AHLA. J. Practicing before IRS Exempt Organizations in 2014 What the EO Reorganization Means for You

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1 AHLA J. Practicing before IRS Exempt Organizations in 2014 What the EO Reorganization Means for You Eve Borenstein Borenstein and McVeigh Law Office LLC Minneapolic, MN Stephen M. Clarke Ernst & Young LLP Washington, DC T.J. Sullivan Drinker Biddle & Reath LLP Washington, DC Tax Issues for Health Care Organizations October 19-21, 2014

2 PRACTICING BEFORE THE IRS IN 2014 WHAT THE EO REORGANIZATION MEANS FOR YOU October 19 21, 2014 Eve Borenstein Borenstein & McVeigh Law Office Minneapolis, MN (612) Stephen M. Clarke Ernst & Young LLP Washington, DC T. J. Sullivan Drinker, Biddle & Reath LLP Washington, DC (202) The Beginning (of the End?) May 10, 2013, was a fateful day... Lois Lerner takes planted question at ABA Tax Section Exempt Organizations Committee meeting in attempt to get ahead of upcoming TIGTA report within six weeks, we lost: then IRS Acting Commissioner Steve Miller TE/GE Director Joseph Grant EO Director Lois Lerner Director of EO Rulings & Agreement ( R&A ) Holly Paz 2

3 IRS TE/GE Environment Budget pressures Staffing reductions Retirement brain drain New ACA guidance responsibilities Automatic revocations for 990 nonfilers Reapply Uptick in (c)(4) political activity and targeting scandal Resource drain from 1023s and general EO guidance 3 An In process Log jam 1/1/2014, 70,000 exemption applications had been pending for at least one year (this was >1/3 of all applications then in inventory ) Resulted in part from 2006 law yielding June 2011 and forward auto revocations : number of revoked entities started out (those who missed filings) at 225,000/380,000 (Jun/Nov 2011) Fast forward three years total number now over 500k (Aug 2014 = approximately 580,000) ~15% of revoked entities still there and they have yielded approximately 55,000 reinstatement 1023s or 1024s so far! 4

4 Grew and Grew Over Time Budget Cuts: EO Division staffing has dropped over time. Highest number of individuals employed in EO Division in last 10 years was 900; in 2013 number was down to just above 800 EO Division staff was responsible for handling: Million+ Form 990 series returns and notices Exemption applications, classification requests, and other determinations requests Examinations Guidance e.g., ACA and PPA ongoing regulations and implementation (PPA brought 509(a)(3) AND automatic revocation) 5 To Overwhelming Proportion Then Came Citizens United and (c)(4) Political Activities Backlog grew while Determinations in Cincinnati and EO Technical in Washington figured out how to respond And Congress got TIGTA involved 6

5 Example of EO Frustration Where s my 1023? Multispecialty clinic decided to reorganize, form new system parent Newco files substantially complete Form 1023 in Covington, March 1, 2013 IRS was holding all hospital 1023 s in National Office pending CHNA guidance When Newco filed in March 2013, IRS was assigning cases from April Where is my 1023? Newco requested expedited handling of Form 1023 denied Newco s Congressman requested expedited handling denied Newco filed 7428 petition in Tax Court Dec. 2, 2013 IRS served Dec answer was due Feb. 3 IRS attorney called Jan settled 8

6 Outcome Stipulated decision in US Tax Court (published declaration that Newco is described in Sec. 501(c)(3) and 509(a)(3)) Determination letter from IRS saying the same thing Resolution 9-12 mos earlier than otherwise 9 IRS TE/GE Environment

7 New Leadership Initial transition personnel in 2013 have been replaced by permanent executives (rather than acting ) New IRS Commissioner (2013): John Koskinen Comm r TE/GE: Sunita Lough Deputy Comm r TE/GE: Donna Hansberry Director EO Division: Tammy Ripperda [Cincinnati] Director EO R&A: Matthew Weir [Cincinnati] Director EO Exams position vacant since Feb 2014: Sept 2014 announcement of Margaret Von Lienen [Dallas] NONE except Sunita Lough (and none of the prior serving Actings ) has prior EO management experience 11 Changes to Speed Up 1023s Fall 2013 roll out of interactive 1023 (the i1023 ). Assists applicant in preparing its Form 1023, print out, mail it. Great prompts very educational. July 1, 2014 (via Rev. Proc ) roll out of NEW FORM 1023 EZ for small charities Applicant pool here (gross receipts NOT >$50k past/future 3 year blocks AND net assets NOT >$250k) can apply with much less detail IRS justifies as low risk and too time consuming to handle via paper and reading. Application is submitted on line 9/18/2014: IRS noted 7,000 had already been approved 12

8 New Form 1023 EZ $400 fee Must be done on line (at: since fee goes thru that site) Users told to print the Form s instructions (10 pages NOT INCLUDING 7 pages of eligibility criteria that cover 26 points in a Q&A framework) Automatic revocation reinstatements being sought under streamlined retroactive reinstatement procedures OR those only seeking reinstatement as of date of reinstatement application filing can use this Form! No hospitals EZ s Six Attestations 1 That entity really exists (i.e., for NP corporation, that you have FILED Articles of Incorporation) 2 That organizing document limits purposes to 501(c)(3) ones 3 That organizing document does not empower operations in favor of activities NOT in furtherance of 501(c)(3) purposes, other than insubstantially 4 That organizing document has proper dissolution clause, i.e., one dedicating assets to 501(c)(3) purposes 5 Enumerating which of 8 purposes (that 501(c)(3)s must be organized and operated exclusively to further ) are noted in organizing document 6 For non PFs: Stating which public support test entity meets [note: certain OTHER non PFs, for example: schools, cannot use this Form] 14

9 New Executives Intend to... Verify that new procedures work by sampling Have application of exam resources be datadriven; will employ analytics to direct scarce resources Sampling will be used in review of those with streamlined exemption awards (the c4/c3 backlog entities, 1023 EZ users, and also for desk and correspondence exams) EO Director states that EOCA (in Ogden, UT) will do vast majority of compliance and office audit exams 15 IRS Exempt Organizations Division Realignment 16

10 Introduction On March 20, the IRS TE/GE Exempt Organizations and Employee Plans divisions in Washington, DC announced a major realignment. This realignment will affect: Applications for exemption Private letter rulings (PLRs) Technical advice memoranda (TAMs) and other technical advice Most formal IRS guidance affecting exempt organizations (including private foundations), such as: Proposed and final regulations Revenue rulings and procedures Notices Announcements 17 Overview of realignment Transferring responsibility from IRS TE/GE Exempt Orgs Guidance and Technical groups in Washington, DC (EO DC) and TE/GE Employee Plans (EP DC) to: IRS Associate Chief Counsel (TE/GE) exempt organizations and employee plans branches in Washington, DC (EO Counsel) for: Review of applications for exemption Guidance PLRs TAMs Revenue rulings and procedures Regulations Notices and announcements 18

11 Overview of realignment Greatly shrunken TE/GE EO HQ will be based in Cincinnati EO Exam headquarters remains in Dallas TEB unchanged Timing of realignment: originally intended by October 1, 2014 (but experiencing some delay) 19 Transfer of guidance to EO Counsel Currently EO DC and EP DC initiate formal EO guidance. This includes revenue rulings, PLR requests, notices, announcements. EO DC typically consults with EO Counsel and with Treasury. PLR requester may or may not be aware of EO Counsel involvement and may or may not have opportunity to meet with EO Counsel. Regulations projects are initiated by Treasury. This includes proposed, temporary and final regulations. EO DC, EP DC and EO Counsel informally consult with Treasury. Realignment Formal EO guidance will be transferred to EO Counsel. Only one IRS office will be responsible for issuing formal EO guidance. Some EO DC and EP DC tax law specialists will shift to EO Counsel. Counsel will have three EO branches. 20

12 Transfer of guidance to EO Counsel Implications Should streamline, expedite issuance of formal EO/EP guidance. Comments IRS issues very little formal guidance to exempt organizations EO related guidance that IRS issues likely will be processed more expeditiously, because of fewer layers of review involved and tighter EO Counsel timelines EO Guidance group in EO DC likely will cease to exist, as personnel will be moved to EO Counsel EO Technical group in EO DC likely will continue to exist, but with significantly diminished responsibility 21 Elimination of exemption application review by EO DC Currently All applications for IRS recognition of exemption are submitted to the EO Determinations office in Cincinnati, OH. Most applications are reviewed by EO Determinations agents in Cincinnati, or Determinations centers with higher grade agents (e.g., El Monte, CA). But some exemption applications historically have been referred to EO DC. These are: Unusual, complex applications involving unique issues or important tax policy questions Applications involving certain types of organizations or issues. For example: Health maintenance organizations (HMOs) Section 501(m) (commercial type insurance) Hospitals participating in joint ventures with unrelated for profit organizations Foreign healthcare organizations 22

13 Elimination of exemption application review by EO DC Realignment The EO DC application review function will be eliminated. Thus, all exemption applications will be reviewed by EO Determinations agents in Cincinnati (or elsewhere). Fewer exemption applications being referred to EO DC. On April 8, IRS announced that only applications for exemption from hospitals subject to section 501(r) requirements and certain organizations applying for recognition of 501(c)(4) status will be forwarded from EO Determinations to EO DC. Implications The net effect of this realignment, at least initially, is likely to be slower IRS review of large, complex applications. 23 Elimination of exemption application review by EO DC Comments Instead of forming a new 501(c)(3) that would need to apply for IRS recognition of exemption, consider: Using an existing Sec. 501(c)(3) or Sec. 501(c)(4) organization to avoid the exemption application process. Forming a non 501(c)(3) exempt organization that would not be required to apply for IRS recognition of exemption If a parent organization has received a group exemption, becoming a subordinate of the parent. Small organizations seeking recognition of exemption should consider filing Form 1023 EZ 24

14 Exemption Applicants Now Can Go To Appeals Applicants receiving proposed adverse determination can request review by IRS Office of Appeals Internal Revenue Manual Associate Chief Counsel (TE/GE)/Division Counsel to Divide Associate Chief Counsel TE/GE (National Office) attorneys will report to Deputy Chief Counsel (Technical) Division Counsel TE/GE (Field) attorneys assisting with examinations and Tax Court litigation will report to Deputy Chief Counsel (Operations) 26

15 Comments on Realignment Realignment is driven by need to operate EO/EP more efficiently, and to make processing of applications and guidance consistent across IRS operating divisions Will bring EO/EP into alignment with other 3 IRS operating divisions, all of whom already use Counsel for their guidance and legal work. Approximately EO/EP tax law specialists were expected to move to EO Counsel, though this number may be dropping IRS is negotiating details involving transfer with unions for both TE/GE employees and Chief Counsel employees. Unclear what work, if any, will remain in EO Technical Form 990 revisions? Compliance projects? Support for customer education and outreach? Technical support for EO Determinations and EO Exam? Remains to be seen how accessible and responsive to public EO Counsel will be 27 Other Questions on Realignment Will all EO Technical inventory be transferred back to EO Determinations or go to Counsel? Will streamlined procedures eliminate backlog of exemption applications? Will consistency suffer (or be enhanced)? Will taxpayers know when Counsel assistance is obtained by EO Determinations? Will taxpayers be able to get cases transferred to Counsel or get Counsel involved? Will PLRs be timely and practical again? Will compliance sampling and/or exam of those who garner streamlined exemption award occur? If so, when? 28

16 Significant Changes to Form 990 for Form 990, Schedule A Significant Changes for Tax Year

17 2014 Form 990 Schedule A Public Charity Status and Public Support Schedule A s significant revisions address supporting organizations (SOs). Schedule A will ask more questions and request more information about SOs. Extensive changes to the Form 990 Instructions explain these changes Form 990 Schedule A Public Charity Status and Public Support Part I, Question 11 will be reorganized, and ask: Is organization a Sec. 509(a)(3) SO? If so, what type is it (Type I, Type II, Type III functionally integrated, or Type III non functionally integrated)? Has it received a written determination of its SO type from IRS? Names, EINs, and public charity types of supported organizations? Are supported organizations listed in SO s governing document? Amount of monetary support provided to supported organizations? Amount of other support provided to supported orgs? (NEW) Questions on disqualified persons contributions and control, notification to supported organizations, and foreign supported organizations will be moved from Part I to new Part IV. 32

18 2014 Form 990 Schedule A New Part IV, Sec. A New Part/Questions Are all the supported organizations listed by name in the SO s governing documents? Did the SO have any supported organizations that do not have an IRS determination under Sec. 509(a)(1) or (a)(2)? Did the SO have a supported organization described in Sec. 501(c)(4), 501(c)(5), or 501(c)(6)? Was any supported org not organized in the U.S.? If yes, and if SO is Type I or Type II: Did the SO have ultimate control and discretion in deciding whether to make grants to the foreign supported organization? Did the SO support any foreign supported organization that does not have an IRS determination under Sec. 501(c)(3) and Sec. 509(a)(1) or 509(a)(2)? Form 990 Schedule A New Part IV, Sec. A New Questions (cont d) Did the SO add, substitute, or remove any supported organizations during the year? Did the SO provide support to anyone other than its supported organizations, individuals in their charitable class, or other SOs that support any of the supported organizations? Did SO provide a grant, loan, compensation, or similar payment to a substantial contributor, family member or 35% controlled entity thereof, or another disqualified person? Did SO have any excess business holdings during the year? 34

19 2014 Form 990 Schedule A New Part IV, Sections B D Part IV, Sec. B Type I SOs Did supported organization(s) have power to regularly appoint or elect at least a majority of the SO s directors or trustees? Did SO operate for the benefit of any supported organization other than that which supervised or controlled the SO? Part IV, Sec. C Type II SOs Were a majority of the SO s directors/trustees also a majority of the directors/trustees of each of the supported organizations? Part IV, Sec. D All Type III SOs Did the SO meet its notification requirement to its supported organizations? Was there a close and continuous working relationship? How did the supported organization have a significant voice in SO s investment policies and in directing use of SO s income/assets? Form 990 Schedule A New Part IV, Sec. E Type III Functionally Integrated SOs How did the SO satisfy the integral part test? Satisfied the activities test SO is a parent of each of its supported organizations SO supported a governmental entity (see Notice ) If activities test box is checked Did substantially all of SO s activities directly further supported organization(s) exempt purposes? But for the SO s involvement, would one or more of the supported organizations have engaged in the activities? If parent box is checked Did SO have power to regularly appoint or elect a majority of the supported organizations officers, directors, or trustees? Did SO exercise a substantial degree of direction over the policies, programs, and activities of each of its supported organizations? 36

20 2014 Form 990 Schedule A New Part V Type III Non Functionally Integrated SOs Sec. A: Adjusted net income Sec. B: Minimum asset amount Sec. C: Distributable amount Sec. D: Distributions Sec. E: Distribution allocations Similar to distribution requirement provisions in Form 990 PF 37 Form 990, Schedule H Significant Changes for Tax Year

21 2014 Schedule H updates Draft Drafts available at dft/f990sh dft.pdf dft/i990sh dft.pdf No significant changes to Parts I, II, III and IV Part V, Section A If Group Return, asks for name and EIN of the subordinate hospital Part V, Section B Changes appear to reflect some of final 501(r) regulations Final 501(r) regulations are expected to be released by year end or early Schedule H updates Draft (Continued) Part V, Section B (Continued) Questions 1 & 2 added about timing of becoming a hospital facility Question 6b added regarding assistance with CHNA from organizations other than hospitals Question 7c Was paper copy of CHNA available for free Questions 8 11 replace 2013 questions 6 & 7 More detail about the Implementation strategy, year of adoption, website and the addressing significant needs Question 13 replaces 2013 questions Removed State regulation and Medicaid/medicare as listed criteria for establishing financial assistance eligibility Underinsurance status replaced Uninsured discount 40

22 2014 Schedule H updates Draft (Continued) Part V, Section B (Continued) Question 15 (how FAP explains method for applying for FA) Adds new checkboxes re: whether the FAP or FAP application form described required information and documentation for a FAP application, and who applicants can contact regarding the FAP application process Question 16 (formerly question 14; how FAP is publicized) Requests URL for FAP Requests URL for FAP Application and plain language version Was it available without charge Were members of community most likely to need assistance notified Question 17 added reference to an authorized party s ability to take billing and collection actions Schedule H updates Draft Part V, Section B (Continued) Questions 18 and 19 modified list of actions permitted and taken before the hospital facility made reasonable efforts to determine eligibility for financial assistance collapsed 3 boxes for lawsuits, liens, and body attachments into a single box: actions that require a legal and judicial process added selling individual s debt to another party Added None or these actions or other similar action were permitted Question 20 about initiating collection efforts modified Made it clear to answer in spite of responses to 18 Added None of these efforts were made 42

23 Form 990, Schedule L Instructions Significant Changes for Tax Year Schedule L instructions changes (draft) 2014 Schedule L instructions (draft dated August 4, 2014) Purpose of changes Increase consistency Decrease confusion Decrease burden Key change: more uniform definition of interested persons for Parts II IV 44

24 Schedule L instructions changes (draft) Interested person definition: For Schedule L, Part I no change Disqualified persons under Code Section 4958 For Schedule L, Parts II IV (expansion): The creator or founder of the organization And his or her family members Substantial contributors reported in Schedule B (expanded to Parts II and IV) And their family members 35% controlled entities of any of the above (expanded to Part II) 45 Schedule L instructions changes (draft) Interested person for Sch. L, Pts II IV (contraction) Removed (from Part II): highest compensated employees and 4958 DPs Removed (from Part II): contributing employers and sponsoring organizations of VEBAs Removed (from Part IV): entity of which a current or former officer, director, trustee, or key employee, or any family member thereof, was serving as a Director, officer, or trustee; or Partner, member, or shareholder with a direct or indirect ownership interest in a professional corporation or entity treated as a publicly traded partnership, in excess of 5% Removed (from Part IV) non stock organizations more than 35% controlled by other interested persons 46

Schedule L instructions changes (draft) Other 2014 Schedule L instructions changes (draft): Uniform reasonable efforts definition that applies to all parts (not just Parts III and IV) Part I (excess

25 Schedule L instructions changes (draft) Other 2014 Schedule L instructions changes (draft): Uniform reasonable efforts definition that applies to all parts (not just Parts III and IV) Part I (excess benefit transactions): identify in Part V organization manager(s), if any, that knowingly participated in the excess benefit transaction Part II (loans): clarification that split dollar life insurance arrangements described in Regs are loans reportable in Part II Part IV (business transactions): new reporting exception for transactions with publicly traded corporations in the ordinary course of business, on the same terms as are generally offered to the public 47 48

Representing and Managing Tax- Exempt Organizations

Georgetown Law s 32 nd Annual Representing and Managing Tax- Exempt Organizations Form 990 and 990-T Issues April 23, 2015 D. Greg Goller Tax Managing Director and Area Practice Leader KPMG LLP Exempt