United States: Looking Ahead For Tax-Exempt Organizations: IRS Priorities In 2016

Last Updated: December 16 2015
Article by Michele A.W. McKinnon and Kelly L. Hellmuth

Sunita Lough, IRS Commissioner of the Tax-Exempt and Governmental Entities Division (TE/GE), recently released the TE/GE Priority Letter for FY 2016. Rather than focusing on specific tax issues, the letter states that TE/GE will focus on the same five priorities as last year: continuous improvement, knowledge management, risk management, data-driven decision-making, and employee engagement.

In the area of continuous improvement, TE/GE plans to add several long-term projects including the following:

  • Evaluating the Form 1023-EZ process for potential improvements
  • Delivering new outreach products, especially for taxpayers affected by the Affordable Care Act
  • Developing a Form 990 in an e-file format, including automatic redaction tools
  • Improving efficiency in closing unit processes and workload processes
  • Simplifying tax forms and enhancing digital functionality
  • Refining information document requests to reduce the length of exams

In the area of knowledge management, TE/GE previously had introduced the concept of Knowledge Networks (K-Nets) to provide technical resources to its employees on significant issues. TE/GE intends to further develop and expand these K-Nets by continuing to build collections of knowledge and existing guidance that are searchable by key issues and resource types.

As well as listing several accomplishments in the area of risk management, the TE/GE letter states that TE/GE will expand the use of a tool to document risk-based business decisions. TE/GE also intends to implement mitigation strategies to lessen the likelihood or impact of risks.

As part of its commitment to integrating data-driven decision-making, TE/GE focused its exams on areas or issues where it believes there may be greater risk of noncompliance. TE/GE developed a pilot process to analyze Form 1023-EZ applications for trends and patterns and will continue to test its methodologies and refine its strategies, using data to guide decision-making.

In the area of employee engagement, TE/GE launched several initiatives to request and respond to employee feedback and questions. In the coming year, TE/GE views employee engagement as a continuing top priority and intends to incorporate feedback from the previous year, as well as request additional feedback, to provide employees with the tools they need.

Ms. Lough's letter also attaches an Exempt Organization (EO) Workplan Briefing that provides more specific plans. In the area of examinations, EO intends to identify and focus on existing and emerging high-risk areas of noncompliance through the use of historical information, stakeholder input, reliable outside data, and public information, and will allocate resources among all major subsections and size classes of organizations. EO will focus on the following five concerns:

  • Exemption issues, including non-exempt purpose activities and private inurement
  • Protection-of-assets issues, including self-dealing, excess benefit transactions, and loans to disqualified persons
  • Tax-gap issues, including employment tax and unrelated business taxable income
  • International issues, including oversight of funds spent outside the U.S., funds spent on potential terrorist activities, foreign conduits, and FBAR requirements
  • Emerging issues, including non-exempt charitable trusts and section 501(r) issues

In addition, EO intends to review tax-exempt hospitals with compliance issues related to the Patient Protection and Affordable Care Act and begin compliance enforcement for organizations determined to be exempt through the Form 1023-EZ process.

In the determinations area, EO projects that it will have an increased inventory of applications for exemption by the end of 2016. EO will realign 30 specialists from determinations to examinations in 2016 but expects that efficiencies gained from using the Lean Six Sigma approach will offset the loss of these employees and ensure timely processing of applications. EO will also review data from Forms 1023-EZ that were selected for pre-determination review and consider adjusting the percentage of such forms selected for review in the future.

EO seeks a continued reduction of its correspondence inventory and will refine its process to prevent erroneous revocations. As discussed in the TE/GE letter, EO will also continue to build out its K-Nets program and add to those issues established in 2015.

Exempt organizations and their advisors should pay attention to those exempt organization issues likely to receive the most IRS attention in the coming year. For a copy of the entire TE/GE Priorities for FY 2016 letter and Workplan Briefings, as available on the IRS website, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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