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The IRS has released new technical guides for tax-exempt organizations providing an overview and guidance on applying the rules related to (1) non-exempt activity and unrelated business income tax and (2) excess benefit transactions. In addition, the IRS notified taxpayers that sign-in options are available for eligible small tax-exempt organizations to submit Form 990-N, an e-postcard, to satisfy their annual IRS Form 990-series filing requirement.

New exempt organization technical guides

The IRS has published new technical guides, which are comprehensive, issue-specific documents that update and replace certain IRS Audit Technique Guides and the corresponding technical content of the IRS Internal Revenue Manual, for tax-exempt organizations.

TG 3-10: Disqualifying and Non-Exempt Activities — Trade or Business Activities — IRC Section 501(c)(3). This guide provides an overview of the unrelated business taxable income (UBTI) rules and specific guidance on applying those rules, including descriptions of:

• "Substantially related" activities for tax-exempt purposes (a condition for avoiding UBTI)
• The commerciality doctrine, which the IRS and courts have used to determine that operating a commercial business does not substantially further tax-exempt purposes, resulting either in UBTI or failure of the operational test, which could result in revocation of tax-exempt status
• The fragmentation rule for separating, and separately analyzing, related and unrelated trade or business activities
• Common types of unrelated trade or business activities, including advertising, services provided to other exempt organizations, and certain partnership activities
• Examination techniques for IRS agents to use in identifying non-exempt trade or business activities and to determine if such activities jeopardize the organization's tax-exempt status

TG 65: Excise Taxes — Excess Benefit Transactions — IRC Section 4958. This guide provides an overview of the excess benefit transaction (EBT) rules and specific guidance on applying those rules, including descriptions of:

• "Excess benefit transactions" (including indirect benefits), "disqualified persons" subject to EBT excise taxes (also referred to as intermediate sanctions), and "substantial influence" that makes a person disqualified
• The factors to consider in determining "reasonable compensation," such as IRC Section 162 standards, all economic benefits provided to the compensated person, fixed and non-fixed payments, and whether the compensation is at fair market value
• How to establish and document the intent to treat a benefit as compensation (to avoid generating an automatic excess benefit transaction) and a rebuttable presumption that a transaction is reasonable rather than an EBT
• How to correct an EBT and qualify for abatement
• Examination techniques for IRS agents to use in identifying EBTs and determining whether to impose excise tax under IRC Section 4958

Sign-In options for e-postcard submissions

The IRS announced in its Exempt Organizations Update (July 25, 2023) that sign-in options are available for small tax-exempt organizations that are eligible to submit Form 990-N, an e-postcard, to satisfy their annual IRS Form 990-series filing requirement. Eligible tax-exempt organizations are those with gross receipts below $50,000 that are not required to file Form 990 or Form 990-EZ.

The two sign-in options are available through Login.gov and ID.me. Previous 990-N filings can be accessed using the same email address associated with the organization's legacy IRS username. The IRS also updated its FAQs and a user guide on submitting Form 990-N.

Implications

The recently issued technical guides do not provide any new guidance; rather, they are helpful compendiums of previous IRS guidance on non-exempt activity, UBTI, and excess benefit transactions. TG-3-10 is particularly helpful in detailing how to identify activities that are not substantially related to a tax-exempt organization's exempt purposes that could result in UBTI, Form 990-T filing requirements, and even revocation of exemption. Additionally, TG-65 provides a comprehensive overview of the guidance on excess benefit transactions that could result in excise tax liability and Form 4720 filing requirements.

For organizations that qualify to submit a Form 990-N, the sign-in options provide simple procedures for completing their annual 990-series filing requirements. The notice can only be filed online, so any steps taken to create an e-filing account should be completed well before the filing deadline (the 15th day of the fifth month after the end of the organization's tax year, e.g., May 15, 2023, for calendar year filers).

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us here.

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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor