IRS Advisory Committee on Tax Exempt and Government Entities (ACT) Releases Its Report of Recommendations

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IRS Advisory Committee on Tax Exempt and Government Entities (ACT) Releases Its Report of Recommendations

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The Internal Revenue Service’s (“IRS”) Advisory Committee on Tax-Exempt and Government Entities Division (“Committee”) has released its 2016 report entitled
“Exempt Organizations: Stewards of the Public Trust: Long-Range Planning for the Future of the IRS and the Exempt Community” (“Report”).

As stated in the Report, the IRS’ Tax-Exempt and Government Entities Division’s (“TE/GE”) mission is “to provide our customers top quality service by helping them understand and comply with applicable tax laws and to protect the public interest by applying the tax law with integrity and fairness to all.”

The IRS currently regulates over one million tax-exempt organizations in the United States. When the IRS recognizes an organization as tax-exempt, the public has essentially delegated its trust to the IRS with respect to the activities and operations of each tax-exempt organization. Tax-exempt organizations are granted tax-exempt status by the IRS based on the fact and belief that each tax-exempt organization will operate in accordance with its stated mission and charitable purpose for which it was originally grated tax-exempt status by the IRS and will provide a public benefit.

As outlined in the Report, the Exempt Organizations Subcommittee of the IRS Advisory Committee on Tax Exempt and Government Entities focuses on planning for the future – big picture areas the exempt organizations function should consider in planning for the next two to three decades in overseeing tax-exempt organizations.

THE REPORT

The Committee held discussions with both national and international regulators, the IRS, and organizations with an understanding of the regulatory issues and challenges that tax-exempt organizations face. These discussions provided the Committee with information on issues currently, and issues that may arise in the future which the IRS will need to address. Several common areas of significance arose through these discussions which are discussed in the Report including a need for coordinated action among regulators; better communication between regulators and those regulated entities; efficient and effective platforms for communication and dissemination of information; the need for transparency, particularly around enforcement; and, above all, the need to be user-focused throughout the regulatory and enforcement cycle.

Following the Committee’s due diligence, a summary of recommendations addressing the issues outlined above was provided. The following is a list of the recommendations included in the Report deemed necessary to assist TE/GE in confronting the challenges and environment of the future.

Ensure that EO Staff are Equipped to Carry out the Responsibilities of EO

From 2009 to 2015, there was a 13.5 percent decline in the IRS Exempt Organization Unit’s (“EO”) staffing. This decline resulted in a staff of 771 at the end of fiscal year 2015; down from 891 in fiscal year 2009. The main reasons for the decline in EO staffing can generally be attributed to:

  1. EO staff members transferring to other divisions within the IRS;
  2. Attrition, due in large part to an aging workforce;
  3. Hiring freezes that preclude the replacement of staff members that leave for the above reasons; and
  4. A significant number of attorneys being transferred from EO to the Office of Chief Counsel.

Provide Leadership and Guidance on Major Issues Impacting the Exempt Organizations Sector, Both Current and Those Anticipated In Near Future

Due to the complexity of these issues, the IRS must provide leadership through historical significance, legal precedent, evolving circumstances, or simply major controversies of the current age including, but not limited to, unrelated business income and political activities of Internal Revenue Code §501(c)(4) tax-exempt organizations.

Give Exempt Organizations the Tools They Need to be Tax Compliant

As described in TE/GE Commissioner Sunita Lough’s TE/GE Priorities Letter for 2016, “EO’s overarching compliance strategy is to ensure organizations enjoying tax-exempt status comply with the requirements for exemption and adhere to all applicable tax laws.” One necessary tool to help the TE/GE sector is for EO to educate the sector by releasing more information with respect to compliance problems raised in EO audits. Another potential tool is to provide relevant, user-focused guidance.

Assure Cyber Integrity Through Technology Tools, Data Collection, and Secured Cyber Storage

The Federal government classifies the three primary cyber security challenges faced today as:

  • outdated technology;
  • fragmented governance; and
  • workforce gaps.

The Report notes that the IRS needs to focus on two main issues with respect to cyber security; Limit and Protect. Limit addresses the problem of collecting too much sensitive information. For example, the IRS should not collect information that does not serve a legitimate tax administration purpose. The second issue of Protect deals with making targeted investments in information technology personnel and technological enhancements.

Release and Share Data Where Appropriate for Public Use

As noted in the Report, states currently may not receive information from the IRS regarding tax-exempt organizations without risking the same criminal penalties as those associated with the prohibited release of individual private taxpayer information. Additionally, the Report notes that the IRS should continue to strongly advocate with states for amendment of Internal Revenue Code §6103 and §6104 in order to allow for the sharing of information. The second step is for the electronic filing and dissemination of IRS information.

Foster Two Way Communication Between the IRS Exempt Organizations Division and the Nonprofit Sector

As stated in the Report, “An opportunity for exempt organizations to ‘identify and resolve frequently disputed or burdensome tax issues that are common to a significant number of  entities’ has come with the issuance of Revenue Procedure 2016-19. The Industry Issues Resolution Program – historically available only to members of the Large Business and International and Small Business and Self Employed operating divisions – is now open to TE/GE.”

CONCLUSION

The Report provides valuable information regarding the current and long-term planning for the future of the IRS and the exempt organization community.  The Report notes that “The recommendations represent what  we (and those with whom we spoke)  consider to be the  necessary elements  of a solid platform on which a regulatory partnership can be built: an adequately resourced regulator, armed with appropriate and available data and  tools for the  benefit of an educated exempt community.”

Additional Resource

Advisory Committee on Tax Exempt and Government Entities (ACT)2016 Report of Recommendations

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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.

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