Update on IRS tax-exempt and government entities compliance priorities

In detail

Recommendations from the TIGTA audit of TECU   

TECU’s primary function is to conduct compliance checks to ensure taxpayers meet federal tax return filing obligations. Participation in the compliance checks is voluntary. TECU workstreams include:   

• Credit Balance Non-Filer: Obtain delinquent employment tax returns from organizations that have made payroll deposits.  
• Non-Filers of Form 5500–EZ, Annual Return of a One Participant (Owners/Partners and Their Spouses) Retirement Plan of A Foreign Plan: Obtain Forms 5500–EZ for terminated retirement plans.  
• Affordable Care Act Hospital Review Compliance Checks: Address discrepancies between hospital-filed tax returns, the information on the hospital website, and the requirements under Section 501(r)(4) identified by the Affordable Care Act Hospital Review group.  
• Non-Filers of Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return: Obtain delinquent Forms 940 from organizations that have filed Form 941, Employer’s Quarterly Federal Tax Return, to verify the proper amounts of Federal unemployment tax have been reported.  
• Section 4960 Excess Compensation Excise Tax: Obtain delinquent excise tax returns for the top five highly compensated employees of a tax-exempt organization.  
• Form 990–T, Exempt Organization Business Income Tax Return: Obtain delinquent unrelated business income tax returns.  
• Combined Annual Wage Reporting-Employment Tax: Compares the total employee wages reported by the employer on the Form W-2, Wage and Tax Statement, to the wages reported by the employer on the Form 941.  

TIGTA conducted an audit to assess the effectiveness of TECU’s efforts to improve tax administration of tax-exempt organizations. Among the findings of the TIGTA audit were:  

• To promote efficiency, TECU examiners within each work group were required to conduct additional research to identify other potential delinquencies, to promote a “single contact with the taxpayer.” However, this led to TECU experiencing several inefficiencies, hindering its effectiveness and creating the opposite effect. Primarily, examiners now were manually searching for delinquencies that could have been systemically identified by other work groups. There are no controls in place to identify circumstances where an organization falls within multiple workstreams and thus is at risk of being contacted by more than one TECU examiner. Further, examiners spent more hours closing cases, and therefore fewer taxpayers were reached. TECU examiners often made mistakes, such as failing to identify all delinquent returns or not posting secured returns to taxpayers' accounts.   
• Referrals for examination were largely unproductive, with only 5% assigned to the TE/GE Examination function, and most cases closed without changes. TECU also lacks quantifiable performance goals, complicating effectiveness measurement.  

As a result, TIGTA made six recommendations to address identified issues. The recommendations include:  

1. Developing a workstream for taxpayers with multiple delinquencies;  
2. Eliminating the additional research requirement;  
3. Issuing clear compliance check procedural guidance;  
4. Revising contact letters for electronic submission of tax returns;  
5. Aligning examination referral guidance with criteria for assigning cases; and  
6. Establishing performance goals.  

These recommended improvements would aim to reduce mistakes and unproductive examination referrals, enhancing TECU's effectiveness in tax administration. However, the IRS agreed with only four recommendations, disagreeing with the elimination of the additional research requirement and the establishment of performance goals. The IRS stated that the additional research requirement is enforced to reduce taxpayer burden and administrative cost. The IRS further stated that TECU has performance measures in place that allow TE/GE to evaluate program performance and identify needed changes or improvements. 

Audits of tax-exempt hospitals  

Consistent with its focus on tax-exempt hospitals, the IRS has announced plans to conduct 35 examinations of tax-exempt hospitals focusing on community benefit and compliance with Section 501(r). Additional requirements applicable to tax-exempt hospitals were codified in Section 501(r) pursuant to the 2010 Patient Protection and Affordable Care Act. In addition to operating requirements, Section 501(r) also added reporting requirements and an excise tax.  

Facilities required by a US state to be licensed, registered, or similarly recognized as a hospital, and are tax-exempt under Section 501(c), are subject to the provisions of Section 501(r). Section 501(r) requires tax-exempt hospitals to satisfy four broad requirements to maintain their tax exemptions:  

• Community Health Needs Assessment (CHNA): Section 501(r)(3) requires tax-exempt hospitals to conduct a CHNA at least once every three years and adopt an implementation strategy to address identified community needs.  
• Financial Assistance Policy (FAP) and Emergency Medical Care Policy: Section 501(r)(4) requires tax-exempt hospitals to establish and widely publicize a written FAP that includes eligibility criteria for financial assistance, a description of the assistance available, and the application process.  
• Limitations on Charges: Section 501(r)(5) requires tax-exempt hospitals to limit the amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the FAP to not more than the amounts generally billed (AGB) to individuals who have insurance.  
• Billing and Collections Policy: Section 501(r)(6) prohibits tax-exempt hospitals from engaging in extraordinary collection actions (ECA) before making reasonable efforts to determine whether the individual is eligible for assistance under the FAP.  

Failure to satisfy any requirement of Section 501(r) could require disclosure of such failure on the hospital’s Form 990 or loss of tax-exempt status in the most egregious cases. A failure to comply with the CHNA requirements can also result in a $50,000 excise tax.