CHAPTER TWENTY-SEVEN
Administrative and Litigation Procedures
*§ 27.1 ADMINISTRATIVE PROCEDURES WHERE RECOGNITION DENIED
*p. 836, note 3. Delete 2014-9, 2014-2 I.R.B. 281 and substitute 2016-5, 2016-1 I.R.B. 188.
*p. 836, first complete paragraph, last line. Insert footnote at end of line:
3.1 Id. § 7.02.
*p. 836, note 4. Delete 7.02 and substitute 7.03.
*p. 836, note 5. Insert § 7.04 following existing text.
*p. 836, note 6. Delete § 7.05.
*p. 836, note 7. Insert following existing text:
Subsequent federal tax law requires the IRS to prescribe procedures pursuant to which a tax-exempt organization may request an appeal to the Appeals Office (IRC § 7123(c), added by enactment of the Protecting Americans from Tax Hikes Act of 2015 (§ 404), Pub. L. No. 114-113 (114th Cong., 2nd Sess.)).
*p. 836, note 9. Delete 7.06; delete 2014-5, 2014-1 I.R.B. 169 § 4.04 and substitute 2016-2, 2016-1 I.R.B. 102.
*p. 836, note 10. Delete 7.08 and substitute 7.06.
§ 27.2 REVOCATION OR MODIFICATION OF TAX-EXEMPT STATUS: ADMINISTRATIVE PROCEDURES
*p. 837, first complete paragraph. Move footnote 12 reference to end of last line.
*p. 837, note 12. Delete 28.5 and substitute 28.6.
*p. 837, note 13. Delete text and substitute:
Rev. Proc. 2016-5, 2016-1 I.R.B. 188 § 12.02.
*p. 837. Delete third complete paragraph.
p. 838. Insert as second complete paragraph:
In 2015, Congress required the IRS to prescribe procedures under which a tax-exempt organization may request an administrative appeal (including a conference relating to such an appeal, if requested) to the IRS's Office of Appeals of an adverse determination.22.1 For this purpose, an adverse determination includes a determination adverse to the organization relating to (1) the initial qualification or continuing qualification of the organization for tax-exempt status; (2) the initial qualification or continuing qualification of the organization as an entity that is eligible to receive deductible contributions; (3) the initial or continuing classification of the organization as a private foundation or public charity; or (4) the initial or continuing classification of the organization as a private operating foundation.22.2
§ 27.3 RETROACTIVE REVOCATION OF TAX-EXEMPT STATUS
*p. 839, note 30. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.
*p. 839. Insert as first complete paragraph:
A misstatement of material information includes an incorrect representation or attestation as to the organization's organizational documents, the organization's tax-exempt purpose(s), the organization's conduct of prohibited and restrictive activities, or the organization's eligibility to file a streamlined application for recognition of exemption.31.1 Information provided on an application for recognition of exemption that has been withdrawn will not be considered by the IRS for purposes of limiting the retroactive effect of a revocation or modification of a determination letter.31.2
*p. 839, note 32. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.
p. 839, second complete paragraph, note 38. Insert following existing text:
In one of these instances, having found that an organization omitted or misstated material facts and has been operating in a manner materially different from that originally represented, thus justifying retroactive revocation of exemption, the IRS observed that the organization “has not turned square corners in dealing with the Federal government” (Priv. Ltr. Rul. 201543019).
§ 27.6 REVOCATION OF TAX-EXEMPT STATUS: LITIGATION PROCEDURES
(b) Declaratory Judgment Rules
p. 851, last paragraph. Insert as second sentence:
This procedure was extended, in 2015, to the initial determination of or continuing classification of any other category of tax-exempt organization, including apostolic entities.158.1
*p. 851, note 159, first line. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.
*p. 852, second paragraph, ninth line. Delete farmers' cooperatives for and substitute nonprofit organizations for tax.
*p. 852, note 166, third line. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.
*p. 852, note 167. Delete text and substitute IRC § 7848(a).
*p. 852, note 170. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.
*p. 853, carryover paragraph. Insert as last sentence:
Moreover, the nonacceptance of an application for recognition of exemption for incompleteness173.1 is not a final determination for these purposes.173.2
*p. 854, note 187, first line. Delete (Form 1023).
*p. 854, note 187, second line. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.
*p. 854, note 187. Insert as second to fourth sentences:
Also, the nonacceptance of an incomplete application (see § 26.1(b) is not a failure to make a determination (Rev. Proc. 2016-5, 2016-1 I.R.B. 188 § 10.05(2)). The nonacceptance of an application for recognition of exemption for incompleteness (see § 26.1(b)) is not a final determination (id. § 10.05(1)). An organization will not have exhausted its administrative remedies if it was ineligible to submit a streamlined application (see 26.1(h)) (id.)).
*p. 856, second complete paragraph, second line. Delete substantially.
*p. 856, note 201. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.
*p. 856, third complete paragraph, third line. Delete substantially.
*p. 856, third complete paragraph, fourth line. Delete a group exemption request (and accompanying footnote).
*p. 856, note 207. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.
*p. 856, note 207. Insert following existing text:
These steps will not be considered completed by the IRS until the agency has had a reasonable time to act on an appeal or protect (id. § 10.04).
§ 27.7 IRS EXAMINATION PROCEDURES AND PRACTICES
(a) General IRS Exempt Organizations Audit Procedures and Practices
*p. 862, second complete paragraph. Insert as second sentence:
This initiation of an examination will always be by mail, rather than by telephone.241.1
p. 866. Insert following first paragraph, before heading:
(v) Government Accountability Office 2015 Report.
The Government Accountability Office (GAO), in a report issued in July 2015, concluded that there are “several areas” where the Exempt Organizations Division's controls intended to enable it to properly select tax-exempt organizations for examination “were not well designed or implemented.”257.1 The GAO stated that the “control deficiencies GAO found increase the risk that [the Division] could select organizations for examination in an unfair manner—for example, based on an organization's religious, educational, political, or other views.”257.2
In other instances, the GAO reported, the Division maintains “well-documented procedures for several examination selection processes” in the Internal Revenue Manual (IRM).257.3 IRS staff can deviate from the procedures that are part of the IRM only with executive management approval. One of the examples of “internal control deficiencies” the GAO found was that procedures for some audit processes are not included in the IRM, as required by IRS policy. Then, said the GAO, IRS staff can sidestep procedures without approval, increasing the “risk of unfair selection of organization's returns for examination.”257.4
Another GAO finding was that Division management “does not consistently monitor examinations and database files to ensure that selection decisions are documented and approved, to help ensure fairness.”257.5 The GAO's review of examination files found that “approval of some selection decisions was not documented, as required by [the Division's] procedures.”257.6
The GAO recommended that the Commissioner of Internal Revenue direct the Division to take nine actions, including the following: (1) develop, document, and implement a process to ensure that IRM sections and other procedures are reviewed and updated annually, and that updates reflect current practice, as required; (2) complete the development of and formally issue the IRM sections on compliance checks and compliance reviews; (3) develop, document, and implement additional monitoring procedures to ensure case selection controls; (4) develop, document, and implement procedures to ensure that all criteria or methods used in projects to select returns for examination are consistently documented and approved; and (5) provide cross-training for IRS employees who process complaints (known as referrals classifiers), and prioritizing training for classifiers who process political activity, church, and high-profile referrals.257.7
Another set of recommendations pertained to the membership of referral committees. These are committees that are composed of a rotating set of senior examination staff or managers who make the final decision about the potential for examinations. According to the IRM, committee members should rotate every 12 months on a staggered schedule to maintain continuity and expertise. The Exempt Organizations Division utilizes three types of committees to review referrals: political activity referral committees, church referral committees, and high-profile referral committees. The GAO recommended that referral committee members rotate every 12 months or that the IRM be revised to require an alternative rotation schedule. Just prior to issuance of the GAO report, however, the Director of the Exempt Organizations Division issued a memorandum stating that referral committee members will serve for two years.257.8
The GAO also recommended that the Commissioner determine whether additional controls may be needed to ensure that all closed examination files are tracked and maintained accurately.257.9
(vi) IRS Fiscal Year 2016 Work Plan.
The EO Division, in its fiscal year 2016 work plan, stated that its “overarching compliance strategy” is to ensure that tax-exempt organizations comply with the requirements for exemption and adhere to all applicable federal tax laws. This strategy is to be implemented by means of “data-driven decisions with the intended goal of identifying and addressing existing and emerging high-risk areas of non-compliance with the optimal use of available resources.”
The Division will be focusing its resources on these strategic issue areas: (1) nonexempt-purpose activity and private inurement; (2) self-dealing, excess benefit transactions, and loans to disqualified persons; (3) unrelated business income tax and employment tax liability; (4) oversight of funds expended outside the United States; and (5) tax-exempt hospitals and nonexempt charitable trusts.
*(vii) IRS Fiscal Year 2017 Work Plan.
As of June 30, 2016, EO Examinations had completed 4,984 examinations. The issue areas were filing, organizational, and operational matters, including delinquent returns (2,109); employment tax issues, including worker classification and noncompliance with withholding requirements (1,323); unrelated business income issues (611); discontinued operations, foundation status changes, and revocations (195); private inurement and private benefit matters (192); legislative, political, and governance issues (59); and other matters (495).
Hospitals are being reviewed for compliance with IRC § 501(r).257.10 As of June 30, 2016, the IRS completed 692 reviews and referred 166 hospitals for field examinations. Issues for which these referrals were made are lack of a community health needs assessment, lack of a financial assistance and/or emergency medical care policies, and noncompliance with billing and collection requirements.
In FY 2016, the IRS continued post-determination compliance examinations of 1,400 exempt organizations that filed Forms 1023 or 1024 and were approved pursuant to the streamlined process. As of June 30, 2016, the IRS closed 1,051 examined returns, with 61 percent closing as no change and 39 percent having changes ranging from amendments to organizational documents to failure to file returns. In addition, five organizations had their status revoked.
The IRS also began post-determination compliance examinations of exempt organizations that were granted recognition of status through submission of Form 1023-EZ.257.11 A statistically valid random sample of 1,182 organizations has been selected. As of June 30, 2016, 36 examined returns have been closed, with 34 closed with no change and two requiring amendments to their organizing documents.
The IRS was of the view that both of these processes are “working well.” The agency intends to continue both programs in FY 2017.
The IRS will be implementing a statistical sampling methodology to assess compliance by exempt organizations. This statistical sample is intended to assist in the assessment of the overall compliance levels of the exempt organizations community and address the recommendations made by the General Accountability Office in 2015.257.12
*(b) IRS Exempt Organizations Examination Guidelines
*p. 867. Insert as first complete paragraph, before heading:
In an IRS memorandum dated December 30, 2015, from the director of Exempt Organizations Examinations, reference is made to a then newly renamed “EO Referrals Group,” which is to create a “peer review group” that will be responsible for reviewing “high profile referrals” (complaints).289.1 These referrals are said to include “information items” containing or involving evidence or allegations of financial transactions with, including contributions to, individuals or organizations with known or suspected terrorist connections; evidence or allegations involving a church; high-impact issues (e.g., the decision may result in media attention); sensitive cases (e.g., the information was submitted by an elected official other than those in the congressional or executive branches); items submitted by a member of Congress or congressional staff; and other factors indicating that review by the group would be desirable for reasons of “fairness or integrity.”
(c) Church Audits
p. 867, note 293, penultimate line. Delete 1999 and substitute 2009.
*§ 27.10 IRS DISCLOSURE TO STATE OFFICIALS
*p. 874, note 355. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.