United States

IRS TE/GE division releases new compliance initiatives

TAX ALERT  | 

The IRS’s Tax Exempt and Government Entities (TE/GE) division announced the addition of eight new initiatives as updates to its Compliance Programs and Priorities website. The new initiatives affect exempt organizations, employee plans and tax-exempt bonds.

Background

In November 2020, TE/GE launched the new Compliance Program and Priorities website to provide timely information and summary details about compliance initiatives as they are approved, at the end of each quarter. 

Exempt Organizations compliance strategies

With two new initiatives, the IRS increased its Exempt Organizations (EO) compliance strategies for FY21 to a total of four. In addition to the excise tax on excess compensation and Forms W-2 and 1099-MISC being issued to the same payee, the EO compliance strategies include the following initiatives:

  • Officers treating exempt organization as Schedule C business

The IRS states that it will conduct examinations to determine if officers and insiders of exempt organizations are claiming expenses of exempt organizations as Schedule C business deductions. The IRS will focus on potential private benefit and inurement related to the exempt organization and potential adjustments to Forms 1040.

  • Form 990-N filers/gross receipts model

The IRS will conduct examinations to determine if an exempt organization was eligible to file Form 990-N where related filings indicate the $50,000 gross receipts threshold was not met. Typically, an exempt organization may file a Form 990-N (e-Postcard) if its annual gross receipts are normally $50,000 or less. Otherwise, it must file a Form 990-EZ or Form 990.

Employee Plans compliance strategies and compliance contacts

The IRS announced four new initiatives for Employee Plans (EPs), bringing the total compliance strategies to six and increasing the compliance contacts to three. Joining the existing strategies on participant loans, earned income for self-employed plans and required minimum distributions in large defined benefit plans are the following initiatives: 

  • Exempt organizations that sponsor retirement plans

The IRS intends to use examinations to review retirement plans of small exempt organizations to determine whether the plan investments are properly administered, whether there are any party-in-interest transactions in the plan trust and whether any participant loans violate section 72(p). Improper transactions between the plan and its participants can result in prohibited transactions under section 4975, deeming distributions as taxable income, or result in section 72(t) early distribution penalties.

  • One-participant 401(k) plans

Through examinations, the IRS will review one-participant 401(k) plans to determine if there are operational or other qualification failures, income and excise tax adjustments or plan document violations. In this regard, we have noted frequent failures of the employee to complete a written election as to how much he or she wants to defer to the plan. The employee must complete the election by the last day of the plan year. In addition, many plan sponsors fail to update their plan for changes in the applicable laws or regulations.

  • Worker classification

Complementing the existing efforts to properly classify employees and independent contractors, the IRS will conduct examinations of retirement plans to determine if Internal Revenue Code coverage requirements are satisfied where sponsoring employers were determined to have misclassified employees as independent contractors.

In addition to existing compliance checks related to inflated assets and partial termination/partial vesting, the IRS added the following initiative:

  • Plan liabilities and unrelated business income

The IRS will use correspondence contacts and educational letters to determine if plan sponsors who reported plan liabilities on their Form 5500-series returns are engaging in activities that result in taxable unrelated business income (UBI). Large, unusual and questionable liabilities may result from prohibited transactions, UBI or failure to value assets properly. The unrelated business income tax provisions ensure that exempt organizations are taxed on income earned from activities that are unrelated to the purpose for which they were granted exempt status.

Tax Exempt Bonds compliance strategies

The following initiatives have been added to the list of compliance strategies for tax exempt bonds: 

  • Student Loan Bonds Market Segment
  • Form 8038-G Yield Restrictions

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