October 28, 2022
IRS Exempt Organizations and Government Entities division chief details FY22 compliance projects
Compliance projects that IRS EO/GE accomplished in FY22 (October 1, 2021 through September 30, 2022) focused on tax-exempt hospitals and exempt organizations that pay covered employees more than $1 million, among other issues, the director of EO/GE has reported.
FY22 compliance projects
Speaking at a conference on Tax Issues for Health Care Organizations, hosted by the American Health Law Association on October 24, 2022, in Washington, D.C., EO/GE director Robert Malone explained that EO/GE examined tax-exempt organizations in FY22 based on:
Malone cautioned that some tax-exempt organizations have failed to comply with IRC Section 4960, which generally requires any organization exempt from tax under IRC Section 501(a) to pay a 21% excise tax on remuneration over $1 million that it pays to a covered employee during a tax year. (See Tax Alert 2021-0152.) The IRS has found some tax-exempt organizations are failing to report this excise tax on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, he said. Of the 842 EO/GE compliance checks focusing on IRC Section 4960, 100 have been referred for examination.
A compliance campaign focusing on UBTI liability scrutinized how tax-exempt hospitals allocated expenses to offset UBTI, and whether tax-exempt hospitals with continuous losses from unrelated business activities had a profit motive in conducting those activities (a prerequisite for being able to carry forward net operating losses from those activities in one tax year to offset future UBTI gains in subsequent years). EO/GE began 10 examinations of tax-exempt hospitals on these UBTI issues in FY22 and closed 18 examinations that began in prior years on these issues, with an 89% change rate. Since the campaign began in 2019, IRS EO/GE has closed 69 of these examinations, with a 33% change rate.
Malone reported another IRS EO/GE focus area for tax-exempt hospitals in FY22 was its Affordable Care Act-mandated review of tax-exempt hospitals' community benefit (which EO/GE has also leveraged to conduct IRC 501(r) compliance reviews), which resulted in:
FY23 compliance projects
FY23 EO/GE projects include training agents on the siloing rules for IRC Section 512(a)(6) unrelated business income tax (i.e., computing UBTI separately for each unrelated trade or business). (See Tax Alert 2020-2799.)
In the year ahead, the IRS will also be working on guidance around the renewable energy tax credits made available recently to exempt organizations under the Inflation Reduction Act of 2022 (IRA). (See Tax Alert 2022-1281.) Credits made available to exempt organizations under the IRA include production tax credits (IRC Sections 45 and 45Y), renewable and clean energy project credits (IRC Sections 48 and 48E), and credits for clean commercial vehicles and other projects. The types of credits and projects for which those direct payments can be received include production tax credits under IRC Sections 45 and 45Y; credits for renewable and clean energy projects, such as wind, solar, geothermal, and hydropower; investment tax credits under IRC Sections 48 and 48E for energy and electricity projects; and specialized credits for clean commercial vehicles and other projects, Malone explained.
Malone also noted that EO/GE has revised the draft 2022 Form 990, Schedule H instructions to clarify that (1) the only types of community benefit reportable on Schedule H are those defined in Worksheets 1-8 of the Schedule H instructions, and (2) community building activities that also qualify as "community health improvement services" may be reported as community benefit in Part I, rather than as community building in Part II.
Most of EO/GE's compliance initiatives for FY22 are a continuation of initiatives begun in prior years, though the IRS opened more IRC Section 4960 compensation excise tax-related examinations and fewer IRC Section 501(r)-related examinations and compliance checks than in prior years. Malone did not address FY23 compliance priorities or initiatives in detail but did note that the IRS will train examination agents in siloing rules for IRC Section 512(a)(6) UBTI in the coming year, likely in preparation for IRC Section 512(a)(6)-related examinations and compliance checks. The IRS Tax Exempt and Government Entities' (TE/GE, of which EO/GE is a component, along with Employee Plans) FY23 Program Letter should provide tax-exempt organizations with additional insight into TE/GE's priority compliance issues for FY23 (October 1, 2022, through September 30, 2023). TE/GE's Program Letter is usually published in September or October for the upcoming fiscal year. This year's delay might be due, in part, to former TE/GE commissioner Sunita Lough's retirement (effective September 30, 2022) and the installation of new TE/GE commissioner Edward Killen. In the meantime, tax-exempt organizations' management should carefully review Malone's noted EO/GE compliance priorities and take action to strengthen compliance and minimize the risk of IRS examination and penalty assessment.
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor