January 13, 2022
IRS TE/GE issues FY 2021 report on compliance activities of Exempt Organization function
The IRS Tax Exempt and Government Entities division (TE/GE) published its annual Accomplishments Letter on January 6, 2021. Noting that 2021 was the second year of COVID-19 disruption, TE/GE Commissioner Sunita Lough and TE/GE Deputy Commissioner Edward Killen highlight TE/GE's activities and accomplishments for the year, including:
The TE/GE division continued to use its compliance strategy process in 2021, focusing on "high risk and emerging issues using different treatment streams — from examinations and compliance contacts to educational letters and technical guidance."
TE/GE's compliance platform is structured around six programs "that together promote tax law compliance by tax-exempt and government entities":
The Exempt Organizations division examined 3,249 return filings in FY 2021, including Form 990 information returns and their associated employment and excise tax returns. Most (82%) of the closed examinations resulted in a tax change; the examinations also caused the IRS to propose revocations for 94 entities.
Compliance strategy examinations
The Exempt Organizations division's compliance strategy examinations addressed noncompliance in various areas, including:
The most common issues found in the closed examinations involved miscellaneous excise taxes, UBI, filing requirements and operational requirements.
In FY 2021, data-driven compliance examinations performed by the Exempt Organizations division focused mainly on tax-exempt organizations (1) selected through compliance queries based on information reported on Form 990-series returns, and (2) identified in collaboration with the IRS office of Research, Applied Analytics and Statistics (RAAS) to research indicia of private benefit and inurement involving officer-business partnerships, under-reported credit card income and related employees in for-profit partnerships. The most prevalent issues found involved filing requirements and UBI.
Referrals, claims and other casework
In FY 2021, the IRS also focused examinations on:
The most significant issues found in these examinations were UBI, organizational requirements, abatements and excise taxes. The most common issues found in the Section 501(r) examinations related to hospitals' lack of a community health needs assessment and noncompliance with FAP requirements.
The Exempt Organizations division received approximately 110,000 determinations applications (e.g., Forms 1023, 1023-EZ, and 1024 applications for recognition of exemption, Form 8940 requests for various determinations) in FY 2021, an increase of approximately 10,000 over the prior fiscal year. It closed 94,466 determination applications in FY 2021, approving 81,589 new tax-exempt entities, of which the vast majority (76,852) were for IRC Section 501(c)(3) status. To strengthen its determination process, TE/GE updated procedures for processing Form 1023-EZ and issued the revised Form 1024-A and its instructions to allow electronic filing. (See Tax Alerts 2021-0065 and 2021-2243.)
The FY 2021 Accomplishments Letter offers a summary of TE/GE's programs, priorities and process improvements during FY 2021, and supplements the FY 2022 Program Letter issued in October 2021 (see Tax Alert 2021-1916). It provides an overview of, but not specific detail on, those programs, priorities and processes, and does not deviate significantly from TE/GE's FY 2020 Accomplishments Letter.
TE/GE's data-driven initiatives continue to focus on Form 990-series returns and other EO compliance-related filings, underscoring the need for careful Form 990 preparation. In particular, organizations should maintain careful records supporting information reported on Form 990-series returns, ensure consistency and avoid discrepancies in the returns, and avoid noncompliant actions that, if reported, might trigger a data-driven exam.
Hospitals represent a subsector of exempt organizations that continues to garner close IRS scrutiny. As TE/GE continues to focus on hospitals' compliance with IRC Section 501(r), hospitals should ensure that their community health needs assessments, implementation strategies, FAPs, billing and collections policies, and charges to FAP-eligible individuals comply with 501(r). Hospitals should also continue to evaluate their UBI-related activities and expenses each year to ensure adequate efforts are being made to increase and maintain profitability, as TE/GE continues to examine hospitals with expenses that materially exceed gross income from unrelated trades or businesses.
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