Exempt Organizations Advisory - Advisory Committee on Tax Exempt and Government Entities (ACT) Makes Recommendations to IRS Officials

On June 7, the Advisory Committee on Tax Exempt and Government Entities (ACT) met with IRS officials in Washington, D.C. for ACT's fifth public meeting. ACT members made recommendations to the IRS on topics including IRS Form 990, tax exempt bonds, and 403(b) retirement savings plans.

IRS Form 990 Revisions
An ACT team set up to review Form 990, led by project leaders Suzanne Ross McDowell of Steptoe & Johnson LLP and Julie Floch of Eisner LLP, concluded that an overhaul of the form is needed to ensure that organizations are in compliance with federal tax law. The team suggested several revisions for a redesigned Form 990, including: the creation of a core form with single-issue schedules; a requirement for all 501(c)(3) organizations, regardless of the gross receipts ceiling, to provide identifying information on a core form; encouragement for all organizations to file electronically; and simplification of Form 990 instructions to accommodate small organizations who prepare returns internally.

IRS Exempt Organizations Division Director Lois Lerner agreed with ACT's recommendations; "they all make sense," she said. However, one area in which the IRS and ACT may "agree to disagree" is regarding the questions required on Form 990 to determine tax compliance.
 

403(b) Retirement Savings Plans
According to IRS proposed regulations, 403(b) retirement savings plans, which can only be offered to employees by certain tax-exempt organizations, must be maintained according to a written plan that contains all the terms and conditions of benefits under the plan. Because a written plan has never before been a tax law requirement, the IRS lacks procedures to assure compliance with this new requirement, said Michael Coyne, ACT project leader.

Coyne's team made the following recommendations to the IRS: the IRS should create a model document to satisfy the IRS requirements; the IRS should expand the scope of existing 401(a) plan programs to accommodate 403(b) arrangements; and the IRS should create a limited determination letter program addressing plan documentation requirements for individually designed 403(b) plan documents.
 

Tax-Exempt Bonds and Audit Information
ACT members called on the IRS's Tax Exempt Bonds (TEB) unit to disclose information regarding compliance problems identified in IRS audits to the entire exempt bond community. Due to confidentiality and privacy rules related to unlawful disclosure of returns, the IRS is reluctant to share findings from its examinations, but ACT member Maxwell D. Solet pushed for public disclosure of preliminary and proposed adverse determination letters or disclosure of letters in redacted form.

The ACT report states that information about IRS audits is delayed, incomplete and distorted. The result of the misinformation, said Solet, can include "new transactions that repeat old mistakes, new transactions that are less beneficial because they are structured to avoid potential problems whose exact nature cannot be understood, inaccurate pricing of audited bonds in the secondary market, and in valuations by institutional holders."

TEB Acting Director Clifford Gannett said his office posts information on its website on compliance problems identified through audits and that TEB will continue to explore ways to disseminate information on compliance problems uncovered by examinations. Gannett also said that TEB is taking the recommendation that the IRS seek legislative consideration of ways to amend the rules to allow the IRS to disclose adverse examination letters.

The Exempt Organization Advisory is a general summary of the law and is not intended as specific legal advice for any organization.

Internal Revenue Service - Circular 230 Disclosure:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

Questions and comments about the Exempt Organizations Advisory are always welcome and should be sent to bstone@steptoe.com.