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In a new memorandum (TEGE-04-0622–0028) (Memo), the IRS Tax Exempt/Government Entities (TE/GE) Director of Compliance Planning and Classification has announced a change to procedures for sending certain acknowledgement letters to individuals who submit referrals for examination to the IRS regarding an exempt organization, employee plan or government entity when TE/GE receives more than 10 referrals for the same organization in a short period.

Change in referral acknowledgements

IRS Internal Revenue Manual (IRM) 4.70.6.4.1(1) requires TE/GE to issue acknowledgement letter 4426 to any individual or entity that refers an exempt organization to TE/GE for examination (e.g., via Form 13909, Tax-Exempt Organization Compliant (Referral)). Specifically, the Memo states that if the IRS receives more than 10 referrals for examination regarding the same tax-exempt entity over a 10-business-day period, "the Classification Group will not create or send acknowledgement letters to individuals that submit referrals on that entity as instructed in IRM 4.70.6.4.1 (1) and (2) for a period not to exceed 9 months." This change is being made to prevent a developing backlog "in referral processing and other classification activities," which the Memo says could lead to a "delay in providing cases for TE/GE examination operations." Although this change is effective immediately, it will be incorporated into IRM 4.70.6.4 within two years.

Implications

TE/GE has increasingly relied upon referrals, claims and other casework as the basis for choosing exempt organizations to examine in recent years. For instance, in its 2019 Accomplishments Letter, TE/GE indicated that referrals, claims and other casework accounted for 42% of its examinations started in its 2019 tax year v. 59% of its examinations started in its 2021 tax year. In contrast, data-driven examinations (e.g., initiated based on Form 990-series reporting) accounted for 51% of TE/GE's examinations started in its 2019 tax year, but only 26% in its 2021 tax year.

As TE/GE has received and relied upon an increasing number of examination referrals, it has needed to delay the time it takes to respond to certain higher-volume referrals. Given the increase in public scrutiny of tax-exempt organizations and examination referrals, exempt organizations should carefully monitor their public documents and communications channels (e.g., Form 990, website) to reflect their compliance with applicable tax law. In addition, exempt organizations should continuously monitor changes on the TE/GE Compliance Program and Priorities webpage as TE/GE continues to update the site with its compliance strategies and information on referrals, claims and other examination information.

Please contact your Ernst & Young LLP professional for further information.

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