Knowledge and Insights

The IRS Tax Exempt and Governmental Entities Division recently issued their 2016 priorities.

Exempt Organizations (EO’s) overarching compliance strategy is to ensure organizations enjoying tax-exempt status comply with the requirements for exemption and adhere to all applicable federal tax laws. The focus in 2016 will be on significant compliance issues, not on the number of cases closed. Some of these issues may require a multi-year approach.

Through this process, EO will focus resources on five strategic issue areas:

• Exemption: Issues include non-exempt purpose activity and private inurement, enforced primarily through field examination;
• Protection of Assets: Issues include self-dealing, excess benefit transactions and loans to disqualified persons, enforced primarily through correspondence audits and field examination;
• Tax Gap: Issues include employment tax and Unrelated Business Income Tax liability, enforced through compliance checks, correspondence audits and field examination;
• International: Issues include oversight on funds spent outside the U.S., including funds spent on potential terrorist activities, exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements, enforced through compliance reviews, compliance checks, correspondence audits and field examination; and
• Emerging issues: Issues include non-exempt charitable trusts and IRC 501(r), enforced through compliance reviews, correspondence audits and field examination.

EO’s compliance strategy will also include oversight of tax-exempt hospitals with certain compliance issues related to the Patient Protection and Affordable Care Act (ACA). This oversight includes conducting reviews of hospitals’ compliance with ACA as described in IRC section 501(r). They will also continue to review organizations that were granted tax-exempt status through the streamlined determination process and will begin post-determination compliance enforcement on organizations that were granted exempt status through the submission of the Form 1023-EZ application.

Determinations

In FY 2016, EO Rulings and Agreements anticipates having 100 determination specialists to review Form 1023 and Form 1024 application receipts and to participate in predetermination reviews of sampled Form 1023-EZ receipts. In addition, there will be 25 Tax Examiners reviewing the Form 1023-EZ. They project an approximate 3% increase in application receipts in FY 2016, assuming that the increase in the Form 1023-EZ adoption rate will continue at a conservative pace. As a result, they anticipate receipts outpacing closures and an increased open application inventory at the end of FY 2016.

While they will realign 30 determination specialists to EO Examinations for FY 2016, the additional efficiencies gained through streamlined case processing and continued improvements from the Lean Six Sigma recommendations will mitigate the loss of these employees. Additionally, with a consolidated staff within a single post of duty, they may experience additional efficiencies, allowing them to generally keep pace with current inventory levels and ensure timeliness of application case processing.

Applicant compliance risks with the Form 1023-EZ will be mitigated through the continued predetermination application reviews and evaluation of the review data. Consistent with TE/GE’s data driven approach, they will continue to study data analyzed from Form 1023-EZ pre-determination reviews and will consider future adjustments to the percentage of Forms 1023-EZ selected for pre-determination reviews.

Processing

EO will continue to reduce their correspondence inventory; and they have implemented a new, customer service-focused process to help prevent erroneous revocations. In FY 2015, this has resulted in preventing over 1,000 erroneous revocations; and we will refine and formalize this process in FY 2016.

Technical

EO will continue to aggressively build out the Knowledge Management (KM) program through additional staff participation and accumulation of tax law content. In FY 2015, they established Knowledge Networks (K-Nets) for Private Foundations, Hospitals and Other Healthcare, Section 501(c)(3) Issues, Other 501(c) Issues, and Unrelated Business Income Tax. The Knowledge Management program will sustain a vibrant and open process where all EO employees participate and benefit from a robust knowledge repository. A fully functional KM program will improve collaboration between employees, which will mitigate risks and benefit employee engagement. Additionally, they expect the overall knowledge base of employees to improve, which will drive improvements in technical quality and consistency of work completed within EO.
If you have any questions regarding the TE/GE Priorities for 2016, please feel free to contact me at 609-689-9700.

The author of this article, Christine Thomas, is a former employee of Mercadien.