By Laura Kalick, JD, LLM in Taxation
The 2017 Internal Revenue Service (IRS) Joint TE/GE (Tax Exempt and Government Entities) Council Meeting was held in Baltimore in February. These annual meetings were designed to maintain open communication between practitioners and the IRS TE/GE Division. Attendees include members of the five regional TE/GE Councils. Each regional council is comprised of two subgroups: Exempt Organizations (EO) and Employee Plans, and includes representatives from the legal, accounting, consulting and in-house EO community. This year, the theme of the meeting, in keeping with the message IRS TE/GE Commissioner Sunita B. Lough included in the 2017 Tax Exempt Work Plan, focused on transparency, efficiency and effectiveness.
As we have previously reported, the IRS, and especially the Exempt Organizations division, is working with fewer resources and, with additional budget cuts looming, this challenge will likely persist. Lough reported that the workforce is down by 20 percent, requiring the division to find new ways to work efficiently, including more targeted examinations, information requests and the use of digital communications.
Commissioner Lough said the IRS does not want to burden organizations that appear to be tax compliant and is, therefore, making examination decisions based on red flags in an organization’s Form 990. In addition, the IRS may even be obtaining data from individuals associated with organizations to see if there are private inurement or private benefit indicators. To make their process more efficient, the IRS will combine the data mining and research staff into one compliance-focused unit. The commissioner indicated that this is a dynamic effort, and mentioned the agency is constantly tweaking its processes to gain better results.
Lough noted that, like other government agencies, the IRS has a hold on regulations based on President Trump’s recent “one in, two out” executive order. Since there is currently no Assistant Secretary for Tax Policy, there is no one to administer which two regulations will be eliminated to promulgate a new one. Despite this hold, the IRS is still implementing new procedures for exempt organizations.
New Audit Process for Information Document Requests (IDRs)
The commissioner indicated there is a new audit process in place for information gathering once an organization has been identified as having a specific audit issue (or issues). Under the new process, the IRS and the organization will discuss the issues and the information needed before the IRS sends the Information Document Requests (IDRs) and the IRS will provide the organizations with a timeline to respond to the requests. Issue identification before the IDRs are sent represents a major procedural breakthrough for both the IRS and exempt organizations. In the past, even though both sides knew what issues were at play, the IRS would bombard the organization with multiple IDRs (sometimes in the hundreds) that would cause an audit to last for extended periods of time. Also, many IDRs were duplicative and requested information that was possibly irrelevant.
With the new process, it appears that the IRS will be flexible in granting extensions to provide the information, if an organization has good cause to request one. However, if an extension is granted, the IRS will expect the response to come by the extended deadline. Additionally, the IRS is making a commitment to respond to information it receives in response to an IDR in a reasonable time frame.
In April 2017, the IRS will also implement a new process for those organizations that do not respond to IDRs on time. If the organization does not respond within the given time period, the IRS will issue a notice of deficiency. If the IRS still does not receive the documents in time, including extensions, a summons will be issued. The goal of this process is to ensure issues are addressed in a transparent and timely fashion.
Digital Communication
Commissioner Lough also discussed a trial test of digital communications. The IRS will be testing a process for sending IDRs through secure messaging, rather than through “snail mail,” which could also save time.
She also indicated that they are testing electronic return readers that remove personal information, allowing the information from Forms 990 to be online faster. The Form 1023-EZ information is now available online, so a Freedom of Information Act (FOIA) request is no longer required to obtain the application. The IRS will also create a section on the Form 1023-EZ where the organization will input an explanation of the exempt purpose.
Another advancement is that the Form 990-EZ now has 29 electronic help icons that will hopefully reduce the errors on this return. Currently, the paper-filed Form 990-EZ has an error rate of 34 percent. Under new procedures, if a return is not complete, it will be sent back to the organization and will not be considered filed and the organization will have to refile. The IRS is hoping that the new electronic form will lower the error rate and encourage organizations to ensure all necessary information is included on the form so it is not returned by the IRS.
Final Note
Recent Statistics of Income published for Tax Year 2012 showed that over 46,000 tax-exempt organizations filed a Form 990-T with the IRS that year, and over half of those organizations did not report unrelated business income tax liability after subtracting deductions from gross unrelated business income. The new procedures and initiatives that the IRS is implementing should help address this issue, and others.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com