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The Tax Exempt and Government Entities Group (TE/GE) Releases New Tax Procedures for Examinations of Tax-exempt Organizations

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The IRS’s Tax Exempt and Government Entities (TE/GE) division has recently issued significant new tax procedures for its examinations of tax-exempt organizations. The new process is expected to increase efficiency and accountability for both the IRS and the taxpayer. The Commissioner of TE/GE indicated that “(t)his process seeks to overcome issues that lead to prolonged cycle time and undue taxpayer burden.”

Highlights in the new tax procedures that specifically increase efficiency include:
  • The IRS examiner will research and identify the taxpayer’s specific potential audit issue(s) before he or she sends the audit letter to the taxpayer.
  • The auditor will call the taxpayer to discuss the issue(s) being audited and the items on the draft Information Document Requests (IDR), and will clarify the IDR, if needed, before finalizing.
Accountability will increase due to the following:
  • The taxpayer and auditor will agree on dates – taxpayer’s response date and examiner’s date to review the IDR response for completeness.
  • If the taxpayer’s response is complete, the examiner will let the taxpayer know that the response is complete, and the examination will proceed.
  • If the response is not complete, the examiner may grant certain extensions.
  • If the information request response remains incomplete, the examiner will follow certain enforcement steps, and will provide notification before each step –
    • Issuing a Delinquency Notice
    • Proposal of audit adjustment, summons for information, or proposal of revocation
    • If a summons will be issued, the IRS will first issue a “Pre-Summons Notice”.
  • If the taxpayer provides complete information prior to the response dates required for each of these enforcement steps, the examiner will notify the taxpayer, enforcement will end, and the examination will proceed.

In addition to these new procedures which will be in effect on April 1, 2017, the Commissioner of TE/GE also issued best practices as an attachment to its internal memo on the new IDR process.  Here is a link to the IRS‘s internal memo for the new required IDR process and suggested best practices.

Read Next: The Tax Exempt and Government Entities Group (“TE/GE”) Releases 2017 Work Plan

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 Laura Kenney is a Tax Director at BlumShapiro and has over thirty years of experience providing tax compliance and consulting services for public charities, higher education institutions, cultural institutions, foundations, individuals, estates and trusts, nonprofit organizations and healthcare organizations.

For more information or to discuss your organization’s tax matters please contact Laura J. Kenney at lkenney@blumshapiro.com or at 617.221.1944.

IRS Audits on the Rise for Tax Exempt Organizations

shutterstock_228440362Whether you are a board member, executive director, accounting manager or CFO of a non-profit organization, you should be aware that the Internal Revenue Service (IRS) is increasing their audits of the Form 990.

Effective for tax years beginning in 2008, the IRS extensively revised Federal Form 990to include a new summary page, a new governance section, enhanced reporting of executive compensation and an organization’s relationships with insiders and other organizations and new reporting for non-cash contributions, foreign activities, tax-exempt bonds and hospitals.

Now that several years have passed since the 990 revisions, the IRS has commenced auditing Form 990s based on “data-driven” criterion. This means organizations will be automatically selected for audit if certain data is detected by this automated process. The shift to “data-driven” assessments of an organization’s compliance with the federal tax laws, means that Form 990 preparation is more critical than ever. A properly prepared and executed information return will ensure that an organization’s chances for random audit selection are minimized and that exposure to income taxes, both on unrelated business income tax as well as other income by virtue of loss of exempt status, are kept at the lowest level possible.

Continue reading the article here >>

IRS Releases Draft Form 1023-EZ

The IRS recently released a draft of the new Form 1023-EZ “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code”. This new “EZ” form is, as one would expect, much shorter and simpler than the regular Form 1023. The new short form is only three pages long, compared to the 26-page regular Form. The IRS estimates that completion of the short form will take only 14 hours, compared to the 101 hours it estimates as the time needed to complete the full form.

Use of the short form is limited to small organizations with actual and projected annual gross receipts not-to-exceed $200,000 and total assets of $500,000 or less. In addition, foreign organizations, LLCs, churches, schools, hospitals, health maintenance organizations and various other types of organizations are not eligible to use the short form. There is a 22-question eligibility worksheet in the instructions that must be completed before the Form can be submitted to the IRS.

The Form 1023-EZ is designed to reduce the burden on smaller organizations seeking exempt status, while at the same time allowing the IRS to focus more of its efforts on the compliance of organizations which have already been granted exempt status. The Form 1023-EZ has eliminated the need for applicants to include certain information, including copies of governing documents, financial data/projections, narrative descriptions of the applicant’s current and planned activities, and compensation arrangements with officers, directors, key employees, etc. It instead requires some basic information about the organization and a series of “yes or no” questions about its planned activities, including whether the organization will attempt to influence legislation, pay compensation to its officers, directors and trustees, engage in any activities with foreign organizations/individuals or related party transactions, have any unrelated business income, etc.

Thus far, the Form 1023-EZ has not garnered much support from tax and other professionals who specialize in not-for-profit tax issues. Criticism generally stems from the Form’s simplistic nature, and the general fear is that organizations will be formed by people who don’t fully understand what’s involved in running a charitable organization and that organizations are going to be granted exempt status that shouldn’t.

After the date of this blog post the IRS issued a final release of the Form 1023-EZ and its instructions. You can find updated details here >>

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Kevin Fontant Boston Tax AccountantKevin Fontana is a manager in our tax department, Kevin has over ten years of accounting experience and oversees and coordinates tax compliance services for many of the firm’s corporate, partnership and individual clients. His privately owned clients span industries such as multi-location retail, distribution, manufacturing and real estate. In addition, Kevin oversees the tax compliance services for several non-profit clients, including independent schools, social clubs, historical societies and private foundations.