At the beginning of each fiscal year, the IRS releases guidance on its compliance priorities for tax-exempt and government entities (TE/GE) and explains how those priorities align with the agency’s strategic goals. This year, the IRS has streamlined its usual annual long letter approach into a short two-page letter and promised to provide quarterly updates on its compliance priorities; an effort to more accurately reflect the fluid nature of IRS operations and shifting compliance priorities throughout the year.
What does this mean for nonprofits in 2021 and beyond?
1. Nonprofits Should Be Prepared For an Increased Focus on Compliance Activities
Among the agency’s internal priorities are improving its operational efficiencies, developing its workforce, and leveraging its technology and data analytics capabilities. The agency will also strive to make more efforts at better serving taxpayers (we can only hope!) and to proactively communicate with stakeholders.
Most notably (and most directly relevant to exempt entities), the IRS has promised to strengthen its compliance activities for tax-exempt and government entities. What types of things will they be focused on? Per the IRS:
- IRS collaboration on “existing and emerging issues,” like “syndicated conservation easements and abusive charitable remainder annuity trusts.”
- Larger scrutiny of the “global high wealth arena,” including private foundations, retirement plans of closely-held businesses, and employee stock ownership plans.
- Utilizing enhanced techniques to investigate fraud and institute civil and criminal penalties.
Of course, this is not an exhaustive list. And priorities may shift over time.
2. Nonprofits Need to Continuously Monitor Changing IRS Priorities
Because of the IRS’s new approach in making more frequent adjustments (to be reflected in the promised quarterly updates) to its compliance priorities, nonprofits need to remain diligent in staying up to date with new developments.
In addition, we can expect staff changes and shifting priorities that reflect the new administration’s tax and charitable giving concerns to influence IRS actions moving forward.
In the meantime, now is a good time to make sure your nonprofit’s internal policies and procedures are sufficiently designed to ensure a favorable outcome in the event of an IRS compliance examination or audit.
We also recommend periodically conducting internal audits and legal compliance checks. Finally, keep clear board and board committee minutes documenting board decisions.
A nonprofit that anticipates and addresses compliance issues will find an IRS audit to be a much less stressful, less threatening, and less expensive experience. You can read more about IRS audits and compliance checks of tax-exempt entities here.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.