Exempt Org Work Plan and ATGs

| 10/26/2017

The IRS recently issued its “Tax Exempt and Government Entities [TE/GE] FY 2018 Work Plan.” The work plan, which is issued each year, gives leaders of exempt organizations an indication of where the IRS will focus its efforts and resources. There are no surprises in the work plan, as the IRS has been informing the exempt organization community about its increasing focus on data-driven decision-making, on compliance strategies that seek to more efficiently identify organizations at risk for noncompliance, and on efforts to produce knowledge management resources. Following are highlights of the work plan.

Compliance strategies. Compliance efforts will focus on examining supporting organizations that filed Form 990 N (rather than Form 990, “Return of Organization Exempt From Income Tax,” or Form 990-EZ), for-profit organizations that converted to Section 501(c)(3) organizations, and organizations that show indicators of potential private benefit or private inurement to individuals or private entities. For example, a for-profit conversion to Section 501(c)(3) status that involves a small governing board or extensive family relationships potentially would be of concern to the IRS.

Data-driven approaches. The IRS will continue to use data collected on the Form 990 series, exemption applications, and other sources to focus its examination plans on strategic areas or on issues where there is a greater risk of noncompliance with tax laws. Furthermore, private foundations will continue to be examined based on potential anomalies found on their Form 990-PF filings. While the IRS does not disclose specific “trigger questions” that it uses in its compliance models, this effort highlights the importance of organization leaders remaining up to date on tax law matters that affect the reporting on their information returns.

Referrals, claims, and other casework. Both internal and external referrals continue to be used by the IRS to pursue potentially noncompliant organizations, although external referral sources used by the IRS were not identified. Post-determination compliance checks and statistical sampling continue to be part of its strategy as well.

Compliance checks. The IRS will continue to use compliance checks to determine whether an entity is adhering to recordkeeping and reporting requirements. Compliance checks may include tax-exempt employers that had discrepancies between Form W-2, “Wage and Tax Statement”; Form 941, “Employer’s Quarterly Federal Tax Return”; and Form 944, “Employer’s Annual Federal Tax Return.” Checks also may include organizations failing to file Form 940, “Employer's Annual Federal Unemployment (FUTA) Tax Return”; exempt social clubs that reported investment income but did not file Form 990-T; and tax-exempt hospital organizations that did not comply with the financial assistance requirements in Section 501(r)(4). Interestingly, last year’s work plan mentioned 501(r) generally as a focus area (including all of the requirements for charitable hospitals that were added pursuant to the Patient Protection and Affordable Care Act), while this year the focus is narrowed to the financial assistance-related provisions.

Employment tax. Employment tax examiners will assist with examining tax-exempt entities with complex worker classification or complex fringe benefit issues. Among other employment tax strategies, the work plan will address situations in which a Section 501(c)(3) organization handles payroll that includes employees of a related Section 501(c)(4) organization but does not pay the FUTA tax on the employees of the Section 501(c)(4) organization.

Audit Technique Guides and Knowledge Management

The work plan provides that the IRS will continue to produce technical knowledge management products, such as issue snapshots and audit tools. Planned topics include gaming, unrelated business income (and related exemption issues), Section 501(r), organizational test requirements, and employment tax.

Issue snapshots first were released by the IRS in 2016. There currently are approximately 50 issue snapshots covering a broad range of matters related to exempt organizations. While issue snapshots are not official pronouncements of law and cannot be cited as precedent, they provide useful analysis and resources for a given technical tax issue.

The IRS also recently published audit technique guides (ATGs) on a variety of exempt organization topics. The ATGs are designed to help IRS examiners during audits of specific types of exempt organizations. The material in the ATGs is drawn from former Internal Revenue Manual (IRM) 4.76, “Exempt Organizations Examination Guidelines,” which were removed from the IRM in September 2017 and were posted separately to the IRS website. Approximately 30 ATGs cover both Section 501(c)(3) and other Section 501(c) organizations as well as other topics.

While the work plan contains no surprises for exempt organizations, it confirms the importance not only of information reporting itself but of fully understanding all of the underlying tax issues.

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