IRS Announces New Compliance Enforcement Strategies

The IRS’  Tax Exempt and Government Entities division (TE/GE) updated its Compliance Program and Priorities on April 5, 2021, signaling an enhanced strategic focus on smaller exempt organizations and employee benefit plans. The new initiatives include:

  • Reviewing employee benefit plans for unrelated business income (UBI), 
  • Examining use of the abbreviated Form 990-N by small exempt organizations and its appropriateness under the circumstances, and 
  • Other narrow areas of interest related to retirement plan and exempt organization reporting.

Identifying UBI from Employee Benefit Plans

Compliance checks will begin for employee benefit plans, particularly plans with significant liabilities, searching for unreported UBI, as well as prohibited transactions and improperly valued assets. In general, employee benefit plans are subject to the same tax on UBI as other exempt organizations, and an often-overlooked source of UBI in benefit plans is through alternative investments. Johnson Lambert recently hosted a webinar and workshop aimed at identifying this kind of UBI.

Verifying Eligibility to File Form 990-N

Among the new initiatives is a focus on tax-exempt organizations filing Form 990-N. Most small exempt organizations, those with average gross receipts less than $50,000 per year, qualify to file the extremely abbreviated “e-postcard,” self-certifying that they meet the $50,000 gross receipts test. The IRS will conduct examinations to ensure that organizations filing Form 990-N qualify for the shortened filing. 

Other Impacts

The new compliance priorities also indicate an interest in reviewing retirement plans sponsored by small tax-exempt organizations and single-participant 401(k) plans to ensure proper administration, and to review for prohibited transactions or undisclosed party-in-interest transactions. Additional areas of interest include:

  • Situations involving officers claiming expenditures of exempt organizations as tax deductions, 
  • Student loan bonds and bond yield restrictions from Form 8038-G, and 
  • Retirement plans for employers who previously misclassified employees as independent contractors.

Final Takeaway

Many of the updated compliance initiatives share a particular focus on small exempt organizations and employee benefit plans. With the advent of certain simplified tax forms (Application for Tax Exemption Form 1023-EZ, abbreviated Form 990-N and 990-EZ filings for small organizations, and abbreviated Form 5500-SF and 5500-EZ filings for small benefit plans), it has never been easier to keep a small organization or plan in compliance. However, the TE/GE is concerned that these shortened filing requirements may be sources of abuse. 

If you have any questions about these new compliance monitoring strategies or how they might affect your organization, please reach out to the Johnson Lambert Team. 

Andrew Hassler
Andrew Hassler | Tax Associate
J. Calvin Marks
J. Calvin Marks | Senior Manager