On January 26, TE/GE Commissioner Edward T. Killen released the unit's annual Accomplishments Letter for fiscal year 2023, highlighting TE/GE's collaborative partnerships, examination efforts and results, and process improvements.

Collaborative partnerships

TE/GE collaborated throughout FY 2023 with IRS Large Business & International, Small Business and Self Employment, Wage & Investment, and IT to implement the Inflation Reduction Act's "elective payment" provisions for certain clean energy investment and production activity credits, including the creation of a pre-filing registration portal for electing taxpayers, the letter said.

EO worked with RAAS to create the Exempt Organizations Graph Exploration Tool (EOGET), an interactive graph tool designed to help EO examiners visualize the network of relationships between exempt organizations, their officers, and other affiliated individuals and organizations. EOGET will help examiners with conducting risk analysis and identifying potential insider abuse of exempt organizations, according to the letter.

EO agents also continued working with SB/SE, LB&I and Criminal Investigations counterparts on joint examinations of high income/high wealth taxpayers with links to exempt organizations, as well as finalizing and implementing a joint desk guide for examinations concerning such taxpayers.

The EO unit also partnered with RAAS throughout FY 2023 to launch a demonstration project that leverages advanced artificial intelligence processes to screen and prioritize referrals submitted by the public, the letter said. EO and RAAS plan to test and launch the project in FY 2024.

EO examinations

According to the letter, the EO Examinations unit started 2,529 exams and completed 2,464 exams in FY 2023, with approximately 40% of those exams "picked-up" from related exams and approximately 76% of closed examinations resulting in a tax change. This compares with 3,009 exams started and 3,425 exams closed by EO Examinations in FY 2022, approximately 78% of which resulted in a tax change and approximately 35% of which were picked up from related exams. EO Examinations' FY 2023 exams prompted the unit to propose revoking the exempt status for 141 tax-exempt entities, with 124 of those for failing to meet the organizational and operational requirements for exemption under IRC Section 501(c)(3). This compares with 53 revocations that EO Examinations proposed in FY 2022, 23 of those for failure to meet the organizational and operational tests for IRC Section 501(c)(3) exemption.

The EO Examinations unit continued several compliance strategies in FY 2023, including focusing on organizations that showed indicators of potential private benefit or inurement to disqualified persons, nonmember income generated by exempt recreational and social clubs exempt under IRC Section 501(c)(7), and Form 990-N (e-postcard) filing eligibility. The unit also initiated and continued several data-driven compliance examinations based on information reported on Form 990, Return of Organization Exempt from Income Tax. The most prominent issues found in data-driven examinations related to employment taxes, unrelated business income and underreported compensation, the letter said.

In FY 2023, EO Examinations also focused on:

• Organizations selected through data-driven compliance queries based on information reported on Form 990-series returns
• Entities claiming the Employee Retention Credit
• Hospital organizations' noncompliance with IRC Section 501(r)(4) financial assistance policy requirements, based on mandatory 501(r) reviews of 877 hospital organizations
• Promotor organizations under criminal investigation for fraud
• Examinations stemming from the 5,880 referrals TE/GE received during the year

The most significant issues found in these examinations, according to the letter, were unrelated business income, unreported compensation, employment taxes, Employee Retention Credit eligibility, for-profit conversions, self-dealing, failure to meet filing requirements, and failure to operate in furtherance of tax-exempt purposes.

EO determinations

The letter stated the EO Determinations unit closed 119,491 determination applications in FY 2023, resulting in 103,073 approvals, 98,417 of which were for IRC Section 501(c)(3) status. Use of Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3), continued to grow in FY 2023, with the largest pool of applications coming from human services and educational institutions.

Process improvements

TE/GE continued its Lean Six Sigma (LSS) efforts throughout FY 2023, the letter said. The Examinations LSS team worked through recommendations for improving exam-related processes and should conclude its work in early FY 2024 with the release of a new TE/GE Consolidated Examination Internal Revenue Manual (IRM) to replace existing functional IRMs.

The compliance check LSS team continued work on compliance check process consistencies and the development of procedural content related to the compliance check process for inclusion in a new IRM, which is scheduled to be published by the end of March 2024. The team also expects to implement a newly developed quality measure system for compliance check workstreams during Q3 2024.

The EO Rulings and Agreements Correspondence Unit LSS team focused on intake submission process improvements to improve efficiencies and minimize bottlenecks, and will continue those efforts throughout FW 2024, the letter said.

Implications

TE/GE's FY 2023 Accomplishments Letter offers a summary of TE/GE's programs, priorities, and process improvements during FY 2023, and supplements the FY 2024 Program Letter issued in October 2023 (see Tax Alert 2023-1677 ). It provides an overview of, but not details on, those programs, priorities and processes, and does not deviate significantly from its FY 2022 Accomplishments Letter.

The Accomplishments Letter addresses TE/GE's continued attempts to improve its processes regarding exams and compliance checks, make its compliance efforts more efficient and narrowly tailored to priority compliance issues, and increase its examination change rate. These updates should be reflected in a new TE/GE Consolidated Examination Internal Revenue Manual, which is scheduled to replace TE/GE's current functional IRMs in 2024. The Accomplishments Letter also reflects TE/GE's expansion of several different collaborative partnerships to strengthen its compliance programs; for instance, its collaboration with several other divisions to implement the Inflation Reduction Act's "elective payment" provisions aimed at clean energy investment and production activity credits, its collaboration with RAAS to use advanced artificial intelligence to screen and prioritize public-submitted referrals, and its development of the EOGET tool with RAAS to identify abusive transactions with insiders.