Tax Exempt & Government Entities – Compliance Programs and Priorities

 

The Tax Exempt and Government Entities (TE/GE) Fiscal Year 2021 Program Letter PDF lists our priorities and how those align with the IRS Strategic Goals.

In fiscal year 2021, we’ll continue to pursue our compliance programs described in our FY 2020 Program Letter PDF, and use this webpage to share information about new compliance priorities at the end of each quarter during the fiscal year. 

TE/GE protects the public interest by applying the tax law with integrity and fairness to all. To accomplish our mission, we deliver a compliance platform of six programs that together promote tax law compliance by tax exempt and government entities.  

  • Compliance Strategies - issues approved by the TE/GE Compliance Governance Board to identify, prioritize and allocate resources within the TE/GE filing population.
  • Data-Driven Approaches - data and queries based on quantitative criteria, used to identify the highest risk areas of noncompliance and focus on issues with the greatest impact.
  • Referrals, Claims and Other Casework - alleged noncompliance referrals from internal and external sources, and claims for refunds, credits or adjustments.
  • Compliance Contacts - address potential noncompliance through correspondence contacts known as “compliance checks” and “soft letters” to limit costs and taxpayer burden.
  • Determinations - letters issued to exempt organizations on exempt status, private foundation classification and other determinations related to exempt organizations and qualified retirement plans that meet legal and regulatory requirements.
  • Voluntary Compliance and Other Technical Programs – voluntary correction program to enable a plan sponsor (at any time before exam) to pay a fee and receive IRS approval for correction of plan failures. Other technical programs, including Knowledge Management, work to ensure the quality and consistency of technical positions, provide timely assistance to employees and preserve and share TE/GE’s knowledge base.  

Fiscal Year 2021 Priorities

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Practice Area:  Entire U.S.

This strategy is to ensure that participant loans comply with Internal Revenue Code Section (IRC) 72(p) rules on maximum loan balances and IRC Section 72(t) re-payment rules for early distributions before age 59 ½. We will verify whether participant loans of retirement plans that hold a high percentage of participant loans to total assets of the trust are being repaid timely if the loan balance remains consistent or increases for more than one year. Noncompliance may result in deemed distributions under IRC Section 72(p) and/or prohibited transaction excise taxes under IRC Section 4975. The treatment stream for this strategy is issue based examinations.

Practice Area: Entire U.S.

This strategy is to review the impact of the new Internal Revenue Code Section 4960 excise tax on excess compensation. IRC Section 4960 imposes a 21% excise tax on tax-exempt organizations that pay over $1 million in compensation to any “covered employee”.  On-going review of filing data shows there continues to be a high volume of exempt organizations that paid compensation of over $1 million to at least one “covered employee” but did not report IRC Section 4960 excise tax on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. The approved workstreams for this strategy are compliance checks and examinations of Form 4720.

Practice Area: Entire U.S.

This strategy concerns payors that have issued both a Form W-2, Wage and Tax Statement, and Form 1099-MISC, Miscellaneous Income,  to the same payee in the same calendar year and focuses on misclassification of wages (distinguishing payments made to employees as independent contractors from those treated as wages on the Form W-2). The treatment stream for this strategy is examinations of Form 941, Employer’s Quarterly Federal Tax Return.

Practice Area: Entire U.S.

This strategy concerns potential arbitrage violations of Internal Revenue Code Section 148 by investment of bond proceeds in higher yielding investments beyond the allowable temporary period under Treasury Regulation (Treas. Reg.)1.148-2(e). Failure to meet the temporary period requirements and investing the proceeds in higher yielding investments could cause the bonds to be arbitrage bonds as defined in IRC Section 148(e). Treas. Reg. 1.148-2(e)(2)(i) states that proceeds expected to be allocated to capital projects may be invested at an unrestricted yield for a 3-year temporary period or under certain circumstances a 5-year temporary period.  Beyond the temporary period, the investments must be yield restricted. The general rule under Treas. Reg. 1.148-2(d)(2)(i) states that if an investment purchased with proceeds of the bonds produces a yield at or above one-eighth of 1% above the bond yield, the yield on the investment is materially higher than the yield on the bonds. The treatment stream for this strategy is examinations of Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues.