IRS Tax Exempt Priorities for 2016

The IRS Exempt Organization Division (the “EO”) recently announced their priorities and strategy for the upcoming fiscal year, and will focus on examining existing exempt organizations as well as the determination of prospective exempt organizations. In light of criticism and allegations surrounding the treatment of certain 501(c)(4) applications, the EO has clearly made compliance and enforcement of exempt organization guidelines a major priority.  

Below are the major IRS priorities for 2016 concerning the oversight of existing exempt organizations.

Exemption: 

Examiners and agents will look for “non-exempt purpose activity and private inurement.” The EO aims to focus on any non-exempt activity that exists in order to reevaluate the organization’s status as an exempt organization. The EO is aware that business operations for existing exempt organizations have the possibility of shifting over time into the realm of non-exempt activities.

Protection of Assets:

The EO is concerned and will focus on the possibility of any individual or group of individuals using an exempt organization for personal or business advantages, particularly someone with influence over the exempt organization. The EO plans to continue its focus on the existence of any “self-dealing, excess benefit transactions, and loans to disqualified persons,” in relation to this issue.

Tax Gap:      

The EO plans to focus on activities that may trigger Unrelated Business Income Tax (“UBIT”). The EO acknowledges that guidelines surrounding UBIT may be a bit complex and that not-for-profits may fail to realize certain routine activities may be subject to UBIT.

International:

The EO will place more focus on activities conducted by exempt organizations outside the U.S. in fiscal year 2016. The EO is concerned that funds spent overseas may be a front to certain illegal or terrorist activities. As international business and electronic funds transfers overseas become more the norm, the EO recognizes the potential major risks associated with this trend. The EO will focus on increased compliance reviews, compliance checks, correspondence audits and field examinations to ensure activities overseas fall within the guidelines applicable to exempt organizations and U.S. law.

Emerging Issues:

The emerging areas of risk identified by the EO for fiscal year 2016 include “non-exempt charitable trusts and IRC 501(r)” organizations. The 501(r) classification is a product of the Affordable Care Act and applies to exempt organizations that operate one or more hospitals. The EO will focus on compliance in regards to these emerging issues.