January 11, 2021
IRS updates tax-exempt organization compliance program initiatives, determination letter procedures, and Form 1024-A
The IRS has announced several developments relating to tax-exempt organizations: (1) updates to the IRS Tax-Exempt and Government Entities (TE/GE) Compliance Program and Priorities website, (2) updates to the determination letter procedures in Revenue Procedure 2021-5 and (3) revisions to Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4).
Compliance Program and Priorities: New initiatives
The TE/GE Compliance Program and Priorities webpage provides information about initiatives aimed at promoting compliance by tax-exempt and government entities. The webpage was created to accompany the TE/GE program letter as an avenue for the TE/GE to post quarterly updates on changing plans and circumstances (see Tax Alert 2020-2656). The webpage outlines the TE/GE's compliance program with the use of six components (Compliance Strategies; Data-Driven Approaches; Referrals, Claims and Other Case Work; Compliance Contracts; Determinations; and, Voluntary Compliance and Other Technical Programs). The latest update includes new initiatives under the "Compliance Strategies" and "Compliance Contracts" components.
The new initiatives under Compliance Strategies include:
- TE/GE: Worker Classification. This strategy aims to review worker classification to ensure taxpayers aren't reducing their tax burden by incorrectly treating workers as independent contractors instead of employees.
- Employee Plans: Required Minimum Distributions in Large Defined Benefit Plans. This strategy aims to ensure retirement plan sponsors comply with IRC Section 401(a)(9) to begin distribution of benefits by April 1 following the calendar year an employee turns 70 ½. Failure to make these distributions could cause plan disqualification as well as a 50% excise tax on amounts not distributed.
- Employee Plans: Earned Income for Self-Employed Plans. This strategy reviews compliance by businesses that file Schedule C, Profit or Loss From Business (Sole Proprietorship), and a Form 5500-series return. Compliance will be determined by ensuring the retirement plans have (1) correctly taken the self-employed deduction on the Form 1040, Individual Income Tax, Schedule 1, Additional Income and Adjustments, rather than on Schedule C, Profit or Loss From Business (Sole Proprietorship); (2) properly calculated the owner-employee's earned income; (3) made correct allocations to plan participants; and (4) complied with the nondiscrimination requirements and IRC Section 415 contribution limits.
The new initiatives under Compliance Contracts include:
- Employee Plans: Inflated Assets. This initiative evaluates if plan sponsors are completing financial information on Form 5500-series returns with complete and accurate information, with a focus on plans with assets that have increased beyond reasonable amounts from the beginning of the year to the end of the year.
- Employee Plans: Partial Termination/Partial Vesting. For employers whose Form 5500, Annual Returns/Reports of Employee Benefit Plan, indicates their plan has had a significant decrease in plan participants, this initiative aims to review such plans to determine compliance with IRC Section 411(d)(3) vesting requirements and accuracy of other information on their Form 5500.
- Exempt Organizations: IRC 509(a)(3) Organizations Misfiling Form 990-N. This initiative involves reviewing IRC Section 509(a)(3) organizations that file Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations, to determine if they meet the eligibility standards to file the form.
Determination letter procedures
The IRS's annual updates to determination letter procedures are included in Revenue Procedure 2021-05. Changes from last year's procedures (Revenue Procedure 2020-05) include:
- New Section 2.03(1) to clarify that Form 3115, Application for Change in Accounting Method, is not a request for a determination and to explain how a tax-exempt organization may change its method of accounting
- New Section 3.02(11) to reflect Notice 2020-36, which states that the IRS will not accept any requests for group exemption letters until publication of the final revenue procedure described in the Notice or other guidance in the Internal Revenue Bulletin
- Revisions to Section 6.08 to clarify the relief under Treas. Reg. Sections 301.9100-1 through 301.9100-3 (providing the standards the IRS Commissioner may use to determine whether to grant a reasonable extension of time to make a regulatory election or application for relief of tax) and specify certain circumstances in which such relief will not be granted
- New Section 9.12 to state that additional guidance may be provided in the future to clarify the Independent Office of Appeals' role in matters covered by this Revenue Procedure
- Updates to reflect Revenue Procedure 2020-08, which addresses procedures for the electronic Form 1023, and updates to Section 16 to clarify that Revenue Procedure 2021-05 supersedes Revenue Procedure 2020-08
Revisions to Form 1024-A
To allow for electronic filing, the IRS revised Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4), and its instructions. The electronic form is available as of January 5, 2021. Paper forms will be optional for 90 days (until April 5, 2021), at which point electronic filing will be required. The required user fee will remain the same for 2021 ($600).
Concurrently with the revised Form 1024-A, the IRS issued Revenue Procedure 2021-08 to modify Revenue Procedure 2021-5 to allow for the new electronic submission process on www.pay.gov for Form 1024-A. Revenue Procedure 2021-08 also provides for the 90-day transition relief period, during which paper Form 1024-A applications will be accepted by EO Determinations. Payments made through pay.gov may be made directly from a bank account or by credit or debit card.
The updates to the TE/GE's compliance program initiatives and determination letter procedures illustrate the IRS's continued efforts to remain timely and transparent while communicating newly identified priorities and streamlining the tax-exempt determination process. Tax exempt organization's management should continue to review the TE/GE Compliance Program and Priorities webpage at least quarterly to evaluate applicability of any additional TE/GE initiatives to their organizations.
As we continue to see forms being updated for efile capability following the Taxpayer First Act's e-filing mandate, the IRS's revision of Form 1024-A instructions serves as a timely reminder for tax-exempt organizations to check their electronic filing capabilities and determine whether they have the proper safe guards in place to issue electronic payments.
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