Last week, the IRS Tax Exempt and Government Entities (TE/GE) division issued their 2017 work plan. The document summarizes strategy and compliance from fiscal year (FY) 2016, as well as a plan for the coming FY 2017. As covered by the Nonprofit Law Blog last year, TE/GE currently focuses on 5 strategic areas for continuous improvement within the exempt organizations (“EO”) division: exemption, protection of assets, tax gap, international, and emerging issues. Here are some notable points from the work plan:
- Issue Snapshots: In order to increase the technical knowledge of EO employees and the general public, the IRS prepares and posts technical “Issue Snapshots” that provide analysis regarding a particular tax issue. Five issue snapshots were completed on EO topics including IRC Section 4946’s definition of a disqualified person, and currently, over 20 are in development. The in-process snapshots will include private foundation qualifying distributions and 501(c)(4) and determining primary activity.
- Examinations/Revocations: As of June 30, 2016, the IRS completed 4,984 examinations of annual returns. The largest issue area examined was “Filing, Organizational, Operational”, which focused on verifying the exempt activities of the organization or its filing requirements. Many of these examinations involved the IRS securing delinquent returns. Within the IRS’s post determination compliance examinations of 1,400 exempt organizations that filed Forms 1023 or 1024, 39% had issues “ranging from amendments to organizational documents and failure to file returns.” Lastly, of the 43 organizations that had their exempt status revoked in FY 2016, the majority were revoked for not operating for an exempt purpose.
- Form 1023-EZ: Form 1023-EZ constituted roughly 60% of all Form 1023s received by the IRS in the third quarter of FY 2016. Ninety-four percent of 1023-EZ applications were approved, and approximately 5% were rejected. The IRS anticipates the reduction of the user fee, which went into effect on July 1, 2016, will result in an increase in the percentage of 501(c)(3) applicants using Form 1023-EZ. Despite widespread criticism from state regulators, the National Taxpayer Advocate, and many commentators, the IRS also noted its belief that the 1023-EZ form and process has proven to be efficient and effective through pre- and post-determination review processes.
- Determination Results: In late 2015, the IRS began rejecting incomplete Form 1023 applications by returning the application packages, along with any user fee paid and a letter explaining why the application was rejected. This process is meant to educate applicants as to the requirements of a complete application and ensure that once the application is assigned to a review agent, it can be expedited and reviewed efficiently. Overall, the IRS approved 93.6% of applications in FY 2016, and denied less than one percent. The most common reasons for denial of exempt status were private benefit and private inurement, having a substantial non-exempt purpose, and commerciality issues. Additionally, since the implementation of the new requirement for social welfare and civic organizations to submit notice to the IRS of intent to operate as a 501(c)(4), Form 8976, the IRS has received and processed over 400 notifications.