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New IRS Initiatives for Tax-Exempt and Governmental Entities

1/18/21 – Bryan Pautsch

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On January 5, 2021, The IRS Tax Exempt and Governmental Entity (TE/GE) announced several developments/initiatives relating to tax-exempt organizations.   The IRS has updated its Compliance Program and Priorities website.  Listed below are some IRS initiatives to take note of:

  1. Worker Classification. This new strategy aims to review worker classification to ensure tax-exempt organizations are not reducing their employment tax burden by incorrectly treating workers as independent contractors instead of employees.  Most IRS audits of tax-exempt organizations include reviewing the organization employees, payroll and independent contractors.

    Another strategy to identify the potential misclassification of wages is when a tax-exempt organization issues both a W-2 and a 1099 to the same payee in the same calendar year.

  2. Employee Plans: Partial Termination/Partial Vesting. For employers whose Form 5500, Annual Returns/Reports of Employee Benefit Plan, indicates their plan has had a significant decrease in plan participants, this initiative aims to review such plans to determine compliance with IRC Section 411(d)(3) vesting requirements and accuracy of other information on their Form 5500.
  1. Exempt Organizations: 501(c)(3) Supporting Organizations Misfiling Form 990-N. This new initiative involves reviewing IRC Section 509(a)(3) supporting organizations that file Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations, to determine if they meet the eligibility standards to file Form 990-N.  Generally, most supporting organizations do not meet the eligibility standards and are required to file Form 990 or Form 990-EZ. 
  1. Exempt Organizations: Excise Tax on Excess Compensation. This strategy is to review the impact of the new excise tax on excess compensation. IRC Section 4960 imposes a 21% excise tax on tax-exempt organizations that pay over $1 million in compensation to any “covered employee.” According to the IRS, the filing data continues to show a high volume of exempt organizations that paid compensation of over $1 million to at least one “covered employee” but did not report IRC Section 4960 excise tax on Form 4720.
  1. Tax Exempt Bonds:  Arbitrage violations. This strategy includes an examination Form 8038 regarding the potential arbitrage violation of IRC Section 148 and its Regulations by investment of bond proceeds in higher yielding investments beyond the temporary period (generally three or five years). 

Future Initiatives

The IRS indicated that the Compliance Program and Priorities webpage will be updated at the beginning of each fiscal year quarter with information about new initiatives. The six components of the webpage are:

  • Compliance strategies
  • Data-driven approaches
  • Referrals, claims and other casework
  • Compliance contacts
  • Determinations
  • Voluntary compliance and other technical programs

All tax exempt organizations’ management should continue to review the TE/GE Compliance Program and Priorities webpage quarterly to determine the applicability of any new TE/GE initiatives to their organizations.  If you have any questions about these initiatives or other concerns about your organization, please contact Bryan Pautsch, CPA, JD, Tax Principal, at bpautsch@vlcpa.com or 800.887.0437.