Other Developments

Date01 September 2020
Published date01 September 2020
September 2020 7
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
and assignment, and planning and monitoring activities.
(Technically, the IRS examines returns, not organizations.)
This function has three groups: (1) Issue Identification
and Special Review, which identifies and develops issues
for examinations or compliance activities and criteria for
examination selection; (2) Classification and Case Assign-
ment, which reviews returns for examination; and (3)
Planning and Monitoring, which develops an annual work
plan, detailing the number of examination starts, clo-
sures, and other measures, and monitors performance.
As to the second of these groups, the IRS personnel
in this regard are referred to as classifiers. Classification
is the process of determining whether a return should
be selected for compliance activities, what issues should
be the primary focus of the compliance activity, and the
type of compliance activity that should be conducted.
TE/GE’s Compliance Governance Board oversees TE/
GE’s compliance program, including CP&C operations
such as approving priority issue areas (i.e., compliance
strategies). This board reviews program goals, considers
metrics and reporting, and reviews performance of com-
pliance strategies. This board has five TE/GE executives,
along with counsel, who are voting members; there are
three nonvoting members.
TE/GE identifies exempt organization returns for
examination from many sources and categorizes exam-
inations into three groups (which the IRS refers to as
portfolios): data-driven approaches, referrals and other
casework, and compliance strategies. All three of these
groups rely on data, to some extent, to make decisions
on selecting returns for examination.
The data-driven approaches portfolio uses analytical
models (which it now refers to as query sets) based on
quantitative criteria to identify potential examinations.
Three models are used to review exempt organization
data from annual information returns for compliance.
The models score returns for examination on the basis
of potential noncompliance; these models have 354
unique queries. A query reviews databases to identify
responses on returns that may indicate noncompliance
because they do not meet certain criteria or expected
values, such as exceeding a dollar threshold. The models
use a scoring system that applies weights, or points, to
each query result to generate a score for a return. (For
example, the Form 990 model has points ranging from
0 to more than 50.)
Biannually, each model is run using the latest data;
the run generates a model score sheet, which is a ranked
list of returns that score above a minimum threshold. A
classifier uses the ranking to identify returns for poten-
tial examination, selecting returns in fulfillment of a
“stocking plan,” which identifies the number and type
of returns to be examined in satisfaction of IRS work
plan requirements. Aside from the three models, the TE/
GE Division uses other methods and data to identify and
develop its compliance work. For example, this portfolio
includes approaches that the division developed in part-
nership with the IRS’s Research, Applied Analytics, and
Statistics Division.
As to the referrals and other casework portfolio,
returns are selected for examination (1) based on refer-
rals (complaints) about exempt organization noncompli-
ance submitted by third parties; (2) in connection with
post-determination compliance queries with respect to
organizations that filed Form 1023-EZ; (3) in response
to requests for tax refunds, adjustments of tax paid, or
credits; and (4) as part of the training of examiners.
The compliance strategies portfolio concerns com-
pliance issues that originated from a Compliance Issue
Submission Portal for TE/GE Division staff. The strategies
are approved by the Governance Board, which results in
adding the compliance strategies to the IRS work plan.
Returns are selected using sampling or other uses of data.
Once an examination is underway, an examiner may
expand it to include an organization’s returns for other
tax years or other types of returns, such as employment
tax returns. These additional examinations (which the IRS
refers to as pick-ups) are counted by the IRS as separate
examinations. Examiners must obtain manager approval
to expand an examination.
Examiners are required to check that an exempt organ-
ization filed all returns that are required. If an examiner
finds that a return was not filed by an organization and is
unable to secure the return, the examiner has the author-
ity to prepare a “dummy” return (technically referred to
as a substitute for return), leading to an examination of
the organization’s activities, records, and documents.
Examinations have various outcomes, the most
severe being revocation of the organization’s tax-exempt
status. Income, employment, and/or excise taxes may be
assessed as a result of an examination. [27.6(b)]
Bloomberg Law’s June 19 Daily Tax Report brought
news of greater IRS audits of private foundations, in
accordance with combined efforts by the Tax Exempt &
Government Entities and Large Business & International
Divisions. It seems that the IRS has targeted over 1,000
foundations that, in the words of TE/GE Commissioner
Tamera Ripperda, have linkages or that are interwoven
into … global high wealth enterprises.” The TE/GE
Division has trained about 400 LB&I Division agents on
private foundation law. Ripperda previously was the
director of the IRS’s Global High Wealth Industry group.
An individual selling religious merchandise by means of
the internet was found liable for federal income tax on the
net proceeds, with the US Tax Court, on June 22, rejecting
his argument that he was functioning as a church (Lloyd
v. Commissioner). He was found liable for various tax
penalties, including failure to file a timely tax return (IRC

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