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By Ashley Cooper, HoganTaylor Tax Manager

The IRS recently released its fiscal year 2017 Work Plan for Tax Exempt and Government Entities on September 28, 2016.  In 2016, the IRS identified five areas of focus that it will continue to concentrate on during fiscal year 2017.  The following is where the IRS will continue to focus their resources:

  • Exemption: Activities not related to exempt purpose activity, and private inurement
  • Protection of Assets: Self-dealing, excess benefit transactions, and loans to disqualified persons
  • Tax Gap: Employment tax and unrelated business income tax liability
  • International: Oversight on funds spent outside the U.S., exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements
  • Emerging issues: Nonexempt charitable trusts and IRC 501(r)

During fiscal year 2016, the IRS completed just under 5,000 examinations, most of which focused on the areas above.  The majority of the examinations dealt with exemption issues and verifying the exempt activities of the organization and/or its filing requirements.  A close second to the exempt issues examinations were examinations that dealt with employment tax issues followed by unrelated business income (UBI) examinations.  In combining the employment tax and UBI examinations, the total tax gap examinations are just under 2,000.  It is important for organizations to take into account the IRS’s focus on the tax gap when determining their tax positions. The following are key areas to evaluate concerning the tax gap:

  • Employment Tax: Worker classification, unreported compensation, tips, accountable plan, noncompliance with FICA, FUTA, and back up withholding requirements
  • UBI: Expense allocation issues, net operating loss adjustments, transactions with controlled organizations, rental activity, debt-financed property, nonmember income, gaming, and investment income

While the tax gap concerns seem to be one of the largest focuses from the IRS, it is important to keep in mind the other areas that are typically under scrutiny for exemption organizations such as political activity, private benefits and inurement, and lobbying activities.

Now that the IRS work plan has been released, I would urge organizations to use this insight to prepare for the year ahead. It will be highly important to evaluate if your organization has any exemption issues and/or tax gap issues. It is beneficial for an organization to find an issue internally prior to being selected for examination not only in terms of potential IRS consequences but also in terms of public opinion of the exempt organization.

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