Exempt organizations and the Coordinated Examination: a rude awakening.

• Author: Mackay, James R.
• Position: IRS Coordinated Examination Program

It seems like just yesterday that an exempt organization's biggest concern about the IRS was having an agent spend 100 to 200 hours examining it. The advent of the Exempt Organizations Coordinated Examination Program (CEP), at least for exempt organizations with assets over $50 million, has significantly changed that. A CEP examination brings together personnel from various offices within the Service, such as Exempt Organizations managers and agents, computer audit specialists, income tax, excise tax, international and Employee Plans agents, engineers and economists. The CEP, in conjunction with Exempt Organizations taking jurisdiction of employment tax issues affecting exempt organizations and tax-exempt bonds, has opened a new era in tax compliance. It is not uncommon for four to eight agents to spend 1,000 to 3,000 hours on a CEP examination. In addition to the additional time involved, the IRS is looking at issues that were routinely ignored in the past.

In the employment tax area, the Service has expanded its focus from strictly independent contractor-employee classification issues to include the student nurse and full-time student exemptions from FICA. In another area that had not received widespread attention, reporting requirements for nonresident aliens, IRS International Examiners will open up a major compliance initiative and begin with examinations of colleges and universities. This program is expected to expand in the future to include hospitals and other not-for-profit organizations. In raising these "new" issues, it is not unusual for a large institution, such as a university, to be assessed tax, interest and penalties into the millions of dollars.

The exhaustive nature of CEP examinations has brought Sec. 403(b) tax-sheltered annuity plans under scrutiny. According to the IRS National Office reviewers, they have not seen even one plan that complies with the statutory requirements. The primary areas of noncompliance are the contribution limits, distributions and discrimination in favor of the highly compensated. This area has raised such a concern that the Service has developed exhaustive examination guidelines for use by its examiners. In response to the limited guidance it has issued on Sec. 403(b), the IRS is establishing a Voluntary Compliance Resolution (VCR) program to allow exempt organizations with compliance defects to voluntarily approach the Service and resolve the defects.

The IRS has begun reviewing compensation...