February 12, 2021 IRS TE/GE issues FY 2020 report on compliance activities of Exempt Organization function The IRS Tax Exempt and Government Entities division (TE/GE) published its annual Accomplishments Letter on February 8, 2021 (see PDF attached below). Emphasizing the disruption that COVID-19 caused in FY 2020, Acting TE/GE Commissioner Edward Killen and Acting Deputy Commissioner Philip Lindenmuth, both appointed in September 2020, highlight TE/GE's activities and accomplishments for the year, including:
Improving processes The TE/GE commissioners reported making "great strides in leveraging the Lean Six Sigma program office" to improve the examination process. Having completed a successful pilot program, "TE/GE implemented the TE/GE Exam Process/Handbook and deployed related system improvements in late September 2020." In the second half of the year, TE/GE modified certain exam-related forms by eliminating duplication and implementing process improvements, paving the way for fully electronic case closures. In the fourth quarter, TE/GE implemented three process improvements:
Within TE/GE, the Exempt Organizations division completed examinations of 3,240 returns in FY 2020, 88% of which resulted in a tax change. A significant number (39%) of the Exempt Organizations division examinations stemmed from a related examination. The IRS proposed revocations for 36 tax-exempt organizations, most for failing to operate in furtherance of exempt purposes. Compliance strategies The Exempt Organizations division's compliance strategy examinations addressed noncompliance in various areas, including:
In compliance strategy examinations that closed, the most significant issues related to miscellaneous excise taxes, UBI, filing requirements, unreported compensation and operational requirements. Data-driven examinations In its FY 2020 data-driven compliance examinations, the Exempt Organizations division chose tax-exempt organizations: (1) based on information reported on Form 990, 990-EZ or 990-PF; and (2) using research, applied analytics and statistics (RAAS) to find indicators of private inurement or benefit, officer business partnerships, unreported credit card income, and related employees and for-profit partnerships. The most significant issues arising in these examinations related to filing requirements, employee classification, UBI and operational/organizational requirements. Referrals Referrals for examination in FY 2020 included cases questioning hospital systems' compliance with IRC Section 501(r). The most significant issues that arose in these cases involved filing requirements, UBI, organizational requirements, abatements and excise taxes. Determinations In FY 2020, the Exempt Organizations division closed 95,864 determination applications, approving 85,509 — more than 93% of which pertained to IRC Section 501(c)(3) status. Compliance projects Tax-exempt hospitals. TE/GE continues to review IRC Section 501(r) compliance for approximately 3,000 tax-exempt hospitals (on a rolling three-year basis); 1,078 reviews were completed in FY 2020, resulting in 66 hospitals referred for examination and 65 for potential noncompliance with the Affordable Care Act. The most common issues that arose in the FY 2020 reviews involved the absence of community health needs assessments (required under IRC Section 501(r)(3)) or financial assistance policies (required under IRC Section 501(r)(4)). Retirement plan sponsors. TE/GE sent more than 17,000 educational letters to retirement plan sponsors and organizations addressing various issues, including:
In FY 2020, TE/GE officials attended 60 outreach events, 14 of which expressly addressed tax-exempt organizations. Further outreach was accomplished through electronic newsletters, news messages sent to subscribers, Issue Snapshots posted on IRS.gov, and videos posted on the IRS video portal. Implications The FY 2020 Accomplishments Letter offers a concise summary of the priorities undertaken by TE/GE during FY 2020 and supplements the 2021 Program Letter issued in November 2020 (see Tax Alert 2020-2656). The 2021 Program Letter builds on the TE/GE accomplishments of FY 2020 by identifying high priority issues and emerging risks going forward. Organizations should take note of all compliance strategies accomplished during FY 2020 and those identified for FY 2021, including the following takeaways within each program: Compliance strategies: In addition to responding to the COVID-19 pandemic, TE/GE's priorities per the FY 2020 Accomplishments Letter include a continued focus on hospital organizations with unrelated business income reported on Form 990-T, investment and nonmember income earned by IRC Section 501(c)(7) social clubs, and under-reported income and over-reported charitable contributions of IRC Section 4947(a)(1) non-exempt charitable trusts. Organizations should continue to focus on compliance with these strategies as well as those areas of focus identified in the FY 2021 Program Letter, including: private foundation loans to disqualified persons, formerly for-profit entities, private and public inurement, filing requirements and unreported compensation. Data-driven approaches: TE/GE's data-driven initiatives continue to focus on EO compliance-related filings, which include the Form 990 series, and the use of RAAS to identify noncompliance indicators. 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: In FY 2020, TE/GE continued to (1) examine entities that have filed Form 1023-EZ and been granted exemption, and (2) receive referrals from both within and outside the IRS. Many of these referrals resulted in hospital examinations focused on compliance with IRC Section 501(r). Referrals, claims and other casework continue to be a successful identifier of noncompliance for TE/GE. Compliance contacts: The accomplishments that TE/GE achieved in FY 2020 indicate a continued trend by the division to focus on employment-related issues and on tax-exempt hospital facilities' compliance with IRC Section 501(r), as evidenced by a continued review of approximately 3,000 tax-exempt hospitals on a rolling three-year basis. Tax-exempt hospitals may want to focus on complying with IRC Section 501(r) and its accompanying regulations. Determinations: TE/GE continues to partner with and to study recommendations from MITRE, the IRS's federally funded research development center, to reduce the number of errors that occur while organizations seek exemption. TE/GE has also implemented a process to enhance the quality of internal referrals assigned to revenue agents. Organizations should continue to heed the new qualifications for each determination form when filing applications for tax-exempt status. Voluntary compliance and other technical programs: Use of the voluntary compliance programs discussed in the FY 2020 Accomplishments Letter should allow tax-exempt organizations to minimize the risk of potential penalties and interest and anticipate issues that may arise on examination. ——————————————— — For more information about EY's Exempt Organization Tax Services group, visit us here. ———————————————
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