The Advisory Committee on Tax-Exempt and Government Entities (ACT) recently held its 15th annual public meeting with the Commissioner and other top IRS officials. The ACT comprises national experts representing each of the five major jurisdictions of the TE/GE division: employee plans, exempt organizations, federal, state and local governments, Indian tribal governments and tax-exempt bonds.
The function of the ACT is to identify and research issues important to each constituency area and make recommendations to the IRS on improving knowledge, implementation and efficiency. Although these recommendations may not be wholly adopted by the IRS, they may signal potential upcoming changes that not-for-profit organizations may want to monitor. Below, we have highlighted three of the major items on this year’s ACT agenda.
Employee Benefit Plan Determination Letter Program
This year’s issue for the Employee Plan (EP) group stemmed from recent dramatic changes to the Determination Letter Program outlined in Announcement 2015-19 issued in July 2015. Benefit plan sponsors request determination letters to verify that their plan documents are in compliance with stringent tax qualifications. Under the prior remedial amendment cycle (RAC) system (in effect since 2006), individually designed plan (IDPs) sponsors were permitted to file for a determination letter every five years to verify that any plan amendments since the prior letter incorporate all required law and regulatory changes. This system offered protection to the plans from disqualification due to document failures.
Citing budget issues, workload constraints and staff turnover, the IRS abolished the five year remedial amendment cycle RAC system with Announcement 2015-19, effective January 31, 2017. It stated the IRS would now only accept applications for determination letters upon initial qualification or termination. In the report, the ACT makes recommendations to ease the transition and help allay fears of the EP community. While they don’t think the IRS will acquiesce and reinstate the program, the ACT would like them to consider extending the cycle period to as much as 7-10 years. Further, they would like the current measures to just serve as an interim transition until the IRS and EP community can work out a mutually beneficial plan. If the IRS persists in terminating the current program, ACT suggested 10 improvements based on surveys of the EP community. Among the items suggested were:
- Adding flexibility to the pre-approved program;
- Providing adequate time for plans to adopt interim amendments;
- Simplifying plan documents by expanding provisions that can be incorporated by reference to the Code;
- Publishing of model plan amendments in conjunction with Cumulative Lists and List of Required Modifications;
- Allowing plans with inconsequential errors in document language leniency under audit; and
- Creating a safe harbor for individually designed plans to convert to a pre-approved plan format.
The IRS appeared to consider a piece of ACT’s recommendations with the passage of its Rev. Proc. 2016-37, New Determination Program. With the ending of the five year RAC system, IDPs will no longer be required to make interim amendments, but instead will need to adopt changes from an annual Required Amendment List (RA List) within two calendar years of its publication.
Rev. Proc. 2016-37 also opens the door for plan sponsors to request additional determination letters in certain circumstances, which will be handled by the IRS on a case-by-case basis.
Improved Communication between Not-for-Profit Groups and Regulators
When surveyed, both regulators and tax-exempt organizations asked for better transparency and enhanced communication. As a result, in this year’s report the ACT made six recommendations to help facilitate the exchange of information:
- The significant reduction in Exempt Organization (EO) staff has depleted IRS expertise in this area and its ability to address issues and questions. ACT recommends not only an increase in internal training, but also participation in external training opportunities (teaching and participation) with the opportunity to interact with those who work within the EO sector.
- As tax issues increase in complexity, the IRS should provide thought leadership and guidance on issues that affect the sector so they can maintain public trust in their ability to regulate effectively. The IRS must provide more tools to help organizations with compliance, including release of detailed audit data, user-focused guidance similar to the former CPE text, and a user-friendly website. Compliance with IRS regulations remains a top concern for many organizations, so the IRS providing easily accessible, understandable and timely information is critical.
- The EO division should make an effort to increase cybersecurity through enhanced technology tools, secure cyber storage platforms and improved data collection and protection processes.
- The IRS should look to coordinate its regulatory efforts and share data with state charities’ officials and enhance its ability to communicate and disseminate IRS information in a digitized format.
- Continue building the interaction between the IRS and the not-for-profit community by including a greater number of not-for-profit voices in its decision-making and providing expert-level resources for customer service calls.
ACT’s tax-exempt bond subcommittee too recommended more frequent communication and targeted outreach between the IRS’s TE/GE division and shareholders. It also suggested the IRS consider revisions to Form 8038 (the required information return filing for tax-exempt private activity bonds) as well as implementing electronic filing of the form.
Finally, the group asked for revisions to the examination process. Currently, the IRS may ask for extensive documentation from the issuers of private activity tax-exempt bonds, some of which may not be directly related to the issue under scrutiny. The ACT would like to see a more targeted and focused request for the data that would minimize disruption to the tax-exempt bond issuer while taking the strain off the IRS’s resources.
For More Information
While the ACT’s recommendations are merely suggestions, subcommittee members have developed productive relationships with their IRS counterparts. The information sharing may lead to the IRS taking some of the recommendations into account when issuing new or revised guidance.
For more information about any of the issues covered in the ACT’s recommendations, please contact us.
Lisa Burke is a Senior Tax Manager at CBIZ MHM located in Kansas City, MO. She can be reached at 816.945.5500 or lburke@CBIZ.com.