Other Developments

• Date: 01 September 2020
• Published date: 01 September 2020
• DOI: http://doi.org/10.1002/npc.30772

Bruce R. Hopkins’ NONPROFIT COUNSEL

September 2020 7

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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)] ◆

OTHER DEVELOPMENTS

◆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