4.75.8 Compliance Strategies and Critical Initiatives

Manual Transmittal

September 09, 2016

Purpose

(1) This transmits a new IRM 4.75.8, Exempt Organizations Examination Procedures, Compliance Strategies and Critical Initiatives.

Material Changes

(1) This manual is entirely new, composed of procedures for the Compliance Strategies and Critical Initiatives area.

(2) This manual complies with the Plain Writing Act of 2010. For additional information on the Plain Writing Act, please see http://www.plainlanguage.gov.

Effect on Other Documents

This supplements IRM 4.17.1-4, Compliance Initiative Projects.

Audience

Tax Exempt and Government Entities
Exempt Organizations
Examinations

Effective Date

(09-09-2016)

Tamera L. Ripperda
Director, Exempt Organizations
Tax Exempt and Government Entities

CSCI Introduction

  1. CSCI carries out and monitors on-going compliance programs that impact Exempt Organizations (EO) and Tax Exempt / Government Entities (TE/GE) operations. Within EO Examinations (EOE), CSCI consists of the following groups:

    • Projects group

    • Programs group

    • Workplan Monitoring group

  2. CSCI is responsible for leading and carrying out:

    • Compliance Initiative Projects (CIPs)

    • Development of data driven compliance efforts

    • Compliance programs

    • Operations reporting

  3. CSCI is also responsible for developing and monitoring the annual workplan which is made up of:

    • Referrals

    • Regularly recurring work (claims, training, etc.)

    • Data driven compliance efforts

    • National CIPs

  4. CSCI uses the following tools to identify and focus compliance efforts on the next best cases:

    • Data driven compliance efforts

    • Risk-based models

    • CIPs

Project Group

  1. CSCI’s Project Group is responsible for:

    • Implementing, monitoring, and reporting on CIPs

    • Developing, evaluating, and monitoring data driven compliance efforts

EOE Compliance Initiatives

  1. The Project Group carries out, monitors, and reports on two types of compliance initiatives:

    • CIPs

    • Data driven compliance efforts

  2. Use Exhibit 4.75.8-1, Summary Document, to report on and close an initiative. The TE/GE EOE Summary Document provides information on:

    • Case selection

    • Operations

    • Findings

    • Recommendations and conclusions

  3. The Project Group monitors changes and new phases of initiatives to ensure all criteria used to select returns are consistently documented and approved. Advance approval by the Director, EOE is required for deviations from procedures.

TE/GE EOE CIPs
  1. CSCI:

    • Evaluates and develops EOE CIPs

    • Ensures the completed CIP Authorization Form is approved

    • Sends the CIP Authorization, once approved, to the CSCI Area Manager

TE/GE EOE CIP Procedures
  1. Use this IRM along with the following manuals to propose, develop, implement and report on EOE CIPs:

    • IRM 4.17.1, Compliance Initiative Projects - Overview of Compliance Initiative Projects

    • IRM 4.17.2, Compliance Initiative Projects - Responsibilities

    • IRM 4.17.3, Compliance Initiative Projects - Requirements

    • IRM 4.17.4, Compliance Initiative Projects - Procedures

  2. The Project Group carries out, monitors, and reports on CIPs. A CIP is used when either an:

    1. Initiative isn’t on the approved annual workplan

    2. Executive decides that a CIP authorization is necessary. See IRM 4.17.1, IRM 4.17.2, IRM 4.17.3 and IRM 4.17.4.

  3. Data driven compliance efforts being tested or in process doesn’t require a CIP if they are on the annual workplan.

  4. After the CIP is approved, it’s then turned over to CSCI. See IRM 4.17.4, Compliance Initiative Projects - Procedures.

  5. An EOE CIP often requires cross-functional development and support. It may involve one or more units in TE/GE including:

    • EOE

    • Exempt Organizations Determinations (EOD)

    • Communication and Liaison (C&L)

    • Rulings and Agreements (R&A)

    • Counsel

    • TE/GE Research

  6. CIP components may include::

    • Audits

    • Compliance contacts

    • Educational materials

    • A combination of the above

  7. The objectives of CIPs are to:

    • Identify trends of non-compliance and improper treatment of tax issues.

    • Improve voluntary compliance.

    • Use research to help decision-makers in expending resources.

    • Ensure authorization by functions whose resources will be significantly impacted.

    • Gather information and develop strategies to address emerging issues.

    • Measure overall levels of compliance and success.

    • Address specific questions about an issue, tax-exempt sector, or potentially abusive transactions.

Analysts’ Responsibilities
  1. Each CIP is assigned to an analyst. The analyst:

    • Provides advice on CIP procedural aspects

    • Provides information for developing measures, methods, analysis, etc.

    • Prepares any necessary monitoring reports and ad hoc reports.

    • Assists in preparing and finalizing the summary document and recommendations.

    • Identifies and analyzes trends.

CIP Development and Implementation
  1. CIP development begins after the team is assigned the CIP authorization and ends when they start the CIP. The team uses the authorization to research and develop processes necessary to implement the CIP.

  2. CIP implementation begins when the development finishes, and ends when the compliance work is substantially completed.

CIP Analysis, Closure and Reporting
  1. The CIP analysis and reporting phase begins during implementation data-gathering and generally ends when the team completes the summary document. Many aspects and tasks described below happen concurrently.

  2. Analyze CIP data: The team coordinates with TE/GE Research to:

    • Analyze results

    • Identify trends

    • Make recommendations

  3. Develop CIP closure strategy: The team develops the CIP closure strategy.

  4. Prepare and submit summary document: The CSCI Project and Area Manager review and sign the summary document before submitting to the Director, EOE for final approval.

  5. The report document addresses:

    • Case Selection

    • Project Operations

    • Findings

    • Lessons Learned

    • Recommendations

    • Conclusions

    • Reviewing and Approving Authorities

  6. Don’t include:

    • Specific taxpayer information in the summary document.

    • Law enforcement criteria and audit tolerances in any publicly released document.

Queries

  1. CSCI analysts develop queries on returns under EO jurisdiction to identify organizations with potential compliance issues.

    Note:

    A query uses data from certain lines or answers to questions on a tax or information return to identify if potential compliance issues exist. CSCI maintains the master list of queries and the queries in the model.

Form 990-Series Case Selection Models

  1. The Form 990-Series Case Selection Models are a collection of queries CSCI uses to evaluate the audit potential of information returns under EO jurisdiction.

How Case Selection Models Work
  1. Case selection models:

    • Are a technique CSCI uses to score Form 990 series returns as to audit potential.

    • Identify returns by assigning weights to basic information return characteristics.

  2. The weights are added together to obtain a composite score for each return.

  3. CSCI:

    1. Uses this composite score to systematically rank the returns in numerical sequence (highest to lowest). Generally, the higher the score the greater the probability of an issue warranting audit.

    2. Provides the scored returns to Case Selection and Delivery (CS&D) twice a year to fill return orders.

  4. Return scoring:

    1. Is for official use only and isn’t discussed with unauthorized personnel.

    2. Shouldn’t be disclosed.

Case Selection Model Development
  1. CSCI:

    • Develops models for Form 990-series returns. Case selection model development is a continuous process. CSCI may develop other models based on forms under EO jurisdiction as the need arises.

    • Submits the models to the Director, EOE for approval.

    • Maintains the master list of queries in the model.

  2. The Director, EOE reviews and approves the model’s contents after each update cycle.

Triage

  1. Triage is a process to review cases from a CIP, compliance check, compliance review, or data driven compliance efforts (e.g., condition code queries) to determine the next best return to be assigned for audit. This process reviews case information to determine if the return:

    • Has audit potential.

    • Has no audit potential.

    • Should be considered for an audit in a future year.

    • Should be considered for acquiring additional information to make a decision.

  2. For information on a "compliance check" , see IRM 4.75.9, Exempt Organizations Compliance Area (EOCA).

  3. For information on a "compliance review" see IRM 4.75.9.3, Affordable Care Act (ACA) Hospital Review.

Triage Team
  1. Depending on resources, a triage team consists of one to three persons, unless the volume of the material being reviewed warrants using more people.

  2. The triage team leader generally initiates triage. If the compliance initiative or CIP has a team, that team leader generally initiates triage. If the triage is a part of a CIP, then the triage team leader can be the same as the project team leader. The team leader and CSCI Area Manager determine which other team members are on the triage team.

  3. The team conducts triage to determine if the result of a compliance check or review has audit potential. Depending on the nature of the triage work, the team can start it as soon as possible but should at least start it by the time they've gathered all information for all returns.

  4. The team can conduct triage:

    • On-site

    • Electronically

    • Via conference calls

Reviewing Triage Material
  1. The triage team:

    • Reviews materials from the compliance check/review, query or CIP and, if necessary, follows up with the person that generated the information to clarify any issue.

    • Can use other resources to help them evaluate the return and related information.

Triage Documentation
  1. The current workplan and/or CIP Authorization provides an estimated number of returns the triage team should select. These numbers can vary due to:

    • Workplan goals

    • The duration of the CIP or query work

    • Availability of resources

      Exception:

      Sometimes the number of returns the team selects is less than the stated workplan goals due to the triage evaluation process.

  2. The triage criteria are in the:

    • CIP authorization for a CIP.

    • EOCA development procedures and guidelines for triages based on a compliance check or compliance review.

    • IRM 4.75.9, Exempt Organizations Compliance Area.

  3. The triage team establishes case selection criteria using query definitions.

    1. The Area Manager, CSCI approves the condition code triage criteria.

    2. The criteria and approval are fully documented and kept in the historical file.

    3. Any subsequent modifications to the criteria used is likewise approved, documented, and kept.

Triage Closing
  1. Triage closes when the teams have reviewed returns and related information and decided on a disposition for each return.

  2. A list of the triaged cases and results is kept in the historical records. The team sends cases selected for audit to CS&D using established protocol(s). See IRM 4.75.4, Exempt Organizations Examination Guidelines, Case Selection and Delivery.

  3. The list sent to CS&D becomes the master list of cases established for audit for the CIP or query, however, its contents may change based on the needs of CS&D. For example, if a return does not have adequate time left on the statute by the time a return is selected from the list to be established, CS&D may either select a subsequent year if the issue is still present, or it may not establish any return for that organization.

  4. If the triage team decides a return needs to be assigned to the field but is not part of a compliance initiative, the team will send the return to the EO Referral Group for review and classification purposes following normal operating procedures. See IRM 4.75.5.4, Exempt Organizations Examination Guidelines, Information Items.

Program Group

  1. CSCI’s Program Group implements, monitors and is responsible for on-going EO compliance programs that impact EO and TE/GE operations.

  2. A program is a continuous process that addresses:

    • Compliance issues

    • Subsections in IRC 501

    • Types of organizations

    • Other categories of work

  3. A program’s purpose is regularly monitoring and enforcing known areas of noncompliance in the tax-exempt community. A program may come from:

    • IRS-wide strategies (e.g., employment tax)

    • Legislative initiatives (e.g., healthcare)

    • Completed CIPs (e.g., international)

    .

Employment Tax Activities

  1. EO has jurisdiction over the employment tax returns filed by tax-exempt organizations.

  2. For EO’s employment tax responsibilities, refer to:

    • IRM 4.23.2.4.3 , TE/GE Employment Tax Program Responsibilities,

    • IRM 4.75.12.5 , Examination Jurisdiction

  3. The CSCI Program Analyst:

    • Serves as the Subject Matter Expert (SME) for employment tax issues.

    • Provides technical and procedural support to EOE employees.

    • Supports the Employment Tax Knowledge Network (K-Net).

    • Performs reviews in collaboration with EOE review functions to promote quality employment tax audits.

    • Develops employment tax queries.

    • Coordinates training on employment tax issues.

International Activities

  1. EO has jurisdiction over tax-exempt organizations that conduct activities outside the United States.

  2. Compliance responsibility includes identifying whether charities maintain adequate discretion and control over funds transferred overseas to ensure that the funds are being used for exempt purposes.

  3. The CSCI Program Analyst:

    • Serves as the SME for international issues.

    • Provides technical and procedural guidance to exam employees.

    • Supports K-Nets dealing with international issues.

    • Performs reviews in collaboration with EOE review functions to promote quality international audits.

    • Performs reviews of referrals and requests from the Exchange of Information Office (EOI) or the Joint International Tax Shelter Information Centre (JITSIC) on specific domestic charities with foreign activities and/or transactions.

    • Develops international queries.

    • Coordinates training on international issues.

Fed/State Activities

  1. The Fed/State program, with Privacy, Governmental Liaison and Disclosure (PGLD), plays an important role in the stakeholder relationships between EO and:

    • State charity regulators

    • State tax agencies

    • Other federal agencies

  2. The CSCI Program Analyst:

    • Offers help as the central point of contact for these agencies.

    • Serves as the SME for fed/state activities.

    • Provides technical and procedural guidance to exam employees.

    • Supports K-Nets dealing with Fed/State issues.

    • Helps revenue agents and others in TE/GE in making appropriate contact with charity regulatory agencies.

    • Develops and implements procedures per the data exchange programs under IRC 6104(c) and IRC 6103(d). Refer to IRM 4.75.21, EO Special Examination Procedures.

Gaming Activities

  1. CSCI’s Program Group monitors tax-exempt organizations’ gaming activities to determine whether the conduct of gaming constitutes unrelated business income or is an exempt function. Refer to IRM 4.76.50 , Examinations of Organizations Conducting Gaming Activities.

  2. The CSCI Program Analyst:

    • Serves as the SME for gaming issues

    • Provides technical and procedural guidance to exam employees.

    • Supports K-Nets dealing with gaming issues.

    • Performs reviews in collaboration with EOE review functions to promote quality gaming audits.

    • Develops gaming queries.

    • Coordinates training on gaming issues.

Affordable Care Act Activities

  1. EO oversees compliance by tax-exempt hospitals with the Patient Protection and Affordable Care Act (ACA). This oversight includes reviewing:

    1. Compliance with ACA as described in IRC 501(r), Additional Requirements for Certain Hospitals

    2. Excise tax under IRC 4959, Taxes on Failures by Hospital Organizations

  2. The CSCI Program Analyst:

    • Serves as the SME for ACA issues.

    • Provides technical and procedural guidance to exam employees.

    • Supports K-Nets dealing with ACA issues.

    • Performs reviews in collaboration with EOE review functions, ACA Hospital Review group and Chief Counsel.

    • Develops ACA queries.

    • Coordinates training on ACA issues.

Workplan Monitoring Group

  1. The Workplan Monitoring Group (WPM) is responsible for developing and monitoring the EOE annual workplan and giving reports to management.

  2. A workplan is a summary document containing the fiscal year’s planned:

    • Workstream activities

    • Case closures

    • Staff days

    • Inventory levels

    • Time by activity codes

  3. The workplan is categorized into five compliance categories:

    • Exemption

    • Asset protection

    • Tax gap

    • International

    • Emerging issues

Purpose of the EOE Workplan

  1. The EOE Workplan’s purpose is to strategically allocate staffing resources to focus on the most significant areas of non-compliance in the upcoming fiscal year.

  2. The EOE Workplan is used to:

    1. Allocate staff days applied by technical employees.

    2. Project EOE’s primary performance targets (Balanced Measures) and other supporting measures (Workload Indicators).

    3. Prepare monitoring reports to track progress based on projections.

  3. The workplan is assembled using:

    1. Hiring, staffing, and training plans.

    2. Progress tracked via the action plan (see below).

  4. CSCI will send reports to Area Managers to ensure that audits related to projects are properly coded.

EOE Workplan Action Plan

  1. An action plan is:

    1. Developed annually and sets the timelines and steps to create the EOE Workplan.

    2. A timetable for activities required to be completed before the due date of the workplan.

  2. The action plan includes:

    • Projected dates for completion of actions.

    • Status of each action (i.e., ongoing, not started, in process, complete).

    • Individuals responsible for each action.

  3. There are four general steps required to complete the action plan:

    1. Review the action plan from the prior year for accuracy and insert new actions needed for the upcoming fiscal year.

    2. Update action plan goal due dates to current year calendar.

    3. Share the document with responsible employees to alert them of their required future actions.

    4. The action plan is intended to be a live document and status of actions should be continually updated as action items are started and completed.

Form 5440 Completion

  1. The Workplan Monitoring Group creates a draft EOE Workplan on Form 5440 with supporting worksheets. They review the draft Form 5440 with the Director, EO and staff.

  2. Form 5440 strategically allocates staffing resources to EO Exam’s priorities in the upcoming fiscal year. See IRM 4.5.5, TE/GE Reports, for more information on Form 5440.

  3. To complete Form 5440:

    1. Review Form 5440 individual spreadsheets to catch formula and link errors.

    2. Verify fiscal year workdays for calculation errors that directly impact the number of staff days.

    3. Verify total staff days by calculating the number of full-time equivalents (FTEs) available to work in the upcoming fiscal year by the number of staff days.

    4. Ensure that the staff days to be planned are allocated. Adjust workstream activities until the staff days have been allocated.

    5. Finalize Form 5440 and distribute to management for approval.

Summary Document

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