Knowledge and Insights
The impacts of the COVID-19 pandemic in 2020 have forced us and our tax-exempt (and for-profit) clients to grapple with rapidly changing work environments, economic climates, and regulatory and compliance landscapes. The IRS Tax Exempt and Government Entities (TE/GE) Division is not immune from this rapidly changing environment either!
The TE/GE recently released its fiscal year 2021 Program Letter from Commissioner Tammy Ripperda and Deputy Commissioner Edward Killen. Keeping with the theme of change, the program letter has taken on a different format this year. Whereas in prior years, the program letter was more detailed and comprised of several pages, the 2021 version is, in the words of the commissioners, a “compact summary of our goals and how we plan to achieve them.” The commissioners have cited the need to remain flexible amidst the ongoing pandemic as the primary reason for the change in format, and anticipate regular updates to the program letter and the TE/GE’s new Compliance Programs and Priorities page as circumstances require throughout the year.
While the full Program Letter and Compliance Program webpage are linked above, the following summarizes some of the high priority items that the TE/GE unit will focus on this year:
- Employee Plans – initiatives will focus on participant loans, specifically compliance with IRS rules on maximum loan balances and repayment rules for early distributions for participants before age 59 ½. The unit will be verifying whether participant loans are being repaid timely if the loan balance remains consistent or increases for more than one year using issue-based examinations. Examinations will target plans whose participants loans represent a high percentage of the plan’s total assets.
- Exempt Organizations – the focus is on excise taxes on excess compensation. The Tax Cuts and Jobs Act of 2017 established IRC Section 4960 which imposes a 21% excise tax on tax-exempt organizations that pay over $1 million in compensation to any “covered employee” via filing of Form 4720. The unit continues to see a high volume of organizations paying a covered employee over $1 million but not filing a Form 4720 and will be performing compliance checks.
- Exempt Organizations, Federal, State & Local Governments, Indian Tribal Governments – the TE/GE will focus on payors that have issued both a Form W-2 and Form 1099-MISC to the same payee in the same calendar year with the intent of building upon a 2020 focus of misclassification of employees vs. independent contractors.
- Tax Exempt Bonds – the TE/GE will focus on arbitrage violations by failing to invest bond proceeds in higher yielding investments as required by Treasury Regulation 1.148-2(e). The proceeds expected to be allocated to capital projects may be invested at an unrestricted yield a 3-year temporary period. Beyond the temporary period, investments must be yield restricted.
A quick read of the Program Letter and Compliance program webpage will give you valuable insight as to how the IRS can find their way to your organization, and the method they use to investigate your compliance practices. If you believe you’re at risk for compliance exposure and would like to vet your concerns with someone who understands tax compliance, please contact me for a consultation at firstname.lastname@example.org or 609-689-2362.
DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.