IRS Tax Exempt and Government Entities: A Summary of the Past Year
On January 6, 2022, the Tax Exempt and Government Entities (TE/GE) released its Fiscal Year 2021 Accomplishments Letter. Here is a summary below:
TE/GE FY 2021 Accomplishments Letter
- TE/GE hiring in 2021 brought its staff to roughly 1,521, with approximately 111 positions to be filled Q1 2022. Majority of TE/GE employees (about 550) are designated to exempt organizations (EO), and about 130 employees are in the Compliance, Planning, and Classifications section. This illustrates TE/GE’s continued focus on, and investment in compliance-related initiatives in the tax-exempt and governmental entities sector.
- The Exempt Organizations (EO) unit completed examinations of 3,249 filings, including the Form 990 series (990, 990-EZ, 990-PF, 990-N, 990-T) and associated employment and excise tax returns. Revocations of exemptions were proposed for 94 tax-exempt entities as a result of examinations. The lion’s share of revocations (30% +/-) were for failure to meet organizational and operational tests.
- TE/GE compliance strategies included a focus on “the potential” for private benefit and inurement. Private foundation loans to disqualified persons were a key focus in this compliance area. Most issues found in this area related to excise taxes, unrelated business income, filing requirements, and operational requirements. This illustrates the continued importance of compliance in areas of self-dealing for private foundations, related party transactions, excess benefit transactions, and maintaining operations that advance qualified purposes for which tax exemption is granted.
- EO closed 94,466 determination applications in FY 2021, with 81,589 approvals, 76,852 of which were for 501(c)(3) status. Applications were up roughly 15,000 from 2020. Applications through Form 1023-EZ more than doubled the number of applicants using the Form 1023. The Form 1023-EZ is available for applicants seeking public charity status pursuant to section 501(c)(3) of the Internal Revenue Code (other than, for example, organizations seeking church-status exemption) whose average annual revenue for the first three years is not expected to exceed $50,000.
- This data supplied by the IRS suggests that, through the pandemic era of FY 2021, many in the private sector sought to advance health of body, mind, and community as the highest percentage of applicants for tax exemption were in fields of Health Services; Education; Arts, Culture & Humanities; and Recreation & Sports.
- As for exams of Employee Plans, 4,295 examinations closed in FY 2021, with revocations or disqualifications proposed for 16 plans for, among other things, failing to amend a plan document and failure to meet nondiscrimination requirements of IRC Section 401(a)(4).
- As for Governmental Entities, TE/GE completed 900 examinations in FY 2021 and continues to focus on employment tax compliance in this sector.
- The Tax Exempt Bonds unit closed nearly 300 examinations in FY 2021, with a focus on over-funding and resulting arbitrage, which can impact qualification for tax advantages.
The TE/GE also issued its brief Fiscal Year 2022 Programs and Priorities, which include a continued focus of strengthening compliance activities within the tax-exempt and governmental entities sectors.