24th annual health sciences tax conference€¦ · · 2015-07-2924th annual health sciences tax...

24th Annual Health Sciences Tax ConferenceIRS update: fallout from the IRS exempt organizations’ earthquake of 2013

December 10, 2014

IRS update: fallout from the IRS exempt organizations’ earthquake of 2013

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► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.

► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.


Presenters

► Steve ClarkeErnst & Young LLPWashington, DC [email protected]+1 202 327 6064

► Katherine KurtzmanErnst & Young LLPChicago, [email protected]+1 312 879 2183

► Mike RachaelErnst & Young LLPAtlanta, [email protected]+1 404 817 5676


Agenda

► IRS exempt organizations (EO) realignment► Form 1023-EZ► Current audit issues


IRS Exempt Organizations realignment


IRS organizational chart

Agency-Wide Shared Services

Human Capital Officer

Mission Assurance

Large and Mid-Size Business

Tax Exempt and Government Entities

Criminal Investigation

Chief Information Officer

Chief Financial Officer

Small Business/ Self-Employed

Wage and Investment

Operations Support

Office of Professional

Responsibility

Services and Enforcement

CommissionerChief of Staff

Research, Analysis and Statistics

EEO and Diversity

Communications and Liaison

Chief Counsel

Appeals

National Taxpayer Advocate


IRS organizational chart –exempt organizations

Program StaffDirector, Exempt Organizations

Director, EO Examinations

Director, Rulings and Agreements


Introduction

► On March 20, the IRS Tax Exempt & Government Entities (TE/GE) Exempt Organizations and Employee Plans divisions in Washington, DC, announced a major realignment.

► This realignment will affect:► Applications for exemption► Private letter rulings (PLRs)► Technical advice memoranda (TAM) and other technical advice► Most formal IRS guidance affecting exempt organizations

(including private foundations), such as:► Proposed and final regulations► Revenue rulings and procedures► Notices► Announcements


Overview of realignment

► Transferring responsibility from IRS TE/GE Exempt Organizations Guidance and Technical groups in Washington, DC (EO-DC) and TE/GE Employee Plans (EP-DC) to IRS Chief Counsel’s exempt organization’s office in Washington, DC EO Counsel) for: ► Review of applications for exemption ► Guidance

► PLRs► TAM► Revenue rulings and procedures► Regulations► Notices and announcements

► Timing of realignment


Transfer of guidance to EO Counsel

► Currently► EO-DC and EP-DC initiate formal EO guidance.

► This includes revenue rulings, PLR requests, notices, announcements.► EO-DC typically consults with EO Counsel and with Treasury.

► PLR requester may or may not be aware of EO Counsel involvement and may or may not have opportunity to meet with EO Counsel.

► Regulations projects are initiated by Treasury.► This includes proposed, temporary and final regulations.► EO-DC, EP-DC and EO Counsel informally consult with Treasury.

► Realignment► Formal EO guidance will be transferred to EO Counsel.

► Only one IRS office will be responsible for issuing formal EO guidance.► Some EO-DC and EP-DC tax law specialists will shift to EO Counsel.

► Implications► Should streamline, expedite issuance of formal EO/EP guidance.


Transfer of guidance to EO Counsel

► Comments► IRS issues very little formal guidance to exempt organizations. ► EO-related guidance that IRS issues likely will be processed more expeditiously,

because of fewer layers of review involved and tighter EO Counsel timelines.► EO Guidance group in EO-DC likely will cease to exist, as personnel will be moved

to EO Counsel.► EO Technical group in EO-DC likely will continue to exist, but with significantly

diminished responsibility.


Elimination of exemption application review by EO-DC

► Currently► All applications for IRS recognition of exemption are submitted to

the EO Determinations office in Cincinnati, OH.► Most applications are reviewed by EO Determinations agents in

Cincinnati, or Determinations centers with higher-grade agents (e.g., El Monte, CA).

► But some exemption applications historically have been referred to EO-DC. These are:► Unusual, complex applications involving unique issues or important tax

policy questions► Applications involving certain types of organizations or issues. For

example:► Health maintenance organizations (HMOs)► Section 501(m) (commercial-type insurance)► Hospitals participating in joint ventures with unrelated for-profit

organizations► Foreign health care organizations



► In general, EO Determinations agents are less experienced than IRS Tax Law Specialists in EO-DC.

► Realignment► The EO-DC application review function will be eliminated. ► Thus, all exemption applications will be reviewed by EO

Determinations agents in Cincinnati (or elsewhere).► Fewer and fewer exemption applications are being referred to EO-DC.► On April 8, IRS announced that only applications for exemption from

hospitals subject to section 501(r) requirements and certain organizations applying for recognition of 501(c)(4) status will be forwarded from EO Determinations to EO-DC.

► Implications► The net effect of this realignment, at least initially, is likely to be

slower IRS review of large, complex exemption applications.



► Comments► Instead of forming a new 501(c)(3) organization that would need to

apply for IRS recognition of exemption, consider:► Using an existing Sec. 501(c)(3) or Sec. 501(c)(4) organization to

avoid the exemption application process► Forming a non-501(c)(3) exempt organization that would not be

required to apply for IRS recognition of exemption► Becoming a subordinate of the parent, if a parent organization has

received a group exemption ► Small organizations seeking recognition of exemption should

consider filing Form 1023-EZ.


Comments on realignment

► Realignment is driven by the need to operate EO/EP more efficiently, and to make processing of applications and guidance consistent across IRS operating divisions.► It will bring EO/EP into alignment with three other IRS operating divisions,

all of which already use Counsel for their guidance and legal work.► Approximately 40-50 EO/EP tax law specialists were expected to

move to EO Counsel, though this number may be dropping.► IRS is negotiating details involving transfer with unions for both TE/GE

employees and Chief Counsel employees.► It is unclear what work, if any, will remain in EO Technical.

► Form 990 revisions?► Compliance projects?► Support for customer education and outreach?► Technical support for EO Determinations and EO Exam?

► It remains to be seen how accessible and responsive to the public EOCounsel will be.


Other questions on realignment

► Will all EO Technical inventory be transferred back to EO Determinations?

► Will streamlined procedures eliminate backlog of exemption applications?

► Will consistency suffer (or be enhanced)?► Will taxpayers know when Counsel assistance is obtained

by EO Determinations?► Will taxpayers be able to request transfer of cases to

Counsel or otherwise get Counsel involved?► Will PLRs be timely and practical again?


Form 1023-EZ – new streamlined application for IRS recognition of exemption


Form 1023-EZ (background)

► One of the top priorities of TE/GE’s new leadership is to eliminate the backlog of 60,000+ exemption applications pending with EO Determinations.

► Since June 2013, Lean Six Sigma has been helping IRS identify inefficiencies in exemption application processing and take steps to make the process more efficient:► Using more standardized language in development letters► Creation of an interactive Form 1023 to help organizations file

complete and accurate applications (debuted earlier this year)► Improved training of EO Determinations staff (e.g., recent training

on how to process charter school applications)► More streamlined processing of applications using a new Form

1023-EZ (debuted July 1, 2014)


Form 1023-EZ

► Form 1023-EZ: released by IRS on July 1, 2014► Purposes:

► Minimize the burden on smaller organizations► Reduce the backlog of exemption applications► Shift IRS focus from aspirational activities to actual activities of EOs► Ultimately free IRS resources to be moved to higher-risk areas

► 2½ pages with 6 sections:► Identification of applicant (basic identifying info)► Organizational structure: filer represents compliance with organizational test► Specific activities

► Filer represents compliance with operational test► Checkboxes that may be used to identify applicants for further scrutiny or exam

► Foundation classification► Filer represents foundation/public charity status

► Request for reinstatement (after automatic revocation of exemption for failure to file Form 990-series returns)

► Signature block (signed under penalties of perjury)


Form 1023-EZ

► Must be e-filed through pay.gov► $400 filing fee► Can only be filed by organizations with annual gross receipts less than

$50,000 and total assets less than $250,000► Exemption letter generally issued within a few weeks if form is complete and

fee is paid► About 20 types of organizations are ineligible to file 1023-EZ, including:

► Churches► Schools► Hospitals► Supporting organizations► International organizations► Private operating foundations► Organizations engaging in joint ventures with for-profits


Form 1023-EZ – implications

► Form 1023-EZ will be subject to much less IRS scrutiny than Form 1023.

► Processing of Form 1023-EZ will be much faster than Form 1023 processing.

► IRS plan is to shift resources from EO Determinations to EO Exam, to review more applicants after they have begun conducting activities.

► Organizations that are considering formation of exempt subsidiaries or affiliates should consider applying for exemption using 1023-EZ, if eligible.► Would save time and resources► Subject to same public disclosure requirements as full Forms 1023


Current audit issues


Current audit issues

► Anticipate a General Program (non-Team Exam Program) project beginning this fiscal year on Chapter 42 compliance.

► It would initially involve 990-PF Exams. FY2015examinations will involve 4942 (minimum distribution requirements) and 4941 (self-dealing).

► Later phases may look at 4943 (excess business holdings) and 4945 (taxable expenditures).


Questions?

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24th annual health sciences tax conference€¦ · · 2015-07-2924th annual health sciences tax...

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