2023 IRS Priorities for Nonprofit Organizations

2023 IRS Priorities for Nonprofit Organizations

Februay 9, 2023

Tax Exempt and Government Entities (TE/GE) is the IRS department that is responsible for the oversight of exempt organizations, government entities, and employee plans (retirement plans, IRAs etc.). At the beginning of each new year, TE/GE releases a letter outlining their accomplishments from the prior fiscal year and a second letter outlining their goals and focus for the upcoming fiscal year. Reviewing these two letters gives us a glimpse into IRS priorities relating to nonprofit organizations and what issues might receive increased scrutiny in the coming years.

Strengthening Compliance Activities

A 2023 priority is to strengthen compliance activities. This is an important objective of TE/GE as they oversee the initiating and closing of examinations. The following are areas of compliance that have received increased scrutiny in the past year and will remain a priority:

• Worker Classification: review 1099 vs W2 employee classification to ensure taxpayers are treating workers correctly as employees rather than independent contractors.
• Excise Tax on Excess Compensation: ensure that organizations that pay over $1 million in compensation to any “covered employee” are reporting and paying the additional 21% excise tax on Form 4720.
• 990-N Filers: determine if organizations are appropriately filing 990-Ns when related filings indicate that an organization is typically over the $50,000 in gross receipts threshold. Also, specifically evaluate 509(a)(3) support organizations with 990-N filings since, with limited exceptions, support organizations are required to file a 990 or 990-EZ.
• For-Profit Successors: additional focus on organizations that were for-profit entities before conversion to 501(c)(3) organizations.
• Hospitals with Unrelated Business Income: closer scrutiny when the 990-T expenses materially exceed the gross income reported.
• Section 501(c)(7) Organizations: further attention to recreational and social club entities generating investment and nonmember income.
• Private benefit and self-dealing: evaluating private foundations providing loans to disqualified persons or having involvement with officer business partnerships.

Data-Driven Examinations

In the coming year, TE/GE is expanding the use of data, machine learning, and artificial intelligence algorithms to select returns for exam. Data queries are created based on quantitative criteria being reported on Forms 990 to identify high risk areas of noncompliance. In 2022, nearly 14% of the 3,425 completed examinations for exempt organizations were data-driven. The most prominent issue identified in these examinations was concerns related to miscellaneous unrelated business taxable income. Further, in 2022 TE/GE developed and tested several new artificial intelligence methods to identify potential noncompliance, so expect to see more data-driven examinations in the coming years.

Taxpayer Services and Operations

TE/GE is working to drive forward the IRS modernization plan. This includes the following efforts:

• The expansion of taxpayer digital communications (TDC). TDC provides a secure mailbox for the two-way exchange of messages and documents. As implementation increases, this should decrease processing time and the need to send paper documents through the mail.
• A robotics processing automation (RPA) system being implemented in 2023. This RPA will automate the establishing of most examination cases and some of the closing processes.
• The ability to electronically file additional returns in 2023, including Form 5227, which is used in part to determine if a split-interest trust should be treated as a private foundation.

The nonprofit sector continues to grow. Nearly 137,000 exempt determination applications were filed in 2022 with 88% being approved. TE/GE needs to continue to develop and transform to support this growth. The IRS has been allocated approximately $80 billion over the next 10 years through The Inflation Reduction Act, which should help with this effort. Based on review of the two letters recently released by TE/GE, they will endeavor to use this additional support to enhance taxpayer’s services, strengthen compliance activities, and continue development of data-driven activities.

If you have any questions or need help filing your Form 990, please don’t hesitate to reach out.