On Nov. 5, 2020, the IRS Tax Exempt and Government Entities (TE/GE) division released its 2021 Program Letter, summarizing its goals and priorities for the fiscal year ending Sept. 30, 2021. While the 2021 Program Letter takes a more streamlined form than that of the Priority Guidance Plans issued in previous years, TE/GE also launched a new Compliance Program and Priorities webpage to provide timely information and summary details about compliance initiatives as they are approved, at the end of each quarter.
TE/GE’s fiscal year 2021 priorities are aligned with the IRS’ overall strategic priorities and fall within six categories: strengthen compliance activities, improve operational efficiencies, maintain a taxpayer-focused organization, ensure awareness and collective understanding, leverage technology and data analytics, and develop our workforce.
Among the priorities for 2021, TE/GE will focus on the following compliance activities:
- Syndicated conservation easements
- Abusive charitable remainder annuity trusts (CRATs)
- Tax compliance in the global high wealth arena
- Private foundations
- Retirement plans of closely held businesses, such as employee stock ownership plans (ESOPs)
- Identify and develop criminal and civil fraud investigations against taxpayers or promoters who evade the assessment or payment of taxes
- Use noncompliance research and data analytics to detect emerging issues
- Collaborate with Research Applied Analytics & Statistics to improve identification of issues with a high risk for noncompliance
The Compliance Program and Priorities webpage includes the following updates to TE/GE’s priorities for fiscal year 2021:
1. Exempt Organizations: Excise Tax on Excess Compensation
Through compliance checks and examinations of Form 4720, the IRS will review the impact of section 4960 on excess compensation. TE/GE reports that there continues to be a high volume of exempt organizations that paid compensation of over $1 million to at least one “covered employee” but did not report excise tax on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code.
2. Exempt Organizations, Federal, State and Local Government and Indian Tribal Governments: Form W-2 and 1099-MISC to the same Payee
Through examinations of Form 941, Employer’s Quarterly Federal Tax Return, the IRS will review payors that have issued both a Form W-2, Wage and Tax Statement and Form 1099-MISC, Miscellaneous Income to the same payee in the same calendar year and focus on misclassification of wages.
3. Tax Exempt Bonds: Arbitrage Violations
Through examinations of Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues, the IRS will review potential arbitrage violations of section 148 where bond proceeds are invested in higher yielding investments beyond the allowable temporary period.
4. Employee Plans: Participant Loans
Through issue-based examinations, the IRS will focus on retirement plans that hold a high percentage of participant loans to total assets where the loan balance remains consistent or increases for more than one year. TE/GE will verify whether participant loans are being repaid timely. Noncompliance may result in deemed distributions under section 72(p) and/or prohibited transaction excise taxes under section 4975.
The Compliance Program and Priorities webpage also indicates that the TE/GE division will continue to pursue the compliance programs described in its 2020 Program Letter. The FY20 compliance strategies specific to exempt organizations included the following:
- Hospitals with unrelated business income (UBI) where expenses materially exceed gross income
- Section 501(c)(7) social clubs with investment and nonmember income
- Section 4947(a)(1) non-exempt charitable trusts that under-report income or over-report charitable contributions
- Section 501(c)(3) organizations that converted from for-profit entities
- Private foundation loans to disqualified persons
The FY20 strategies for Employee Plans included the following:
- 403(b) and 457 plan reviews
- SEPs and SARSEPs
- ESOP discrimination testing and related issues
- Terminated cash balance plans