Data-driven analytics are here to stay when it comes to compliance enforcement for not-for-profit organizations. The IRS Tax Exempt and Government Entities FY2018 Work Plan outlines strategies and approaches that the IRS will use to monitor tax compliance for tax-exempt organizations.
The IRS has been making several behind-the-scenes changes to streamline its TE/GE operations in the wake of its declining workforce. TE/GE commissioners predict 2018 is when the results of those updates will come to light. Use of data and other technology are expected to increase efficiencies across IRS activities for Exempt Organizations, Employee Plans and Tax-Exempt Bonds.
Below are some of the key highlights from the plan that may affect exempt organizations in the coming year.
Changes Made to Address 2017 Compliance Issues
Employment taxes were identified as a top compliance issue for not-for-profits, and the IRS created the Employment Tax Knowledge Network to help educate users on common issues that arise. The IRS also added employment tax specialists to assist in examining these issues.
Another prominent issue involved the Form 1023-EZ, the streamlined application for tax-exempt status. The Taxpayer Advocate Service had undertaken a study that found a high deficiency rate among organizations that used the 1023-EZ. In response, eligibility criteria was modified to exclude organizations that qualify for exemption under sections of the code other than 501(c)(3). Organizations that have already filed for exemption with the Form 1023 cannot use the streamlined application, either. Additional questions related to gross receipts, assets thresholds and foundation classification were also added to the Form 1023-EZ. The questions are expected to increase the form’s processing time.
The Form 8976, Notice of Intent to Operate Under 501(c)(4), also proved problematic in 2017. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) had required entities to file the form if they wanted to create a social welfare organization. Since it was implemented, the IRS has rejected 17 percent of the Form 8976 notices, most commonly because the user fees were not paid or due to pre-existing exemptions. To assist with the issues related to the Form 8976, the IRS will make changes to its submission platform to reduce the number of rejections related to the user fee.
Knowledge initiatives will continue to educate users on 501(r) organizations, test requirements, gaming, unrelated business income and employment tax.
Exempt Organizations 2018 Compliance Initiatives
Compliance efforts will be focused on supporting entities that file the Form 990-N, and organizations that were operating as for-profits before they converted to 501(c)(3) organizations. It will also target organizations that show indicators of potential private benefit or inurement to individuals or private entities.
Data-driven approaches will be used to improve the Form 990 and filings for private foundations. Statistical sampling will be used to examine returns filed by exempt organizations for compliance. The IRS also plans on testing its newly developed model for the Form 5227, Split Interest Trust Information Return.
Referrals, claims and casework will continue to be a priority, particularly sources that allege non-compliance by exempt organizations. The IRS will also focus on post-determination compliance for organizations that received their tax-exempt status from the Form 1023-EZ.
Compliance checks will focus on combined annual wage reporting employment tax to identify discrepancies between Forms W-2 and Forms 941/944. The IRS will be looking for 501(c)(7) organizations that reported investment income but did not file their Form 990-T as well.
Examiners brought in with specialized expertise in federal, state and local employment tax will assist with reviews of complex worker classifications and complex fringe benefit issues. Compliance strategies will target early retirement incentive plans, Form W-2/1099 matches, FUTA tax, and back-up withholding. Data-driven models will help identify organizations with substantial credit balances with no returns and minimal Medicare and Social Security wages paid compared to Form 1099 distributions.
Compliance efforts for employee plans will target organizations that pose a risk for noncompliance. Plans affected by mergers or consolidations will receive higher scrutiny, along with plans that had compliance issues with discrimination testing, participation and coverage requirements, distributions, trust investments, benefit accruals, contributions/earnings allocations and elective deferrals. Employee Plans staff will use compliance checks for recordkeeping and information reporting on plans with partial terminations, plans with non-participants loans, 403(b) plans, 457(b) plans with excess deferrals, SEP plans and large SIMPLE IRA plans.
Efforts will be made to further streamline the Voluntary Closing Agreement Program (VCAP) which allows tax-exempt bonds to initiate the resolution for compliance issues and arbitrage violations in exchange for reduced penalties. Compliance strategies will focus on:
- Tax advantaged bonds with guaranteed investment contracts and/or qualified hedges and bonds beyond a temporary period
- Private activity bonds to determine whether rehabilitation requirement was satisfied
- Non-qualified use issues
- Bonds with deep discount and private activity bonds with excessive weighted average maturities
We will keep you up-to-date on further IRS activities and trends. For specific comments, questions or concerns about these topics, please contact us.
- Highlights from the IRS Tax-Exempt and Government Entities Division 2017 Work Plan
- Report Asks for 501(c)(3) Application Improvements
Betty Isler is a Managing Director in the Tax Group of CBIZ MHM in the Tampa Bay office. She can be reached at 727.451.7923 or BIsler@cbiz.com.