The IRS Tax Exempt & Government Entities Division (TE/GE) recently published its FY 2020 Accomplishments Letter. One segment of customers covered by TE/GE is Exempt Organizations (EO), which includes charities, private foundations, business leagues, labor unions, and veterans’ organizations. The other two segments of customers are Employee Plans and Government Entities. The IRS fiscal year runs from October 1 through September 30.
TE/GE Compliance Platform
The Accomplishments Letter describes its compliance platform as consisting of six programs that together promote tax law compliance:
- Compliance Strategies: Issues approved by the TE/GE Compliance Governance Board to identify, prioritize and allocate resources within the TE/GE filing population.
- Data-Driven Approaches: Data and queries based on quantitative criteria, used to identify high risk areas of noncompliance and focus on issues with the greatest impact.
- Referrals, Claims and Other Casework: Referrals of alleged noncompliance from internal and external sources, and claims for refunds, credits or adjustments.
- Compliance Contacts: Correspondence contacts known as compliance checks addressing potential noncompliance, and educational letters to limit costs and taxpayer burden.
- Determinations: Letters issued to exempt organizations on exempt status, private foundation classification and other determinations related to exempt organizations and qualified retirement plans that meet legal and regulatory requirements.
- Voluntary Compliance and Other Technical Programs: The Voluntary Correction Program (VCP) enables a plan sponsor (at any time before examination) to pay a fee and receive IRS approval for correction of plan failures. Other technical programs, including Knowledge Management, work to ensure the quality and consistency of technical positions, provide timely assistance to employees and preserve and share TE/GE’s knowledge base.
The Accomplishments Letter describes the following areas from EO:
Exempt Organizations completed examinations of 3,240 returns in fiscal year 2020 [a miniscule fraction of returns filed], including the Form 990 series (990, 990-EZ, 990-PF, 990-N, 990-T) and their associated employment and excise tax returns. Overall, 88% of closed examinations resulted in a tax change (change percentage) and 39% of the examinations were “picked-up” from a related examination (pick-up percentage). We proposed revocations (agreed and unagreed without protest) for 36 tax-exempt entities as a result of these examinations.
Compliance Strategies [focus areas]
- Hospital organizations with unrelated business income: Focused on unrelated business taxable income reported on Form 990-T, Exempt Organization Business Income Tax Return, where expenses materially exceed gross income.
- Internal Revenue Code (IRC) Section 501(c)(7) entities: Focused on investment and nonmember income by tax- exempt pleasure, social and recreation clubs.
- IRC Section 4947(a)(1) Non-Exempt Charitable Trusts: Focused on organizations that under-reported income or over-reported charitable contributions.
- Previous for-profit: Focused on organizations that formerly operated as for-profit entities prior to their conversion to IRC Section 501(c)(3) organizations.
- Private benefit and inurement: Focused on organizations that show indicators of potential private benefit or inurement to individuals or private entities by way of private foundation loans to disqualified persons.
- Tax-exempt organizations selected through compliance query sets based on information reported on Form 990, Return of Organization Exempt from Income Tax; Form 990-EZ, Short Form Return of Organization Exempt from Income Tax; and Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation.
- Tax-exempt organizations identified using RAAS to research noncompliance indicators of private benefit/inurement, officer business partnerships, under-reported credit card income, and related employees and for-profit partnerships.
EO closed 95,864 determination applications in fiscal year 2020, including 85,509 approvals, 79,730 of which were approvals for 501(c)(3) status. [See figure below for breakdown of application types closed.]
TE/GE Compliance Contacts
In fiscal year 2020, TE/GE continued educating taxpayers through compliance checks and educational letters to improve return filings and filing accuracy on issues of noncompliance. [The EO Compliance Unit started 1,420 such contacts and closed 1.467.]
The compliance checks included:
- Discrepancies between Form W-2, Wage and Tax Statement, and either Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, for entities under TE/GE’s jurisdiction.
- Noncompliance with IRC Section 501(r)(4) Financial Assistance Policy (FAP) by tax-exempt hospitals.
- Exempt organizations that failed to file:
- Form 940, Employer’s Annual Federal Unemployment Tax Return.
- Form 1041, U.S. Income Tax Return for Estates and Trusts under IRC Section 4947(a)(1).
- Form 990-T, Exempt Organization Business Income Tax Return.
- IRC 501(c)(12) organizations that: Received less than 85% of their gross income from members. Did not complete Form 990, Return of Organization Exempt from Income Tax, Part V, Lines 11a and 11b, “gross income from members or shareholders” and “gross income from other sources.”
- Tax exempt and government entities that:
Have credit balances but failed to file employment tax returns.
Failed to file Form 1099-MISC, Miscellaneous Income.
EO-related outreach included:
- 11 EO Updates
- 5 Issue Snapshots
- Attendance at 14 outreach events addressing exempt organizations and their representatives