March 01, 2000
Examination of Tax-Exempt Organizations
WASHINGTON - The mission of the Tax Exempt and Government Entities Division (TE/GE) of the
Internal Revenue Service is: To provide Tax Exempt and Government Entities
customers top quality service by helping them understand and comply with
applicable tax laws and to protect the public interest by applying the tax law with
integrity and fairness to all.
As part of the overall modernization of the IRS, TE/GE became operational in
December 1999. TE/GE is the successor organization to the former Employee
Plans and Exempt Organizations (EP/EO) function, which was established in the
mid-1970s to regulate with regard to employee plans and exempt organizations.
TE/GE focuses on the needs and tax law responsibilities of three distinct
customer groups: Employee Plans, Exempt Organizations, and Government
Entities. The Exempt Organizations (EO) division addresses the particular
needs and issues relating to tax law and procedures governing the tax-exempt
community, with emphasis on customer education and outreach, determinations
and rulings, and examinations programs.
Because TE/GE customers are generally exempt from taxes, TE/GE – including
EO focuses on enhancing and encouraging compliance with the tax law, rather
than collecting tax revenues. Thus, education and up-front compliance
programs are vital to accomplishing the TE/GE mission. When a tax-exempt
organization is examined, EO tries to resolve any deficiencies so the
organization can correct past problems and move forward in a way that ensures
its future activities accomplish exempt purposes.
A Profile of Exempt Organizations Customers
More than 1.5 million tax-exempt organizations, including about 350,000
churches or other religious organizations, control more than $1.3 trillion in
assets. Of these organizations, about 700,000 are exempt under Internal
Revenue Code section 501(c)(3) charities, philanthropic groups, colleges and universities, etc.
About 125,000 are exempt under section 501(c)(4) as social welfare
On Approach to Compliance
Two Major xempt Organizations Compliance Programs.The IRS seeks to
ensure compliance with the various requirements for tax exemption in the
Internal Revenue Code through two primary compliance programs: the EO
determination letter program and the EO examination program. In addition to
these, EO will focus on enhanced communication and outreach and the
establishment of voluntary compliance programs, as part of the overall
reorganization of TE/GE.
Under the EO determination letter program , an EO customer applies for a
ruling from the IRS as to its status as a tax-exempt organization.
Approximately 200 EO field employees work in the determination letter
program, which is centralized in Cincinnati. The determination letter program
allows the IRS to perform an up-front compliance check of an organization
and at the same time educate the customer as to its rights and
responsibilities. The IRS receives more than 80,000 EO applications a year.
The EO examination program operates from six area offices throughout the
country, aligned with the customer base. About 400 EO employees are
dedicated to exempt organizations examinations. In 1999, the IRS examined
about 9,000 returns.
Selection of Organizations for Examination
A key feature of the new TE/GE organization will be a greater consistency in the
EO examination process. When initial organizational implementation is
complete in April 2000, the authority to begin an examination will rest with career
employees located in the six EO area offices:
Los Angeles, in the Pacific Coast Area
St. Paul, in the Central Mountain Area
Chicago, in the Great Lakes Area
Atlanta, in the Gulf Coast Area
Baltimore, in the Mid-Atlantic Area
Brooklyn, in the Northeast Area
Under this new structure, the employees responsible for examination selection
report to an office director under the Director, Exempt Organizations
Examinations, located in Dallas. The centralization of the examination selection
process in Dallas is a cornerstone of the reorganization of TE/GE. The
centralization will enhance consistency and accountability and allow for greater
expertise to be built up in the examination selection staff.
Role of the Exempt Organizations Headquarters Office
The office of the Director, Exempt Organizations, located in Washington, has
overall management responsibility, including program management, but does not
initiate examinations. Program management is exercised by issuing an annual
work plan containing, among other items, areas of emphasis for the year’s
examination program and the amount of time that field offices’ exempt
organization examinations program should spend on areas of emphasis.
For example, the Fiscal Year 2000 work plan calls for the field offices to spend
at least 20% of examination time on large case audits under the Coordinated
Examination Program, and 10-15% of examination time on gaming activities of
The work plan also calls for: work on customer outreach,taking specific nationwide samples, and developing local projects (that is, statistically valid samples of local exempt
organizations on a given issue to verify whether compliance issues exist).
The work plan recognizes that the field will also work on general casework,
including: claims for refund, cases involving emerging issues outlined in the
work plan (for example, organizations involved in car donation activities), and
cases arising from the referral to the IRS of “information items.
Treatment of Information Items Concerning Exempt Organizations
The IRS periodically receives information items about exempt organizations from
various sources. An information item is any communication received from a
source outside the IRS containing (or attaching) allegations of an organization’s
potential noncompliance with a tax law. Information items also include referrals
of items from other parts of the IRS, including other parts of TE/GE. For
example, an application for exemption occasionally will result in a referral of an
entity to a field office to consider whether a future examination is warranted.
The IRS receives information items from various sources, including the general
public, members of Congress and other governmental agencies. Sometimes the
IRS receives multiple referrals of the same item from different sources. For
example, concerned individuals frequently forward copies of newspaper articles
about a particular organization. Members of Congress may also forward the
same article, either because they themselves are concerned or because they
received it from a constituent.
Required Procedures For Handling Information Items
The IRS follows specific procedures for handling information items. (These are
contained in Chapter 2 of Internal Revenue Manual (IRM) at 7.5.1 and are
currently being reviewed and revised as part of the IRS reorganization.) The
most recent changes, in December 1998 and June 1999, were made to
strengthen the assurance that TE/GE operates in an unbiased and appropriate
manner and that its compliance program actions are not improperly influenced
by outside intervention. Additional revisions to the information item portion of
the IRM will be completed shortly.
Several IRS offices, including Headquarters, may receive information items. In
every case, the receiving office forwards the items to the field office with
jurisdiction over the particular entity for whatever action the field office deems
appropriate. As noted before, when the organizational implementation of TE/GE
is complete, the examination selection process will be centralized in Dallas.
IRS procedures require that the field office must act on information items
promptly (within 90 days of receipt), and must make a determination of
whether the item indicates examination potential, no potential or the need
for more information.
Examination potential is determined by career employees, generally by
classifiers who are experienced revenue agents. In some cases, they
refer information items to a committee composed of managers and
experienced agents. Information items in this category include: cases
involving churches, or political or lobbying activity. As a safeguard to
protect the public interest, the committee approach is also used when members of Congress or the Executive Branch make allegations (rather
than just forwarding information from constituents, the press or the
public), and whenever the classifier believes the committee approach is
desirable for reasons of fairness or equity. Note: Certain referrals from
the Executive Branch are now proscribed under section 1105 of the IRS
Restructuring and Reform Act of 1998 (Internal Revenue Code section
Under procedures to be implemented soon, whether the committee or an
agent is evaluating the information item, a “reasonable belief” standard is
used. This standard requires that the information item, considered fairly
and in light of other reliable information, indicates that a violation of
relevant tax law may have occurred, or appears likely to lead to the
discovery of a violation upon examination.
Current procedures implemented in 1998 require that all information items
must be retained, whether or not they result in an examination. There is
also a requirement that there be documentation outlining the receipt of
the information item and the rationale for its disposition.
Data on Number of Examinations Resulting from Information Items
While information items are an important source of leads for the IRS,
examinations triggered by these items constitute only a small part of the
workload. Closures of these exams make up less than 10 percent of all EO
examination closures. This percentage includes all information items, including
those from other parts of the IRS.
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