A report released by the Treasury Inspector General for Tax Administration (TIGTA) recommended that the IRS take certain steps to increase detection of unrelated business taxable income (UBTI) of tax-exempt organizations under section 512. TIGTA reviewed Form 990 returns for which there were indications of UBTI, but no Form 990-T was filed. TIGTA found that examiners do not always attempt to identify UBTI during focused examinations when UBTI is not a pre-identified issue, and examiners do not always require exempt organizations to file a Form 990-T to report UBTI when it is identified. IRS managers explained that while UBTI is always considered when examiners analyze large, unusual, or questionable (LUQ) items, examiners are not required to document evidence for issues they do not identify. TIGTA also found that TE/GE classifiers did not make reasonable efforts to verify the net operating loss deduction in all refund claims involving NOLs.

TIGTA made eight recommendations to help improve guidance, address compliance issues, and safeguard against reporting material errors related to UBTI. The IRS agreed with six of the eight recommendations, and some of its plans include:

  • Require, in appropriate cases, that examiners request any missing Forms 990-T and inform taxpayers of the potential risks if they do not comply with their filing requirements.
  • Evaluate claim thresholds sent to the field in an effort to minimize impact on limited resources and analyze specific case circumstances to prevent unnecessary case referrals to an EO Examination group.
  • Include UBTI issues in future compliance projects to identify issues preventing taxpayers from being compliant with their UBTI reporting requirements.
  • Require experienced senior EO classifiers to review claims involving a net operating loss prior to accepting the claim as filed and document the review in the case file.
  • Implement safeguards to ensure the accuracy of the Reporting Compliance Case Management System Closing Record to avoid material errors that affect information reports based on these inputs.
  • Replace the respective Internal Revenue Manual sections that provide instructions on the Form 5599 closing record with the revised Reporting Compliance Case Management System Closing Record and clarify any differences in how examiners should complete this process for appealed examinations.

The IRS disagreed with the recommendations to require examiners to address UBTI in every case file and to restore references to UBTI that were removed from the Internal Revenue Manual. The report and the changes that the IRS agreed to may make UBTI a more significant issue in IRS examinations and compliance initiatives.

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