the accompanying regulations. Tax-exempt hospitals should ensure that community health needs assessments are in place under IRC Section 501(r)(3) and financial assistance policies exist under IRC Section 501(r)(4).

Determinations: TE/GE continued to streamline the filing process through the increased use of the Form 1023-EZ, with applications increasing by almost 10,000 in FY 2019 from 92,000 to 101,800. With the increase in available data from Form 1023-EZ applications, TE/GE was able to partner with MITRE Corporation to reduce the number of errors that occur while organizations seek exemption. Organizations should continue to heed the new qualifications for each determination form when filing for tax-exempt status.

Voluntary compliance and other technical programs: Use of the voluntary compliance programs discussed in the FY 2019 Accomplishments Letter should allow tax-exempt organizations to minimize the risk of potential penalties and interest and anticipate issues that may arise on examination.

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 here.

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ATTACHMENT

Accomplishments Letter