Purpose: This manual focuses on the examiner’s responsibility to determine a taxpayers compliance with federal tax and information return filing requirements, Topics addressed include:

The procedures in this manual apply to Exempt Organization Examination examiners.

Policy Owner: Director, Exempt Organizations

Program Owner: Exempt Organizations

Examiners must determine whether the taxpayer complies with all federal tax and information return filing requirements. Examiners will ensure required returns have been filed, while assessing their examination potential.

In all examinations you are required to conduct filing checks.

See Exhibit 4.75.12-2, "Filing Check Guidance Table" for a list of returns that are subject to required or waiver-eligible filing checks.

In the interest of conserving resources, increasing compliance, and reducing multiple contacts with exempt organizations, review the filing of other returns to determine whether the taxpayer is in compliance with all filing requirements.

A filing check:

Be alert to possible liability for other federal taxes, potentially leading to referrals, securing delinquent returns, or expansion of the exam.

Consider inspecting returns obtained first from non-taxpayer sources.

Filing checks are further categorized as:

Package audits don't by themselves constitute an examination if the taxpayer’s books and records weren't examined. A package audit:

The conclusion of a package audit is useful in:

One reason to conduct a package audit includes reconciling a discrepancy between a Form 990’s salaries expense and payroll taxes, and amounts shown on Forms 941.

Reconcile related returns with line items shown on the primary return under examination.

For FSL/ET, examiners must determine whether or not an organization has a 403(b), 457, or Social Security alternative plan with a potential compliance problem that warrants a referral to Employee Plans.

For FSL/ET, examiners must identify if government under examination is under a section 218 agreement.

For FSL/ET, examiners must determine whether the taxpayer is self-insured for employee health insurance and subject to excise taxes reportable and payable on Form 720, Quarterly Federal Excise Tax Return.

EO has examination jurisdiction for all annual EO primary returns listed in IRM 4.75.12.4.1., Form 990-N, and related EO tax returns, such as Form 990-T, Form 1120-POL and Form 4720.

Employee plan returns and bond returns of an EO are under the exam jurisdiction of Employee Plans and Tax-Exempt Bonds functions respectively. Miscellaneous excise tax returns, such as Form 720 are under the exam jurisdiction of SB/SE.

EO also has primary examination responsibility for employment tax returns, withholding returns and gaming excise tax returns filed by IRC 501(a) organizations, IRC 4947 trusts, IRC 527 organizations, IRC 529 organizations, and government entities.

The returns and schedules under EO jurisdiction are listed in Exhibit 4.75.12-1.

During the pre-exam phase, verify whether the organization filed all required returns indicated on Integrated Data Retrieval System (IDRS).

To minimize an organization’s burden, before requesting a retained copy of filed returns, use internal sources, such as IDRS, and online Statistics of Income Exempt Organizations Return Image Net (SEIN), to verify filing compliance.

CFOL (Corporate File On-Line) provides online access (read-only research) to tax accounts, returns and other related information stored in IDRS. See Document 6209, IRS Processing Codes and Information, for CFOL command codes. Look for detailed information on any command code in IRM 2.3 or IRM 2.4. You can also search external sources, such as Guidestar, ERI, or Foundation Center for copies of Form 990, rather than requesting them from the organization. Examiners can go to the Tax Exempt Search Tool on IRS.GOV to obtain copies of tax returns.

Obtain and review IDRS prints:

Specify on Form 5773 at Section G:

If the taxpayer has correctly filed all required returns, state your conclusion to that effect. Identify specific returns in the comments.

Document actions taken and decisions made with respect to non-filed returns. See IRM 4.75.12.9.1.

If you don’t complete the minimum required filing checks, include an explanation and document managerial involvement in the workpapers.

If an organization or government failed to file what appears to be a required return, find out why the return was not filed. If the explanation cannot resolve the delinquency, take any of the following actions:

Consider the effect of delinquency on tax-exempt status. Include the delinquency matter in an advisory if exemption is maintained.

Review the prior and subsequent years of the primary return assigned to you for proper filing and to evaluate examination potential. Minimize the organization’s burden by securing copies of the returns from IDRS, online SEIN or through a service such as Guidestar or Foundation Center (unless IRC 6104(d) compliance is part of the scope of the exam). Examiners can go to the Tax Exempt Search Tool on IRS.GOV to obtain copies of tax returns.

Determine whether increases or decreases in activities and financial data affect the organization’s exempt status or result in tax. Such changes may warrant establishing the prior or subsequent tax year’s return for examination.

A review of prior and subsequent year’s returns is essentially equivalent to the classification of a return to determine if an examination is necessary. If the group manager hasn’t approved the examination, don't request books and records related to those returns.

When evaluating the returns for issues related to the year under examination:

Document in the workpapers whether prior and subsequent years’ returns were reviewed and explain why an exam wasn't warranted.

If, during the examination, information is obtained that indicates potential substantive noncompliance in subsequent years for which returns haven't yet been filed by the organization or government, obtain managerial approval to open the year(s) on Non-Master File.

An examination of prior or subsequent year returns may be warranted if:

If adjustments are made to the return(s) under examination, document the reasons other years weren't opened for examination.

Obtain and document in the workpapers or the case chronology and/or case activity record, group manager approval to extend an examination into the prior or subsequent years. Upon the case closure, the manager will sign off on the case chronology and/or case activity record, which should serve to affirm the documented discussions.

Examine prior or subsequent year return(s) concurrently with the assigned return. Ensure sufficient time remains on the statute of limitations before starting an examination of a prior or subsequent year return. See IRM 25.6, Statute of Limitations.

Inform the organization or government of the decision to expand the examination to include a prior or subsequent year’s return. Verify the presence or absence of an audit indicator on a related return before initiating the examination. If an audit indicator is present, take appropriate steps to coordinate before contacting the organization.

In order to establish cases on AIMS using retained copies of the organization or government's returns, create a module on RCCMS as soon as you know an examination will be initiated. Request establishment with the Update AIMS check box selected for Business Master File (BMF) modules.

If it is not possible to secure the original return or if closing would be delayed by awaiting receipt of the original, close the case based on the organization or government's retained copy. If the organization or government doesn't provide a copy, secure BRTVUE and RTVUE prints internally. Original returns must be obtained in the following instances:

Generally, examinations of prior and subsequent year returns will be limited to the issue(s) giving rise to the examination of the originally assigned return. However, the returns would still be reconciled to the taxpayer’s books and records, just as the originally assigned return

If you discover that the entity hasn't filed returns or forms, the examination of which are within the jurisdiction of another function or Operating Division, prepare Form 5666 or Form 5346 and send to the CP&C Referrals for transmittal to the appropriate function. See IRM 4.75.16 for EO closing procedures.

Employment tax is an integral part of the examination of an exempt organization or in the case of FSL/ET, the primary part. Review all employment tax returns to ensure filing compliance. For EO, a separate employment tax examination may be necessary if the review reveals a lack of compliance.

Certain information returns are the primary input documents for computerized matching programs to detect potential unreported income and nonfilers. Policy Statement P-4-4 (see IRM 1.2) and the "required filing check but waiver eligible" provisions in this manual spell out EO’s (including FSL/ET) responsibility to ensure the timely and correct filing of information returns.

Examples of information returns include:

Group managers and special reviewers are responsible for ensuring that examiners properly document their workpapers to reflect adequate coverage of information return issues.

Refer to IRM 4.75.12.4.2 for information on waivers.

If the examination of an organization reveals that the organization maintains an employee benefit plan, conduct certain inspections of the benefit plan(s) in order to ensure compliance with all employee plan requirements. Consult with a pension specialist if further interpretation of the pension plan law is required, using the Online Specialist Referral System. As a required but waiver-eligible filing check, examiners will:

Determine the type(s) of retirement plan(s) maintained by the organization. For each of the following plans, complete Form 4632-A to determine whether a referral would be made to Employee Plans:

If an organization has a profit-sharing plan exempt under IRC 401 (a), determine the effect on the organization’s exempt status. Also, submit a referral to CP&C referrals for IRC 401(a) consideration.

For examinations of employee welfare benefit plans exempt under IRC 501 (c)(9), (c)(17), and IRC 120 (Qualified group legal services plan), review plan documents and complete Form 6212-B, Examination Referral Checksheet B. If any item on Form 6212-B is checked in the right-hand column, forward the form to the Pension and Welfare Benefits Administration of the Department of Labor (DOL). The case won’t be closed until the earlier of receipt of a response from DOL, or 20 workdays after the date you submitted the document to DOL.

Determine if fringe benefits constitute taxable wages. Review the chart of accounts for obvious employee benefits. Secure a copy of the personnel department’s employee benefits and executive benefits procedures.

Complete Form 4632-A for each plan for which a deduction is claimed. Form 4632-A will remain in the case file.

A completed Form 4632-A will assist in the preparation of Form 4632, Employee Plans Referral, if necessary.

If a referral is warranted due to other issues or circumstances not covered by Form 4632-A, a referral may be accomplished by a narrative explaining the particular issues or circumstances.

Complete Form 4632-B, Employee Plans Referral Checksheet or for FSL/ET complete Form 4632–C, Employee Plans Referral Sheet, for IRC 403(b) or IRC 457 plans, to determine if a referral on Form 4632 is necessary for the following plans;

The revocation of a 501(c)(3) status may adversely impact deferred compensation programs sponsored by the organization. Consult with an Employee Plans IRC 403(b)/457 Coordinator.

IRC 527 explains the extent to which political organizations are taxed. Generally, only the political organization’s income from investments, less the expenses directly attributable to such income including a specific deduction of $100.00, is taxed at the highest corporate rate. Neither the NOL deduction nor the special deductions allowed for corporations are allowable pursuant to IRC 527(c).

An IRC 501 (c) organization, on the other hand, is taxed under IRC 527 on the lesser of the amount expended for political purposes (exempt function), or the organization’s net investment income.

Net investment income, for purposes of IRC 527 (f), means the gross amount of interest, dividends, rents, royalties, plus the excess (if any) of gains from the sale or exchange of assets over the losses from the sale or exchange of assets, over the deductions directly connected with the production of this income. To avoid double taxation (and double deductions), IRC 527 (f)(2) provides that income and deductions taken into account for purposes of the tax on UBI of IRC 501 (c) organizations under IRC 511 aren't to be included as either income or deductions in determining net investment income under IRC 527(f).

For purposes of IRC 527, expenditures for an "exempt function" (political purposes), are expenditures for the purpose of influencing the outcome of an election to public office. Political expenditures don't include any expenditures for the purpose of influencing legislation regardless of whether those "lobbying" expenditures are for germane lobbying, non-germane lobbying, or grass roots lobbying.

Review Schedule C, Form 990, Political Campaign and Lobbying Activities.

Review Schedule R, Form 990, Related Organizations and Unrelated Partnerships, for identifying related organizations.

Determine whether a separate segregated fund described in IRC 527(f)(3) is maintained by the organization. Also, determine if the organization has expended any amount from its funds during the taxable year directly (or through another organization) for an exempt function under IRC 527(e)(2). If so, a Form 1120-POL, U.S. Income Tax Return For Political Organizations, may be required. Check the minutes and other correspondence files for indications of political contributions. Also check disbursements for possible political expenditures.

Compare the amount of political expenditures reported on Form 990, Schedule C, Part I, Line 2, to the amount of political expenditures on Form 1120-POL. Also, reconcile the investment income and expenses per return with those reported on Form 1120-POL. Establish Form 1120-POL for examination if adjustments are required.

If the IRC 501(c) organization has $100 or less of net investment income for the tax year, no return or tax is due from the IRC 501(c) organization under IRC 527 regardless of the amount of its political expenditures.

See K-Net for additional technical guidance on examinations involving political organizations.

The Tax Exempt Bond (TEB) program, normally associated with large IRC 501(c)(3) organizations, was established to ensure compliance with the provisions of the Internal Revenue Code applicable to tax-advantaged bonds. Prior to considering a referral to Tax Exempt Bonds via the Specialist Referral System (SRS), be alert for the following transactions:

Review Schedule K, Form 990, Supplemental Information on Tax-Exempt Bonds

The revocation of the issuing organization’s tax-exempt status may adversely impact the bonds. Consult with a TEB specialist.

FBAR is an information report required when a "U.S. Person" owns or has signature or other authority over foreign financial accounts worth over $10,000 in any year.

Certain tax-exempt entities may be required to file FBARs:

The determination to file the FBAR is made annually.

FBAR is due on or before June 30.

The FBAR is now filed electronically through the Financial Crimes Enforcement Network (FinCEN) BSA E-File system.

The FBAR shouldn’t be filed with the filer’s federal tax return. Don’t discuss filing FBAR with a taxpayer.

IRC 3401 and IRC 3402 set forth the requirements for withholding and claiming exemption from withholding. Employers must comply with the W-4 requirements in accordance with 26 CFR 31.3402(f)(2)-1 and 26 CFR 31.3402(f)(5)-1.

Under IRC 6001 and 26 CFR 31.6001-5(a), employers are required to keep records of all remuneration paid to (including tips reported by) employees and make them available for inspection by authorized IRS personnel. When an employer is reluctant or refuses to permit an inspection of payroll records, advise them of their obligations under the Code and Regulations.

Refer to IRM 4.75.12.17.1 for information to determine when a filing check is required for Form W-4.