IRS Regulations

The Internal Revenue Services (IRS) has released its Tax Exempt & Governmental Entities Fiscal Year 2017 Work Plan. In this Work Plan, the IRS details strategic areas where they will focus their audits on in the upcoming year.

These strategic areas include:

  • Exemption: Issues include non-exempt purpose activity and private inurement
  • Protection of Assets: Issues include self-dealing, excess benefit transactions, and loans to disqualified persons
  • Tax Gap: Issues include employment tax and unrelated business income tax liability
  • International: Issues include 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: Issues include non-exempt charitable trusts and IRC 501(r).

Of particular interest to governments and non-profits are the
areas we have identified below from the IRS Work Plan:

Examinations of Employee Plans

The IRS identified various issues in 2016 of non-compliance in employee plans including:

  • Exceeding the maximum annual contributions or benefits
  • Discrimination in favor of highly compensated employees regarding who participates in (or are covered by) the plan
  • Discrimination in favor of highly compensated employees via allocation of funds/benefits and investments of funds in prohibited assets
  • Failure to meet funding requirements for the plan’s trust
  • Improper deductions addressing discrepancies between the deduction taken on a Form 1120 and the contribution reported on the Form 5500
  • Excessive participant loans
  • Form 5500-EZ non-filers
  • Failure to provide benefits
  • 401(k) plans reporting 4971(a) tax
  • Return discrepancies addressing final returns with assets, missing pension feature codes and business codes, and asset mismatches between the end of year and subsequent beginning of year returns
  • Issues involving voluntary compliance submissions including late amendments or failures to adopt amendments, participant loan failures, and the failure to make minimum required distributions

In 2017, the IRS will focus its compliance to the following areas:

  • SIMPLE plans
  • Merger/consolidations/transfers/spinoffs relating to Form 5310A filings
  • Issues surrounding terminated/partially terminated plans
  • Inflated assets and/or unusual investments
  • SEP plan issues including coverage of employees
  • 403(b) plan document requirements

Matters Involving Federal, State and Local Governments

The IRS intends to seek new sources of data to identify new patterns of filing/reporting that uncover high risk for non-compliance and will develop additional compliance initiative projects.

The following are governmental areas of interest to the IRS in 2017:

  • Early Retirement Incentive Plans (High Risk Non-Compliance Issues): Address entities that provide cash (and other options) to employees as an incentive to encourage them to voluntarily retire early. This often results in employment tax issues that were not handled correctly.
  • Worker Classification Project to Identify Misclassified Workers: This project is expected to identify worker classification non-compliance. This will be accomplished through research and analysis to identify volume issuers of high dollar Forms 1099-MISC where the income is the primary or significant source of reported self-employment income.
  • Project to Identify Wages Incorrectly Treated as Non-Employee Compensation (Payment Misclassification): This project is expected to identify payments that should have been treated as wages but were not.
  • Project to use Federal Audit Clearinghouse to Identify Entities with High Risk of Non-Compliance: This project may identify non-compliance with taxable fringe benefits, worker classification, and unreported income based upon audit reports available from the Federal Audit Clearinghouse.
  • Credit Balance-No Returns Filed (Non-Filer Compliance Checks): The IRS intends to bring governmental non-filers into compliance by securing delinquent returns and/or identifying potential misapplied payment situations.
  • Form 1099-MISC Stop Filer Campaign (Compliance Checks): The IRS intends to inform governmental entities when they have no record of receiving any information returns reporting payments made by the entity for tax periods identified.

Matters Involving Tax-Exempt Bonds

New areas of noncompliance involving tax exempt bonds include:

  • Noncompliance Identified Primarily Through Data Analytics of Returns: The IRS is developing a methodology to identify returns with multiple or especially significant indicators of potential noncompliance. The IRS expects to begin producing classified returns for assignment during the second half of FY 2017 with examinations that continue into FY 2018. The IRS is also working on methods to better identify outlier returns to review for potential noncompliance and to spot trends. Trend analysis will enable them to plan for and respond to changes in the market with enforcement initiatives, voluntary compliance programs, compliance checks or other soft contacts, and educational efforts.
  • Noncompliance Identified Through Issue/Fact Pattern Selection (Revised Market Segment): The IRS uses experience as well as market scans to identify new issues or facts patterns that have a higher risk of noncompliance. In the second half of FY 2015 and FY 2016, the IRS revised its market segment program with the goal of better selecting returns for market segments that had a higher risk of noncompliance. Representative market segments included advance refunding issues with variable interest rates or escrows funded with open market escrow securities and solid waste financings for projects that included manufacturing processes. The IRS tested for noncompliance in the segments identified using statistical sampling. In FY 2017, the IRS expects to continue to identify market segment areas.

Please refer to the IRS work plan here for
additional information.