The recently released IRS Tax Exempt and Government Entities FY 2017 Work Plan contains little news but does reiterate its focus on data-driven enforcement activity for those concerned about compliance in the nonprofit sector.
Last year’s plan (FY 2016) for the Exempt Organizations (EO) Examinations section was to develop “an overarching compliance strategy to ensure organizations enjoying tax-exempt status complied with the requirements for exemption and adhered to all applicable federal tax laws.”
So EO implemented a data-driven case selection process to identify and address existing and emerging high risk areas of noncompliance, looking specifically at the following issues:
- Exemption – Nonprofit purpose? Private inurement?
- Protection of Assets -- Self-dealing? Excess benefit transactions? Loans to disqualified persons?
- Tax Gap – Correct employment tax paid? Liability for unrelated business income tax?
- International -- Funds spent outside the US? Organizations operating as foreign conduits? Compliance with Report of Foreign Bank and Financial Accounts (FBAR) requirements?
- Emerging issues – Including non-exempt charitable trusts and IRC 501(r).
As Virginia Gross, a member of an IRS advisory committee, put it (see interview), this means a greater use of technology to review returns and less discretion for IRS – leading to a much more automated exam function. All Forms 990 will be run through a system of close to 200 queries, designed to surface potential compliance risks. Based on the answers, the IRS will identify the organizations that are more at risk for noncompliance and investigate them further.
In FY 2017, the IRS will continue to review how noncompliance issues are identified, making filters more robust and improving statistical modeling. It is all about the data reported on the Form 990 and to other parts of the IRS – they are going to be checked for consistency and accuracy.
The plan calls for IRS to focus on 400 Forms 990 that have been identified as high risk for private inurement and private benefit issues and 100 Forms 990-PF (private foundation returns) with anomalies detected. A statistical sampling methodology to assess compliance in the Exempt Organizations population is under development, with the goal of an ongoing rolling statistical sample of 501(c) (3) and 501(c) other organizations to track the effectiveness of compliance efforts.
The IRS will also be increasing the amount of technical and procedural information available to the nonprofit sector by creating “issue snapshots” – short analyses on specific issues. This is clearly a work in progress.
The bottom line for exempt organizations is clear – be very careful when answering questions on the Form 990 and make the answers accurate and consistent. Be sure to complete any other required parts or schedules if there is a question that then requires a schedule or another part of the form to be filled out. There are no changes to current laws and regulations – just a much higher level of scrutiny of the Forms 990, as the IRS continues the shift to data-driven decision making to guide its compliance efforts.