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IRS officials from the IRS Tax Exempt and Government Entities division (TE/GE) report continued focus on community benefit issue for tax-exempt hospitals along with various filing issues for exempt organizations more generally in fiscal year (FY) 2022.

TE/GE update

Speaking at a recent webinar sponsored by the TEGE Exempt Organizations Council, TE/GE Director Robert Malone discussed the pending IRS restructuring required by the Taxpayer First Act, saying it should result in greater efficiencies for the IRS and its Exempt Organizations (EO) division, though he doesn't know specifically how the EO division will be restructured (see Taxpayer First Act - IRS Organizational Redesign Strategy | Internal Revenue Service). Malone said that the influx of funding anticipated under the Inflation Reduction Act will likely go toward enhanced enforcement for taxpayers earning more than $400,000 per year, technology upgrades at the IRS and additional taxpayer outreach to improve compliance going forward. Hiring will also be important, as the IRS currently employs "one of the oldest workforces in government," with more than 10,000 employees leaving the agency each year, he added. Malone referred those interested in the IRS's plans to the irs.gov/modernization page.

"Letter consolidation" efforts are currently underway, aimed at minimizing redundancy by consolidating form-letter communications that are sent to taxpayers across TE/GE, Malone reported.

Asked to clarify how a tax-exempt organization should notify the IRS about a name change, Malone told the audience that the process would become simpler beginning in 2024, when checking a "Name Change" box on the Form 990 will result in the IRS changing the 990 filer's name on the IRS Business Master File (BMF). In the meantime, an organization that wants to change its name on the BMF may:

• Submit a request to the IRS Exempt Organizations Correspondence Unit with its amended organizing document (e.g., Articles of Amendment) and request a name change/affirmation letter
• Telephone TE/GE Customer Account Services (877-829-5500)

In response to a question about whether the IRS could change its BMF listing of group ruling subordinates to list the subordinates' names as primary (rather than the central organization's name as primary), Malone noted that such a change would require costly new computer programming, and therefore the IRS is not likely to make such a change in the near future.

Responding to questions on how to submit certain forms (e.g., Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations; Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation; Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships), Malone said the IRS will continue to accept PDF versions of these forms attached to a Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)), while it reviews the possibility of accepting XML versions of the forms.

EO Examinations

Speaking on a separate panel, the director of IRS Exempt Organizations Examinations (EO Examinations), Lynn Brinkley, highlighted several current compliance strategies focusing on: (1) tax-exempt hospitals' compliance with IRC Section 501(r); (2) failure to file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42; and (3) employment tax compliance issues.

In FY 2022, EO Examinations completed 1,260 Affordable Care Act (ACA)-mandated reviews of tax-exempt hospitals and referred 67 hospitals for examination regarding possible noncompliance with IRC Section 501(r), IRS tax specialist Tim Berger reported. However, EO Examinations did not audit any hospitals in FY 2022 for possible noncompliance with the community benefit standard. Compliance checks have also proved to be an effective workstream for IRC Section 501(r) issues, Berger said.

EO Examinations closed 58 IRC Section 501(r) exams in FY 2022 with a relatively low (60%) change rate, Brinkley reported. By comparison, the 19 exams of tax-exempt hospitals closed in FY 2022 pertaining to unrelated business income tax issues reflected an 89% change rate.

In FY 2022, EO Examinations started 842 compliance checks for possible noncompliance with Section 4960 compensation excise tax requirements, with approximately 100 referred for examination. To date, none of those examinations have closed. Ongoing review of Form 990 filing data appears to show a high number of tax-exempt organizations paid compensation of over $1 million to at least one "covered employee" but did not report IRC Section 4960 excise tax on Form 4720, Brinkley noted.

Brinkley reported that EO Examinations has implemented the web-based Taxpayer Digital Communication Secure Messaging (TDC) as a "user friendly" way for taxpayers and their authorized representatives to exchange information and documents with the IRS. In 2022, more than 700 TE/GE employees were trained on how to use TDC, and approximately 1,000 TE/GE taxpayers set up accounts. The IRS is using this technology to streamline the communication process and promote timelier resolution of cases. Using the TDC is cost-free and secure, Brinkley said, explaining that it uses a fully secure cloud environment certified for sensitive taxpayer data.

EO Examinations continues compliance efforts to determine whether certain organizations that have filed Form 990-N (e-postcard for small organizations with gross receipts below $50,000) were actually eligible to use the form. Brinkley emphasized that if an ineligible organization files a Form 990-N for three or more years, the IRS will automatically revoke its tax-exempt status.

Implications

The updates provided by TE/GE Director Robert Malone underscore the IRS's continued attempts to streamline and reduce potential errors in its e-filing process. Because updates to the BMF have been delayed repeatedly in the past and continue to be delayed, many organizations receive rejections due to return information not matching IRS records. To facilitate IRS acceptance of forms while these improvements are being made, tax-exempt organizations should continue to use the avenues listed above to request updates to the BMF.

The EO Examinations session also provided insight into areas of priority and focus for EO Examinations that reflect areas of congressional interest and related tax law changes. Given that EO Examinations launched 100 IRC Section 4960 examinations in TY22 and that Forms 990 and 4720 reporting continues to trigger IRC Section 4960 exams, tax-exempt organizations should ensure that any compensation subject to this excise tax, including compensation paid by related tax-exempt and taxable organizations, is properly calculated and timely reported.

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Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor