IRS's TE/GE Advisory Committee Releases 2016 Recommendations

Susan Bernstein, New York, New York

Susan Bernstein is special counsel in the New York office of Schulte Roth & Zabel LLP, where she has been advising employers and plan sponsors on ERISA, employee benefits and executive compensation for over 20 years. Bernstein has experience working with qualified plans, nonqualified plans, 457 plans and 403(b) plans, as well as health and welfare plans. Bernstein is co-chair of the Employee Benefit and Compensation Committee for the New York State Bar Association and serves on the Executive Compensation and Benefits Committee of the New York City Bar Association. Bernstein has written numerous articles on employee benefit plan issues in addition to being a frequent speaker on employee benefit topics. Bernstein was named one of Employee Benefit Adviser's Most Influential Women in Benefit Advising and was recognized by the New York State Bar Association as an Empire State Counsel Honoree and by WHEDco with a Pro Bono Leadership Award. Bernstein holds a J.D. from the Benjamin N. Cardozo School of Law, received her B.A. from the University of Pennsylvania and is a member of the New York Bar.

Judith Boyette, San Francisco, California

Judith Boyette is a partner in Hanson Bridgett LLP, a San Francisco law firm, and is the senior partner in the firm's Employee Benefits Group. Prior to joining her law firm, Boyette spent more than 10 years at the University of California as the Associate Vice President of Human Resources and Employee Benefits. Boyette's clients include single employer and multi-employer plans, 403(b) plans, church plans and governmental plans. Boyette received a J.D. from the Hastings College of the Law and is a member of the California Bar.

Alison Cohen, Atlanta, Georgia

Alison Cohen is a senior associate with the Ferenczy Benefits Law Center assisting clients with many different issues relating to qualified retirement plans and focusing her practice largely on Employee Plans Compliance Resolution System (EPCRS) corrections. Cohen has 18 years of experience working with retirement plans. From plan operations to presentations and sales, to resolution of complex legal issues, Cohen has broad experience and knowledge of the real world of retirement plan law. Cohen received a B.A. in Political Science from Rice University, Houston and a J.D. from the University of San Diego School of Law, San Diego.

Christopher W. Shankle, Shreveport, Louisiana

Chris Shankle is a senior vice president with Argent Trust Company in Shreveport, Louisiana. Shankle assists his clients with a broad array of employee benefits issues, including retirement plan governance and fiduciary matters, plan design, testing and disclosure matters. Throughout his career, Shankle has been involved in numerous outreach initiatives on employee benefits issues and is a frequent speaker on the subject. Shankle has led the American Institute of Certified Public Accountants technical resource panel on employee benefit plans monitoring legislative and regulatory activity. Shankle has more than 26 years of experience in the employee benefit industry and is a member of the American Society of Pension Professionals and Actuaries, American Institute of Certified Public Accountants, Society of Louisiana Certified Public Accountants and Mississippi Society of Certified Public Accountants. Shankle received a degree from the University of Mississippi's school of Accounting and he is a licensed CPA in Mississippi and Louisiana.

Stuart A. Sirkin, Washington, D.C.

Stuart Sirkin is Vice President and Deputy Practice Leader, National Retirement Compliance with The Segal Company. His prior positions include senior positions in the pension offices of the IRS, the Department of Labor and the Pension Benefit Guaranty Corporation. Sirkin also was on the staff of the Senate Finance Committee, as well as with consulting and law firms. Sirkin is active in the American Bar Association employee benefit committees and is a charter member of the American College of Employee Benefits Counsel. Sirkin received a B.A. in Economics from George Washington University, Washington, D.C.; a Masters in Labor Economics from Cornell University, Ithaca, N.Y.; a J.D. from Columbia University Law School, New York and a Masters in Tax Law from the Georgetown University Law Center, Washington, D.C.

Matthew I. Whitehorn, Philadelphia, Pennsylvania

Matt Whitehorn is a partner in the Tax Department and chair of the Employee Benefits Group at Dilworth Paxson LLP in Philadelphia, Pennsylvania. Whitehorn has more than 25 years' experience working with qualified and non-qualified plans including 457(b) and (f) plans, and 403(b) plans. Whitehorn co-chairs the Philadelphia Bar Association's Employee Benefits Committee. Whitehorn has a B.A./M.A. in History from The Johns Hopkins University, a J.D. from Villanova University School of Law and an L.L.M. in Taxation from Temple University School of Law. He is an adjunct faculty member in the Tax L.L.M. program at the Temple University School of Law.

EXEMPT ORGANIZATIONS

Natasha Cavanaugh, Seattle, Washington

Natasha Cavanaugh is a tax attorney for the Bill & Melinda Gates Foundation. Prior to joining the Gates Foundation, Cavanaugh served as lead tax attorney at a major public research university where she managed complex tax matters, including the university's medical resident FICA tax refund claim. When in private practice, Cavanaugh represented educational organizations, museums, private foundations and other tax-exempt organizations. Cavanaugh has a J.D., University of Virginia, M.A., Sociology and a B.A., Economics, Stanford University.

Virginia Gross, Kansas City, Missouri

Virginia Gross is a shareholder with Polsinelli PC concentrating her practice on nonprofit and tax-exempt organizations law. Gross counsels nonprofit organizations on all aspects of tax-exempt organizations law, such as the formation, qualification, activities and business ventures of nonprofit organizations. Gross advises nonprofit clients on issues regarding their operations, fundraising practices, grant-making, unrelated business income planning, joint venturing and partnering, and the use of supporting organizations and for-profit subsidiaries. Clients include charitable and educational organizations, private foundations, healthcare entities, associations, supporting organizations, social welfare organizations and social clubs. Gross works with numerous nonprofit boards of directors and trustees regarding governance and best practices matters and is a frequent writer and speaker on nonprofit law topics. Gross earned a J.D. from the University of Texas and B.S. from Texas A&M University and is listed in Best Lawyers in America for Nonprofit Organizations/Charities Law for 2008-2015.

Cindy Lott, New York, New York

Cindy M. Lott serves as Interim Academic Program Director for Nonprofit Management Programs at Columbia University's School of Professional Studies. Prior to her current position, Lott served as Executive Director and Senior Counsel to the National State Attorneys General Program at Columbia Law School, and within that Program was the developer and lead counsel to the Charities Regulation and Oversight Project from 2006-2015. Currently, Lott is also a Senior Fellow at the Center on Nonprofits and Philanthropy at the Urban Institute, working in conjunction with the Institute's Tax Policy and Charities project. Lott develops and moderates a series of national convenings on state and federal regulation of the charitable sector and is engaged in research regarding regulatory capacity and enforcement at the state level. Lott is a 1993 graduate of the Yale Law School and clerked for the United States Court of Appeals, First Circuit. Lott is admitted to practice in the District of Columbia, Indiana and Massachusetts.

Amy Coates Madsen, Baltimore, Maryland

Amy Coates Madsen is the director of the Standards for Excellence Institute, a program of the Maryland Association of Nonprofit Organizations where she has served for more than 20 years. Madsen specializes in nonprofit organization management and governance issues and works with organizations of all sizes and mission areas. Madsen serves as a frequent trainer and writer in the areas of nonprofit best practices, board conduct, openness/transparency, program evaluation, program replication, fundraising ethics and regulation, and nonprofit management. Madsen received her B.A. degree from Virginia Tech, and her M.A. in Policy Studies from Johns Hopkins University.

David Moja, Orlando, Florida

David Moja is a partner and National Director of Not-for-Profit Tax Services at Capin Crouse LLP. With 30 years of accounting experience, Moja has worked both inside not-for-profit organizations and for public accounting firms. Moja has extensive experience serving colleges and universities, associations, global missions organizations, churches, chambers of commerce, children's advocacy groups and environmental organizations. Moja has spoken extensively on tax-exempt organization issues to a wide variety of groups and conducts regular webcasts on exempt organizations issues. Moja is a licensed CPA in Florida, Georgia and Colorado and received a B.S. in Accounting from Florida State University, Tallahassee.

Andrew Watt, Arlington, Virginia

Andrew Watt is the president and CEO of the Association of Fundraising Professionals based in Arlington, Virginia, representing individuals and organizations that raise more than $100 billion in charitable contributions every year around the world for countless causes. Named president in 2011, Watt has worked for the nonprofit community since the early 1990s. Watt serves on the board of directors for AFP, the AFP Foundation for Philanthropy and the AFP Foundation for Philanthropy-Canada. From 1993 to 2005, Watt was employed by a similar organization in Britain. Watt has international experience, fundraising expertise and experience with small/medium nonprofits. Watt has served on the Public Policy Committee of Independent Sector since 2012. Watt has served as both a volunteer and board member of many nonprofit organizations. Watt sits on the board of the National Philanthropic Trust -- UK and is currently chair of the American Friends of Winchester College. Watt was an adjunct faculty member of St. Mary's University of Minnesota from 2007-2012 where he taught on the globalization of philanthropy. Watt received his B.A. at the University of Edinburgh.

GOVERNMENT ENTITIES: FEDERAL, STATE AND LOCAL GOVERNMENTS

David P. Augustine, San Francisco, California

David Augustine is currently serving as Tax Collector in the Office of Treasurer and Tax Collector for the City and County of San Francisco. Augustine oversees 125 employees encompassing four operating sections: Business Tax, Property Tax, Legal and the Bureau of Delinquent Revenue. Augustine has more than 12 years of professional experience, including legal experience in the municipal finance/bond arena, and is an active member of the Government Finance Officers Association and California Association of Treasurers and Tax Collectors. Augustine's office has received several awards for developing new business practices. Augustine received his J.D. from Stanford University Law School in 2002, B.A. from Swarthmore College and a certificate from the Harvard University Kennedy School of Government -- Executive Education.

Dean J. Conder, Denver, Colorado

Dean Conder is the Deputy State Social Security Administrator for the State of Colorado and has more than 15 years of experience working with state and local governments on FICA tax compliance matters and related training. Conder is a member of the National Conference of State Social Security Administrators and serves as its training and succession-planning chairperson. Conder co-authored an article on "Common Errors in State and Local Government FICA and Public Retirement System Compliance," which was published in the Government Finance Review (GFOA) in August 2009. Conder has also served as a state level board member for the state's Section 457 retirement plan. Conder previously served on the IRS Taxpayer Advocacy Panel and is a past president of the National Association of State Social Security Administrators. Conder holds an M.S. degree from the University of Denver College of Law.

Vandee V. DeVore, Jefferson City, Missouri

Vandee DeVore is the Deputy State Social Security Administrator for the State of Missouri and has more than 27 years of government experience, including experience as an accountant, tax auditor, payroll manager and Assistant Director, Division of Accounting. As the Assistant Director, Division of Accounting, DeVore oversaw and managed statewide payroll and policy, including tax withholding, reporting and reconciliations, Social Security administration and statewide employee benefit budget preparation. As the Deputy State Social Security Administrator, DeVore acts for the state with respect to its responsibilities for maintaining and administering the provisions of the state's Section 218 agreement/modifications and the proper application of Social Security and Medicare coverage. DeVore is an active member of the Association of Government Accountants, having served in several roles in the local chapter and the national organization. DeVore currently serves as the past-president on the Executive Committee of the National Conference of State Social Security Administrators. DeVore is also an adjunct instructor of managerial, governmental and non-profit accounting at Columbia College in Missouri. DeVore holds a CGFM and has a B.A. degree in accounting from William Woods College in Missouri and an M.B.A. from Columbia College.

GOVERNMENT ENTITIES: INDIAN TRIBAL GOVERNMENTS

Tino Batt, Fort Hall, Idaho

Tino Batt is an enrolled member and employee of the Shoshone-Bannock Tribes of Fort Hall, Idaho. Batt had served on the Fort Hall Business Council, the governing body of the Shoshone-Bannock Tribes of Idaho. Batt has served in the position as tribal treasurer from 2009 to 2015. In this position, he was involved in monitoring the financial management and accounting practices of all tribal entities operating within the tribal government structure. Batt serves on the Board of Directors for the Native American Bancorporation Co. and volunteers with the local AARP Foundation Tax Aide program and Volunteer Income Tax Assistance (VITA) program on the reservation. In addition, Batt continues to serve on various advisory committees under the Department of Health and Human Services with Administration for Children and Families Tribal Advisory Committee, and the Alternate for the Northwest Region for the Secretary Tribal Advisory Committee. In the past, Batt has represented the Shoshone-Bannock Tribes at the Tribal Interior Budget Council with the Department of Interior. Batt has a B.S. degree in Human Resource/Corporate Training and Development from Idaho State University.

Stefani A. Dalrymple, Fairbanks, Alaska

Stefani Dalrymple is a CPA and owner of Yukon Accounting & Consulting in Fairbanks. For the past 10 years, Dalrymple has worked primarily with the Native Alaskan villages and organizations in rural Alaska to ensure compliance with federal and state tax and accounting requirements. Dalrymple has also served directly as a tribal government employee in the capacities of both Fiscal Officer and Payroll Manager. Dalrymple earned her B.S. degree in Accounting at the University of Alaska Fairbanks.

Marcelino Gomez, Phoenix, Arizona

Marcelino Gomez served as the Assistant Attorney General (Tax and Finance) at the Navajo Nation Department of Justice for 26 years and as an Assistant General Counsel at the Salt River Pima-Maricopa Indian Community. Gomez represented the tribal governments on matters related to federal and state taxes including the risk management, employee benefit and retirement programs. Gomez is now in private practice in Phoenix, Arizona. Gomez received a B.B.A. in Accounting from New Mexico State University and J.D. from the University of Texas School of Law. Gomez is a member of the State Bars of Arizona, New Mexico and Texas, the Navajo Nation Bar Association, the ABA Tax Section and is a USSF Soccer referee and instructor.

GOVERNMENT ENTITIES: TAX EXEMPT BONDS

David Danenfelzer, Austin, Texas

David Danenfelzer is a community development professional committed to advancing the fields of nonprofit management, community planning and public finance. His current employer, Texas State Affordable Housing Corporation, is a statewide nonprofit housing finance corporation. Danenfelzer has helped Texas State Affordable to increase investment in affordable housing, redesigned its multifamily bond finance programs and created the first statewide affordable housing land bank. Danenfelzer is an alumnus of the University of Wisconsin at Madison and received his MSCRP at the University of Texas at Austin.

William Johnson, Dallas, Texas

Bill Johnson is the senior vice president for First Southwest. Johnson is responsible for managing, mentoring and strategic planning for 22 rebate professionals. Client relationship responsibility includes rebate liability planning and implementation of tax changes for tax-exempt bond clients. Johnson is responsible for developing and implementing the current internal arbitrage compliance and maintains a list of arbitrage clients from state and local governments. Johnson earned a B.B.A. in Accounting from Southern Methodist University and an M.S. degree in Accounting from Texas Tech University. Johnson is a member of the AICPA, Texas Society of CPAs and is a licensed CPA in Texas.

Floyd Newton III, Atlanta, Georgia

Floyd Newton III is a partner at King & Spalding in Atlanta in the public finance practice. Newton has more than 30 years of broad experience with tax-exempt bonds. Newton is an active member of the ABA Tax Section 103 Committee and the National Association of Bond Lawyers. He was President of NABL in 1998-1999 and served on NABL's Board of Directors from 1994-2000. Newton received a Bachelor's degree, magna cum laude, from Princeton University and a J.D., magna cum laude, from the University of Georgia Law School.

As described in its Charter, the ACT's purpose is to provide an organized public forum for discussion between IRS officials and representatives of the five areas within the jurisdiction of the Tax Exempt and Government Entities Division (TE/GE): Employee Plans (EP), Exempt Organizations (EO), Federal, State and Local Governments (FSLG), Indian Tribal Governments (ITG) and Tax Exempt Bonds (TEB). This year, of the 21 members of the ACT, six represent EP, six represent EO, three represent FSLG, three represent ITG and three represent TEB.

Under the Charter, the ACT reports to the Commissioner, TE/GE Division, and the ACT members work respectively with the Directors of EP, EO, FSLG, ITG and TEB to identify and research the issues that the ACT will be address and report to the Commissioner at the public meeting scheduled for June 8, 2016. This year the ACT will present:

• Employee Plans: Analysis and Recommendations Regarding Changes to the Determination Letter Program

• Exempt Organizations: Stewards of the Public Trust: Long-Range Planning for the Future of the IRS and the Exempt Community

• Federal, State and Local Governments: Revised FSLG Trainings and Communicating with Small Local Governments

• Indian Tribal Governments: Survey of Tribes Regarding IRS Effectiveness with Current Topics of Concerns and Recommendations

• Tax Exempt Bonds: Recommendations for Continuous Improvement and Enhancing Resources in the Tax Exempt Bond Market

Acknowledgements and Recognition

ACT members are appointed for a two-year term that may be extended by an additional year. This year will end the term of:

• Virginia Gross, Polsinelli PC, (EO)

• David Moja, Capin Crouse LLP, (EO)

• Alison Cohen, Ferenczy Benefits Law Center, (EP)

• Stuart Sirkin, The Segal Company, (EP)

• David Augustine, City and County of San Francisco, (FSLG)

• Stefani Dalrymple, Yukon Accounting and Consulting, (ITG)

The ACT thanks Commissioner John Koskinen; TE/GE's Leadership, Commissioner Sunita Lough, Deputy Commissioner Donna Hansberry and Assistant Deputy Commissioner, Government Entities/Shared Services Nan Downing; the TE/GE Division Directors, Rob Choi, Tammy Ripperda, Christie Jacobs, Paul Marmolejo and Rebecca Harrigal; and all the TE/GE staff for the support and assistance you've provided to the ACT throughout the year. Special thanks to Mark O'Donnell, the Designated Federal Officer to the ACT and TE/GE's Communications & Liaison Director and his team, Melaney Partner, Brenda Smith Custer and Nicole Swire for handling the logistics for our meetings, conference calls and technology needs for surveys and other information-gathering activities. Special thanks, as well, to all those who participated in the surveys, focus groups and other information gathering critical to the analysis and recommendations made in the reports.

For me, serving on the ACT has been a rewarding personal and professional experience. I am fortunate to have had the opportunity to work with and learn from all of TE/GE's leadership and the other ACT members who have served during the past three years. Thank you to everyone and congratulations to Matt Whitehorn, the incoming Chair.

I hope that our input is helpful to the IRS and to the constituent groups we serve.

Alison Cohen

The Employee Plans Subcommittee (EP Subcommittee) of the Advisory Committee on Tax Exempt and Government Entities (ACT) has chosen as the topic of its 2015-2016 report (Report) an examination of the major restructuring of the Internal Revenue Service determination letter program for qualified plans (the Determination Letter Program), and the resulting impact. These changes were detailed in part in Announcement 2015-19¹ (the Announcement) issued in July 2015. Specifically, the EP Subcommittee has attempted to identify viable approaches that the IRS could take to minimize the impact on the employee plans community (EP Community), while respecting the challenges faced by Employee Plans (EP) (the part of the Tax Exempt and Government Entities Division (TE/GE) of the IRS responsible for qualified pension plans) due to budgetary shortfalls and personnel reductions.

The IRS has received numerous letters (the Comment Letters) from the EP Community in response to the request for comments in the Announcement. The Comment Letters were resoundingly negative toward the change. In Section IV.B., the EP Subcommittee provides a summary of the valid concerns and positive suggestions set forth in the Comment Letters.

As part of the EP Subcommittee's research and analysis, and to obtain a broader range of opinions than those provided with the Comment Letters, the EP Subcommittee also prepared a public survey (the Survey) requesting input on the announced changes to the Determination Letter Program. The complete Survey and the results are included as Appendix A and, where relevant, are referred to throughout the Report.

The EP Subcommittee makes three recommendations.

The first recommendation is not to generally eliminate periodic determination letters under the Determination Letter Program. The EP Subcommittee recognizes that the IRS is not likely to accept this recommendation, but it is a recommendation with which all members of the EP Subcommittee strongly concur.

The second recommendation is to proceed as the IRS has so far, but only as a transition measure while it discusses the matter further with the EP Community. This would address IRS's immediate workload problem concerning a backlog of determination letter applications, while providing time for a real interactive dialogue with the EP community.

The third recommendation, which consists of ten points, assumes there will be no IRS change of heart. The points made are based on the EP Subcommittee's review of the public comments, the Survey results, discussions with the EP Community and the members' own experiences and analyses. The EP Subcommittee recognizes that many of the points require difficult choices as to how best to allocate limited resources and that is why the EP Subcommittee would recommend the transitional approach set forth in the second recommendation.

The key points of the third recommendation are as follows:

• The IRS should provide certainty of the availability of determination letters to as much of the EP Community as is feasible. The EP Subcommittee has provided several possible ways to accomplish this.

• The IRS should look for ways to make the pre-approved program more flexible.

• The IRS should reduce the user fees for document sponsors of pre-approved plans.

• The IRS should modify EPCRS so it can be used without a plan sponsor having a current determination letter and for issues identified on audit.

• The IRS should expand the plan provisions that can be incorporated by reference to the Internal Revenue Code of 1986, as amended (the Code) or regulations to simplify plan documents.

• The IRS should allow leniency for "immaterial" flaws in plan document language found on IRS examination.

• The IRS should immediately confirm that protection under Code Section 7805(b) continues for any plan document language that remains unchanged from issuance of a prior determination letter and further consider the feasibility of accepting an independent private review as "good faith" compliance extending Code Section 7805(b) protection.

• The IRS should provide sponsors with a safe harbor approach for converting an individually designed plan into a pre-approved plan or establish a program to review and approve such conversions.

• The IRS should publish model amendments along with the Cumulative Lists and List of Required Modifications (LRMs).

• The IRS should provide adequate time to adopt all interim amendments.

• The IRS should ask Congress to increase and dedicate user fees for the Determination Letter Program and dedicate such amounts for use by, and on behalf of, the Determination Letter Program.

The EP Subcommittee would like to thank EP Director, Robert Choi, and his staff for their time, energy, responsiveness and support as the EP Subcommittee developed this Report.² The openness of dialogue and the ability for the EP Subcommittee to work closely with the EP staff has always proven invaluable. It remains, in large part, the reason that the EP Subcommittee can, and wishes to, provide helpful analysis to EP. Despite the uncertainty surrounding the IRS's budgetary climate, it is the EP Subcommittee's fervent hope that this collaborative relationship will remain strong.

II. INTRODUCTION

The IRS issued the Announcement on July 21, 2015. The Announcement officially specified that the staggered five-year remedial amendment cycle system (the Cycle System) for determination letters will end at the conclusion of the Cycle A submission period (January 31, 2017). After that date, except for limited to-be-specified exceptions, sponsors of individually designed plans will only be able to submit requests for determination letters upon initial qualification or termination of a plan.³

The current Cycle System for individually designed plans has only been in effect since 2006. Prior to the Cycle System, a plan sponsor could obtain a determination letter on a plan amendment on an ad hoc basis.⁴ As one would expect, this change in the IRS longstanding policy of plan sponsors being able to receive determination letters on plan amendments has been a shock to the EP Community, and has caused much concern. In light of the significance of the change and the concern it has generated, the EP Subcommittee chose to examine this change in policy. This Report addresses the perceived possible repercussions of the change and makes recommendations as to how the IRS could best minimize the disruption to the EP Community, while still accomplishing its goal of eliminating most periodic determination letters.

III. HISTORY

The process for obtaining a determination letter for individually designed plans changed significantly in 2007 pursuant to IRS Rev. Proc. 2005-66,⁵ which created the Cycle System. The Cycle System allows plan sponsors to file for a determination letter every five years to cover plan amendments made since the issuance of the prior determination letter. Plan sponsors are assigned to a Cycle, lettered sequentially as Cycle "A" through "E," based on the last digit of the plan sponsor's federal employer identification number (EIN), with special submission cycles for governmental, multiple employer and multiemployer plans. A prior IRS favorable determination letter expires on the final day of the plan's five-year remedial amendment period unless the plan sponsor submits a new determination letter request before the last day of its subsequent Cycle.

A favorable IRS determination letter verifies that the sponsor has timely amended its plan document to incorporate all required law and regulatory changes since the issuance of the immediately preceding determination letter and that all of the discretionary amendments made to the plan were timely and meet substantive requirements.⁶ The determination letter only addresses the plan document requirements of the Code. It does not address operation of the plan. Nevertheless, because of the protection it offers from disqualification on the account of document failures, its availability has been viewed as integral to a plan sponsor's decision to offer and maintain a plan.⁷

The IRS points to workload, staff turnover and the unlikelihood of resources increasing as fundamental reasons for eliminating periodic determination letters. The IRS notes that because it can devote a median review time of only 3 hours per letter, which is far from sufficient for a thorough review, the IRS is bearing an unacceptable risk that the plan does not satisfy the tax-qualification requirements. The IRS also questioned whether providing determination letters goes beyond the proper role of the IRS and points to the fact that no other part of the IRS runs a parallel program. At this time, the EP Subcommittee, like the rest of the EP Community, has only limited information on how the new system will be implemented. What is known is that the IRS will eliminate the Cycle System at the completion of the current Cycle A and that, in the future, the IRS will primarily issue to retirement plan sponsors a determination letter on initial establishment and upon plan termination.

While the Announcement states that the IRS is contemplating allowing individually designed plans to apply for determination letters in certain other limited situations, the IRS has not yet specified the parameters for such submissions. IRS staff has said that the IRS is not likely to establish those parameters in the immediate future; rather, the IRS will wait to consider various factors including its workload and then announce annually the opening of the modified Determination Letter Program for certain types of plans and/or certain situations.

The Announcement also states that Treasury and the IRS are considering ways to make it "easier for plan sponsors to comply with the qualified plan document requirements." The Announcement includes, as examples, the IRS promulgating model amendments, not requiring amendments where the law change is irrelevant to the particular type of plan, and expanding the scope of incorporation by reference with respect to plan documents.⁸ The IRS requested comments from the public about the changes proposed in the Announcement be submitted by no later than October 1, 2015. The EP Subcommittee has reviewed the Comment Letters (which are summarized below) in conjunction with preparation of this Report.

On January 4, 2016, the IRS released additional guidance on the changes to the Determination Letter Program in the form of IRS Notice 2016-03 (the Notice).⁹ The Notice provides some general guidelines concerning how the IRS will proceed administratively in light of the changes. For example, the Notice states that expiration dates included in determination letters issued prior to January 4, 2016 will no longer be operative.¹⁰ In separate guidance, the IRS provides that determination letters issued after January 4, 2016 will no longer include expiration dates.¹¹

The user fees associated with various programs of EP have historically been published annually as the "08" Revenue Procedure (currently, Rev. Proc. 2016-08). As the use of these IRS services is not needed by every taxpayer, the Independent Offices Appropriation Act of 1952 (IOAA)¹² generally requires that a user fee be established. These fees are reviewed biennially under the process set out in Internal Revenue Manual Section 1.32.19. TE/GE is required to submit information regarding the costs associated with the various programs based on reported time tracked by individuals working on the projects in order to reflect the full cost to the IRS. The user fees must reflect the full cost unless the IRS has determined to seek a waiver of the full fee from OMB based on reasons set forth in the Internal Revenue Manual (IRM), including the potential effect on tax administration.¹³ In a review of the 2015 report of the Taxpayer Advocate to Congress, user fees were considered in general and a recommendation was made that the IRM be updated to require IRS departments to avoid fees that would have significant negative effect on a taxpayer's burden, the IRS's mission, voluntary compliance or taxpayer rights.¹⁴

The most recent plan sponsor filing for pre-approved defined contribution plans (the Pension Protection Act of 2006 (PPA)¹⁵ cycle), required document filers to pay a user fee of $12,000 for the basic plan document and one adoption agreement plus an additional $1,000 for each adoption agreement submitted. For the next submission cycle, on the current user fee schedule, filers would incur a cost of $16,000 for the basic plan document and one adoption agreement plus an additional $11,000 per additional adoption agreement. For purposes of comparison, one should consider the impact on a full suite of adoption agreements. Such a full suite might include the standardized and non-standardized versions of profit sharing, money purchase pension, 401(k) and target benefit formats. Along with this, the suite would likely include the SIMPLE 401(k), new comparability versions of the profit sharing and 401(k) formats and possibly Davis-Bacon Act¹⁶ compliant versions of each of the profit sharing, money purchase pension and 401(k) formats -- for a total of 14 adoption agreements. In this scenario, the cost of filing the PPA documents would go from $25,000 to $143,000 -- a 472 percent increase in cost to provide continuity with the present pre-approved document package. Volume submitter documents face similar increased costs.

IV. DUE DILIGENCE

The EP Subcommittee took multiple steps to determine the views of the EP Community and to develop our recommendations to soften the impact of the change. The steps included conducting a public survey for the EP Community using SurveyMonkey®, a review of the Comment Letters, and discussions with pre-approved plan providers and various interested groups within the EP Community.

Finally, the EP Subcommittee solicited background information from EP personnel. Rob Choi, Director of EP, generously made himself and his staff available so that the EP Subcommittee was able to conduct in-depth telephone interviews with, among others, senior members of the EP leadership team and other EP staff, including those who work in the pre-approved plans area. The EP Subcommittee was also provided with pertinent statistical data by EP, which provided valuable insight into the nature and volume of determination letter application filings, the various types of plans submitted, the status of the IRS case processing under the current Cycle System and other related statistical information.

Virtually all Survey respondents (Survey Respondents) advise, or consult with, sponsors of single-employer plans. The number of Survey Respondents who advise or consult on specialty plans -- such as governmental plans, church plans, multiple employer plans and multiemployer plans -- is much more limited. However, the EP Subcommittee found considerable consistency in responses among the Survey Respondents who practice in each of these narrower areas.

The Survey was not designed for statistical purposes but rather was intended to gauge the immediate reaction of the EP Community to the Announcement. Survey Respondents self-selected, which naturally led to bias in that those who responded most likely were those practitioners most concerned about the changes. Therefore, it is not surprising that Survey Respondents believe overwhelmingly in the importance of determination letters on amendment. In fact, of the Survey Respondents who responded that the initial determination letter is extremely important or very important (94 percent of Survey Respondents) almost 90 percent also responded that the subsequent determination letter on amendment is also extremely important or very important.

Also notable is the current uncertainty among practitioners as to how they will respond to the IRS change. Ninety percent of the Survey Respondents are still assessing how they will react to the IRS elimination of most periodic determination letters from the longstanding Determination Letter Program.

Among the Commenters, there was almost unanimous agreement that the availability of periodic determination letters should not be limited as announced by the IRS. This view in opposition to the elimination of periodic determination letters is best summed up by one Commenter who cited the following language from the 2014 EP Subcommittee's ACT Report:

• In protecting participants and beneficiaries benefits;

• In business transactions (e.g., encouraging a new sponsor to assume the plan of a prior sponsor rather than having it terminated before acquisition);

• In bankruptcy court proceedings;

• In plan mergers;

• In application of tax treaties and dual qualification in Puerto Rico;

• To validate the IRS's approval of the plan in opening financial and banking accounts with respect to the USA Patriot Act of 2001¹⁹ and other federal laws aimed at countering the funding of terrorism or laundering of money;

• For purposes of investment vehicles that need to limit eligibility of investors to qualified plans;

• For record keepers and custodians;

• For SEC disclosures and registrations, PBGC terminations and guarantees and DOL investigations;

• For auditors conducting annual audits for purposes of the Form 5500;

• In easing the anxiety that comes with the IRS's operational audits by assuring that the plan was reviewed on a regular basis and contained appropriate language;

• For accepting rollovers from other plans;

• In triggering a regular, careful review of the plan document and operation; and

• In enticing employers to continue to sponsor plans and to create new designs.

1. Suggestions for Maintaining, but Varying, the Determination Letter Program

Commenters had numerous suggestions as how to maintain, but modify, the existing Determination Letter Program in order to allow the IRS to attain some of its principal goals. These included:

• Change each staggered cycle to a longer period than five years (i.e., anywhere from seven to 10 years was suggested);

• Ask Congress to increase EP user fees and dedicate such fees directly back to EP's budget/cost center;

• Maintain determination letters on amendment for certain types of plans that cover a large number of participants:

• • Very large plans (e.g., those holding assets in excess of $500 million);

  • Large governmental plans; and

  • Large multiple employer plans.

• Maintain the program for plans that cannot use the pre-approved program:

• • Multiemployer plans;

  • Governmental plans with statutory requirements; and

  • Complicated employee stock ownership plans (ESOPs).

• Maintain the program for certain events:

• • Plan sponsor mergers and acquisitions;

  • New plan designs;

  • Changes in a plan's basic design (e.g., moving from a final average pay formula to a cash balance formula); and

  • Major legislative changes.

Commenters also suggested ways that the IRS could expand the benefits of existing determination letters in light of the changes to the Determination Letter Program such as:

• Provide protection for any language that was unchanged from a prior determination letter; and

• Provide protection for amendments adopted in "good faith," even if flawed language was inadvertently used.

Some Commenters suggested a third-party certification process. Others worried that any certification or opinion letter by a third party would have to include numerous caveats, rendering it virtually useless, and thought it would be very expensive for the plan sponsor to obtain a certification from legal counsel.

4. Suggestions for Changes to Increase Availability of Interim and Model Amendments

Commenters made numerous suggestions about how the IRS and Treasury should address a plan sponsor's need to periodically amend plan documents. These include:

• If an amendment is needed, the IRS should issue sample or model amendments and should not require adoption of such amendments until after such sample or model is released (e.g., one year after);

• The IRS should release model/sample language for public comment before issuing such guidance in final form;

• When issued, any regulations and to the extent possible legislation, should contain precise language specifying the deadline to adopt amendments and should provide sufficient time for model amendment language to be released by the IRS and adopted by the plan sponsor;

• The IRS should provide a specific list of provisions that require an amendment (unlike the annually released Cumulative List of Changes in Plan Qualification Requirements (Cumulative List), which merely recites which laws and regulations are effective for a given cycle);

• The IRS should institute a uniform date for all amendments (e.g., once every three or five years) and allow amendments to be retroactively effective;

• The IRS should require immediate plan amendments only for core amendments (i.e., those protected by the anti-cutback rules of Code Section 411(d)(6));

• The IRS should allow greater incorporation by reference of relevant statutes and regulations wherever possible;

• The IRS should allow plans to be drafted less specifically (e.g., allow the plan to quote the statutory language and incorporate related regulations and other guidance by reference as opposed to creating customized provisions);

• The IRS should extend the end-of-the-plan-year period for adopting discretionary amendments (that do not raise anti-cutback issues under Code Section 411(d)(6)) as long as plans operate in accordance with such amendment and the participants are notified about the change;

• The IRS should allow sponsors of individually designed plans to rely on any language included in the IRS published LRMs for pre-approved plans; and

• The IRS should require amendment of individually designed plans only when new LRMs are issued.

Commenters suggested several changes to EPCRS in light of the Announcement:

• The IRS should allow self-correction under the EPCRS Self-Correction Program (SCP) or a simplified, low-fee EPCRS Voluntary Correction Program (VCP) submission for plan document failures;

• The IRS should allow self-correction under SCP even if the IRS discovers the plan document failure on audit (perhaps, with slightly higher penalties);

• If the IRS won't expand SCP for all plan document failures, it should provide a more generous period for correcting mistakes with respect to new laws or regulations, as long as the plan sponsor acted in good faith;

• If the IRS won't expand SCP for all plan document failures, it should expand it where the plan sponsor made a good faith effort to have the plan document reviewed by an independent third-party professional (perhaps, one that is certified, or recognized, as qualified by the IRS); and

• The IRS should allow for the initial determination letter to be the only IRS approval letter needed to satisfy the requirements of EPCRS.

Commenters made the following suggestions concerning IRS plan examinations in the wake of the Announcement:

• The IRS should apply lower sanctions (such as the VCP sanctions) rather than the sanctions currently provided for under the Audit Closing Agreement Program under EPCRS (Audit CAP) for plan document defects that did not result in operational problems (e.g., omitting top-heavy rules in plans that are not likely to be top-heavy or omitting Code Section 436 benefit restrictions in plans where the plan's Adjusted Funding Target Attainment Percentage (AFTAP) under the PPA has never been below 80 percent);

• The IRS should modify Audit CAP to provide a fixed penalty structure for plan document failures; and

• The IRS should focus its audit efforts on operational issues rather than plan document language adopted in good faith.

Commenters expressed a desire to have the IRS issue detailed and flexible guidance on the steps necessary to convert an individually designed plan to a pre-approved plan. Most Commenters felt that some individually designed plans would find the pre-approved program more usable if the IRS expressly stated that such a plan could feature certain unique provisions, even if the pre-approved opinion letter did not cover such provisions. For example, some Commenters thought that pre-approved plan provisions should always be available as a base for a plan document and be protected even though the plan sponsor adopted other provisions that did not specifically fit within the pre-approved program. This would provide such adopters more flexibility in the pre-approved program and was viewed as especially important for plans that had legacy provisions and formulas (either when frozen or if continuing for a limited number of participants).

Commenters also suggested opening the pre-approved program to plan types that are not allowed in the pre-approved program currently, such as multiemployer plans, plans with 401(h) accounts, pension equity plans (PEPs), contributory defined benefit plans, non-electing church plans, 401(k) plans that include non-safe harbor hardship provisions and governmental plans with DROP features.²⁰ The Commenters recognized that this would require a rethinking of pre-approved plans and a willingness on the part of the IRS not to restrict the use of various plan options such as provisions that could affect nondiscrimination testing.

Other ideas that were repeated in Comment Letters included allowing more modifications between pre-approved cycles, and providing more flexibility to make changes covered by ERISA and not the Code (such as rules governing fiduciaries and statutes of limitations for claims).

There were also suggestions that the IRS look at the period of time available to convert a current individually designed plan to a pre-approved document, especially if the plan sponsor is making modifications to broaden its plan language that was based on existing LRMs. Many plans will not be able to make a decision on converting to a pre-approved plan document option until all elements of the new Determination Letter Program are finalized. Thus, Commenters asked for the ability to use IRS Form 8905 to express the intent to adopt a pre-approved plan in the interim period until the scope and breadth of the new process becomes clear.

At present, the pre-approved program has been expanded to include additional document types to reduce the necessity of sponsors of these plans using individually designed plans. Cash balance plans have been included in plan sponsor submissions for October 30, 2015 and the defined contribution cycle opening February 1, 2017 has been expanded to include ESOPs. Although the addition of ESOPs to the pre-approved plan program seems to suggest a single addition to the document offering, practical application of this could likely create the need for multiple versions of the document to consider a standardized and non-standardized version and the need to have a leveraged and a non-leveraged version.

Although these new designs may be included in the pre-approved programs, the sponsors of these documents told the EP Subcommittee that they will need to consider the financial impact of their inclusion as well as which of the prior plan types to include in their product offerings with the next submission cycle. A business decision will be made by these providers as to how many and which of the necessary adoption agreements to include in their offerings. This will most likely limit the number of distinct adoption agreements filed in an effort to control costs. They advised that there is a very real possibility that instead of expanding the pre-approved program, the result of the increase in fees may in fact create a larger demand for individually designed plans as less frequently used adoption agreements will be eliminated or not included in a sponsor's offering package due to cost considerations.

V. CONCLUSION

Recommendation 1: Do Not Eliminate Interim Determination Letters as the IRS has Announced.

As employee benefit practitioners, the members of the EP Subcommittee join with the EP Community in the prevailing belief that the IRS is making a mistake in eliminating most periodic determination letters. The EP Subcommittee believes that periodic determination letters serve as an important adjunct to the audit program, and play a major role in encouraging plan sponsors to regularly review not only their plan documents, but also plan operations, in preparation for periodic IRS filings.

While the EP Subcommittee understands and appreciates the IRS's need to address its budget and staffing shortages, the EP Subcommittee believes that the elimination of periodic determination letters is shortsighted. EP has always approached its regulated community in a different manner than other parts of the IRS. This may be because EP always recognized that establishing a pension plan was voluntary and that the tax-qualification rules relating to retirement plans play a major role in protecting participants and beneficiaries. One of the reasons a separate Commissioner for EP/EO was established under ERISA was a belief that the EP function was unique.²¹ As summarized in Senate Report 93-383, "In creating the office, Congress explicitly acknowledged that the regulatory oversight responsibilities delegated to EP/EO differ from the core revenue collection and enforcement functions of the IRS."²² On the EP side, many of the Code requirements are included to encourage the voluntary establishment of plans and to guarantee that rank and file employees will receive the benefits being promised to them (in return for the special tax treatment given employers and highly compensated employees). The deeper concern as to whether participants will receive the required and accrued benefits is very different from the role the IRS generally plays in other areas.

One of the Commenters cited several paragraphs addressing the value of the Determination Letter Program from the ACT's 2014 Report. These paragraphs are cited previously in the section of this Report summarizing Comment Letters. The EP Subcommittee affirms its support of the statement in the 2014 ACT Report regarding the importance of determination letters. The current EP Subcommittee believes those earlier statements remain even more relevant today in light of the Announcement.

Recommendation 2: Adopt the IRS's Current Position as a Transition Rule While Opening and Having Discussions with the EP Community.

The EP Subcommittee sympathizes with the resource problems that EP faces, and recognizes that changes are needed immediately. The 2014 EP Subcommittee made a recommendation that EP look at suspending the Cycle System for a few years while it catches up on its backlog of determination letter applications. This recommendation builds on that recommendation and the EP Subcommittee's 2014 recommendation about the importance of the Determination Letter Program. For the next two or three years, EP could limit determination letters to new plans, terminating plans and critical situations. During that time, EP should enter into detailed conversations with pre-approved plan providers and other practitioners with respect to how the pre-approved program could better fit the needs of those sponsors who cannot legally, or practically, use it today, and could consider some of the points raised in our third recommendation below.

EP has already said that it will decide in the future, once it determines its workload, whether it will allow certain types of plans to apply for determination letters in accordance with a non-cycle, ad hoc system. Ad hoc systems do not work very well for plan sponsor budgeting and planning. This recommendation would accept the fact that the existing Five-year Cycle System is ending with the current Cycle A. It would not immediately address what will replace it. Instead, EP would take the approach it has always taken in the past when making major decisions that affect the EP Community, i.e., discuss the options and trade-offs with the EP Community.

Recommendation 3: Implement the Change in the Least Harmful Manner.

The EP Subcommittee members recognize that it is highly unlikely that the IRS will change its basic decision as set forth in the Announcement. Therefore, the EP Subcommittee in undertaking this project set as its goal to help EP understand how it can implement the change in the least harmful manner. The points below are aimed at providing constructive feedback to the IRS that would minimize harm to plan sponsors and participants while allowing the IRS to accomplish its stated purpose.

Point 1. The IRS should provide certainty as to the future availability of determination letters to as much of the EP Community as is feasible. There are several possible ways to accomplish this.²³

The EP Subcommittee, like the majority of the EP Community, was distressed by the Announcement and the corresponding general elimination of periodic determination letters. It is the EP Subcommittee's position that such a decision is shortsighted. The EP Community has historically had an open and collaborative working relationship with EP. This productive working relationship is reflected by the incorporation of prior EP Subcommittee recommendations into both the Determination Letter Program and the EPCRS.

This longstanding unique working relationship with EP has been diminishing from the perspective of the EP Community and, apparently, not solely because of EP's limited staff and resources. IRS officials have recently said publicly that EP should be operated no differently than other units of the IRS. This change in the relationship is troubling for the EP Community. It appears that the elimination of periodic determination letters is merely the first step in restructuring the EP Community's relationship with the IRS.

The announced elimination of subcommittees on the ACT can also be reasonably viewed as a second step in the restructuring the EP Community's relationship with the IRS. The EP Subcommittee hopes that the EP Community will be able to continue to work with the IRS in the future in the same mutually productive way as it has in the past. The EP Subcommittee would be happy to discuss these recommendations with any interested parties.

If the IRS believes that it has no choice but to go forward with the announced changes to the Determination Letter Program, the EP Subcommittee would urge the IRS to adopt the EP Subcommittee's second recommendation: make it a transition approach while holding further discussions with the EP Community. EP would receive significantly more "buy-in" if the EP Community felt it was made part of the discussions and process of altering the Determination Letter Program (as it has been in the past). No interested party denies the IRS budget and staffing problems. That is a problem that affects the entire EP Community. It is clear that the Comment Letters and Survey results discussed above reflect the desire of the EP Community (and, of course, the EP Subcommittee) to work with EP in addressing how best to redesign the Determination Letter Program.

 

[ Editor's Note: Appendix omitted. To view the Appendix,

 

see , p. 55.]

 

 

* * * * *

 

 

ADVISORY COMMITTEE ON

 

TAX EXEMPT AND GOVERNMENT ENTITIES (ACT)

 

 

Exempt Organizations:

 

Stewards of the Public Trust: Long-Range Planning for the Future of

 

the IRS and the Exempt Community

 

 

Amy Coates Madsen, Project Leader

 

Andrew Watt, Project Leader

 

Natasha Cavanaugh

 

Virginia C. Gross

 

Cindy M. Lott

 

Dave Moja

 

 

June 8, 2016

 

Over one million organizations are tax exempt in the United States and subject to regulation by the Internal Revenue Service. Each time that the IRS recognizes exempt status, the public has delegated its trust to the IRS. All exempt organizations are required to operate within their stated exempt purpose. All charitable organizations are required to provide public benefit. In doing so, they add immeasurably to the richness of our lives. Many of these organizations help to meet society's aspiration that every individual can flourish in an environment that supports their human rights and needs. Exempt organizations are often complex; they vary from the smallest grassroots organizations to the very largest international NGOs, each with a unique set of needs, each with a unique mission and role to play. The complexity of the exempt sector, its growth trajectory and the shift in IRS priorities have all contributed to the public's perception of the current and future role of the IRS.

This year's report of the Exempt Organizations Subcommittee of the IRS Advisory Committee on Tax Exempt and Government Entities focuses on planning for the future -- big picture areas the Exempt Organizations function should consider in planning for the next two to three decades in overseeing exempt organizations.

The ACT conducted extensive conversations with regulators, nationally and internationally, as well as with individuals and organizations possessing a deep familiarity with regulatory issues and challenges. Not surprisingly, common themes quickly emerged: a need for coordinated action among regulators; better communication between regulators and those regulated entities; efficient and effective platforms for communication and dissemination of information; the need for transparency, particularly around enforcement; and, above all, the need to be user-focused throughout the regulatory and enforcement cycle.

Our specific recommendations are as follows:

1. Ensure that EO staff are equipped to carry out the responsibilities of EO.

2. Provide leadership and guidance on major issues impacting the exempt organizations sector, both current and those anticipated in the near future.

3. Give exempt organizations the tools they need to be tax compliant:

5. Release and share data where appropriate for public use.

II. INTRODUCTION

The environment in which the tax-exempt community operates is changing at an exponential rate. The speed of communication and decision-making, the openness of the environment and the operating requirements the virtual world dictates are all forcing changes in practice and strategy on the part of the exempt community; the IRS, as the regulator of that community, has no choice but to try to keep pace. In addition to the requirement of the IRS to regulate and enforce laws, this transitional period requires more IRS guidance³⁵ and leadership as exempt organizations navigate the many changes that are rapidly impacting our sector. The ACT's goal with this year's report was to provide the most frequently heard recommendations from the field. The field was clear and unanimous. The IRS must prepare today to be ready for tomorrow. This ACT report focuses on improvements that the EO division of TE/GE can make to be better prepared for issues on the horizon. We recognize that EO does not operate in isolation. The scope and recommendations of this report are intended to speak to the broad community of federal and state regulators, Congress, as well as the IRS itself.

As we prepared to write the 2016 report, we reached out to exempt organizations nationally and across the globe. The conversations held by the ACT were with regulators, nationally and internationally, including the IRS, as well as with individuals and organizations possessing a deep familiarity with regulatory issues and challenges. We conducted an extensive series of interviews regarding issues on the horizon and further into the future, focusing on areas for which the IRS should lay groundwork now. These thought leaders included nonprofit association leaders, in-house counsel at leading nonprofit institutions, academics, leading practitioners in the fields of nonprofit law, fundraising and accounting and a number of experts from the international nonprofit community.

Not surprisingly, common themes quickly emerged: a need for coordinated action among regulators; better communication between regulators and regulated entities; efficient and effective platforms for communication and dissemination of information; the need for transparency, particularly around enforcement; and, above all, the need to be user-focused throughout the regulatory and enforcement cycle.

We offer this report with the benefit of these interviews, internal conversations among the ACT committee members, who represent various perspectives from the sector, and many conversations with IRS staff members. We make specific recommendations for addressing current and future issues for which the IRS must plan.

A common theme, reflected in the ACT's many interviews this year, is the stark perception by sector stakeholders that the role and function of the IRS vis-à-vis exempt organizations has been fundamentally impacted by certain critical factors: dwindling resources, declining budgets, loss of historic knowledge and personnel and antiquated technological platforms. Taken together, these critical factors contribute to a widely held perception that the IRS is not able to regulate our tax-exempt community consistently and effectively. There is also an increasing risk that as the number of tax-exempt organizations rises, the oversight by the IRS will not be sufficient. Whether grounded in fact or perception, this attitude toward the IRS was pervasive in our many interviews with sector leaders. At the same time, these stakeholders and leaders recognize that the IRS is not completely isolated; it sits within a larger regulatory network of state and federal regulators and is a significant member of the international community of charity regulators. It is clear that our society both values the work of the nonprofit sector and sees its work as something to be encouraged. We believe Congress could build on this by investing in the IRS EO division, enabling it to support and encourage social investment in our communities.

The good news is that experience, models of successful practice and shared understanding of the criteria underpinning regulation abound. Many of the environmental issues currently faced by the IRS are common to other regulators and environments. We believe that the shared learning of the community of regulators is one of the greatest assets at the disposal of the IRS as it looks to the future in a rapidly changing environment.

The TE/GE Division of the IRS has a mission statement, like many of the organizations that it oversees. TE/GE's articulated mission is "to provide our 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." In preparing this report, the ACT was mindful of this mission statement at all times.

To achieve its mission, TE/GE must be responsive, consistent and fair. Above all, TE/GE, as with the organizations it regulates, must act as steward of the public trust. Those of us who have devoted our professional lives to serving the public in this field understand that this trust is our most precious asset. We also understand that it is an organization's most vulnerable and most fragile asset and the hardest to retrieve once lost.

Stewardship is a fundamental concept for the nonprofit and charitable sector, and EO is held to the same standards of good governance as those entities it regulates, including excellent stewardship of its resources. Just as nonprofit organizations are required to protect and apply their resources on behalf of their stakeholders, so, too, must the IRS utilize resources effectively and ensure that appropriate stakeholder interests are met. In this context, the government's function is to act as steward of the public's trust: no greater stakeholders exist than the citizens on whose behalf government acts. It is imperative that the IRS maintains its integrity and transparency in order to preserve that trust, particularly at a time when it sits under the microscope of public scrutiny.

Clearly, then, it is not enough for the Department of Treasury and the Office of Chief Counsel to determine and institute regulations and for the IRS to implement them. As federal regulators, the Department of Treasury and IRS also have a responsibility to initiate policy directives, to consult and to generate new concepts that allow the regulator to offer support and guidance proactively, and to provide a framework within which exempt organizations can flourish and grow. The IRS today, more than ever, has to be an active participant in the field. A lack of visibility on the part of the EO is not a neutral position -- it is detrimental to the sector it regulates. A lack of responsiveness or guidance inexorably leads to an undermining of the public trust.

III. BACKGROUND

The IRS is at a turning point. This is especially true in EO. The stark shift from EO as a regulator of tax-exempt organizations to its nearly exclusive focus on tax administration is reflected in recent organizational changes, including the following:

• EO does not have the "pen" on guidance. Since January 2015, all responsibility for formal guidance for EO resides with the Office of Chief Counsel.

• Decreased focus on sector oversight. As evidenced by the adoption of Form 1023-EZ, EO is keenly focused on processing efficiencies and undertaking risk analysis, which is laudable. However, when coupled with the incredibly low EO audit rates, this decreased upfront due diligence has diminished TE/GE's role as an exempt sector gatekeeper.

• Reconfiguration of the Advisory Committee on Tax Exempt and Government Entities. On January 19, 2016, the IRS announced a reduction in the number of individuals serving on the ACT and a revision to its focus. As currently constituted, the ACT provides an essential window for the IRS into the needs and concerns of the exempt community. Beginning in June 2016, instead of focusing on recommendations related to the five TE/GE functions,³⁶ including EO, the ACT will focus exclusively on tax administration, such as continuous improvement and data-driven decision-making. As acknowledged by the IRS, this change reflects a shift in priorities of TE/GE.³⁷

 

FEDERAL REGULATORY ENVIRONMENT FOR THE

 

EXEMPT ORGANIZATIONS SECTOR

 

 

 

Despite the changing environment, TE/GE remains committed to providing quality service and helping taxpayers understand and comply with the law. This commitment is reflected in the IRS Taxpayer Bill of Rights (TBOR) and is further reinforced by the TE/GE mission statement. On June 10, 2014, the IRS unveiled TBOR, which delineates the existing rights in the tax code and groups them into 10 broad categories. According to IRS Commissioner John Koskinen, "Respecting taxpayer rights continues to be a top priority for IRS employees, and the new Taxpayer Bill of Rights summarizes these important protections in a clearer, more understandable format than ever before."³⁹ The government's commitment to TBOR was reinforced by the PATH Act of 2015, which requires IRS employees to be familiar with and act in accord with TBOR.⁴⁰

The TE/GE mission includes two key components: 1) providing customers top quality service by helping them understand and comply with applicable tax laws; and 2) protecting the public interest by applying the tax law with integrity and fairness to all.⁴¹

                      The Taxpayer Bill of Rights

TE/GE is striving to be responsive. Because of current resource constraints within the IRS, and in TE/GE in particular, TE/GE is placing greater emphasis on providing more and improved educational tools to enable exempt organizations to become more self-sufficient in complying with their tax responsibilities. This theme of "self-sufficiency" was highlighted by TE/GE Commissioner Sunita Lough in the Priorities Letter for FY 2016, which outlines TE/GE's priorities and key areas of focus for the coming year.⁴² The letter confirms that TE/GE's future state requires it to be an organization that serves "self-sufficient" taxpayers.

Although TE/GE is focused on self-sufficiency, ACT interviewees consistently noted TE/GE's backslide on providing useful educational resources, which are necessary to promote a more self-sufficient EO community. Our qualitative interviews consistently reflected the IRS's poor customer service as reflected by the frequent inability to receive helpful service through the telephone assistance hotline for exempt organizations.⁴³ Cost-effective tools that improve EO responsiveness will become increasingly important as EO continues to be under-resourced and the number of exempt organizations continues to climb post adoption of Form 1023-EZ.

Stewarding the public trust: Protecting the public interest

Some critics have suggested that the adoption of the new short form 1023-EZ has further eroded public trust. Form 1023-EZ, for use by some smaller organizations in applying for Section 501(c)(3) exemption, largely eliminates any possible upfront scrutiny of organizations by the public.⁴⁹ Arguably, by obtaining very little information from 1023-EZ applicants, governmental and public oversight of the sector is likely to diminish, further eroding the public's trust in the IRS and the tax-exempt sector. We recognize that prior to adopting the 1023-EZ, EO undertook a risk analysis, solicited public comments and incorporated risk mitigation measures; nevertheless, the National Taxpayer Advocate has stated that the IRS has taken the idea to develop a Form 1023-EZ and run with it to "the point of absurdity."⁵⁰

In addition, to protect the public interest and rebuild public trust in the IRS, TE/GE must be transparent and publicly release, in a form that is relevant and usable, data and information regarding the EO sector. At the same time, TE/GE must ensure that sensitive, non-public information is protected.

TE/GE also recognizes the need to engage in future planning. TE/GE is developing a Concept of Operations (CONOPS) or "future state vision" to help communicate the TE/GE vision over the next five years and outline a path forward that includes guiding principles, a business architecture, capabilities, initiatives and work areas. TE/GE has only provided a high-level overview of CONOPS.⁵¹ Many of our recommendations align with the action items listed in the CONOPS Overview, such as:

• Provide timely support to the taxpayer community

• Build a more flexible workforce to meet taxpayer expectations

• Continually collect and act upon operational and taxpayer community feedback

IV. DUE DILIGENCE

After consulting with EO staff about current issues and issues on the horizon for the IRS, the ACT decided to focus this year's report on Long-Range Planning for the Future of the IRS and the Exempt Community. The ACT decided to conduct a series of conference call interviews with nonprofit sector thought leaders nationally and throughout the globe to receive input from a diverse cross section of stakeholders.

The interviewees were selected based on their knowledge of tax policy and nonprofit governance. They included nonprofit association leaders, in-house counsel at leading nonprofit institutions, academics, leading practitioners in the fields of nonprofit law, fundraising and accounting and a significant number of experts in the international nonprofit community. Appendix C of this report lists the individuals outside of the federal government with whom we consulted.

Based on those interviews, the ACT prepared a summary of the themes that emerged, and used those themes as a guide for developing the structure and recommendations of this report.

V. RECOMMENDATIONS

The ACT provides the following recommendations to help TE/GE tackle the challenges and environment of the future.

The responsibility for serving and regulating the nation's exempt organizations is borne by EO staff. The number of EO staff, however, is dwindling. From 2009 to 2015, EO suffered a 13.5 percent decline in its staff -- falling from 891 staff strong in 2009 to only 771 at the end of fiscal year 2015.⁵² This decline was even more pronounced following the January 2015 realignment, which shifted responsibility for guidance and technical advice from EO and Employee Plans to the IRS Office of Chief Counsel.⁵³ This shift resulted in the departure of 21 tax law specialists and managers formerly working within EO and EP to the Office of Chief Counsel. For more information on staffing trends in EO see below, Detailed audit data.

There are many reasons for the overall decline in EO staff, including but not limited to:

• EO staff members transferring to other divisions in the IRS and other parts of the federal government

• Attrition, due in large part to an aging workforce⁵⁴

• Hiring freezes that preclude replacing staff members that leave for the above reasons

• A significant number of attorneys being transferred from EO to the Office of Chief Counsel

The overall decline in EO staff has led to a corresponding reduction in the availability of expertise to address questions and issues related to EO tax administration.

Special initiatives to strengthen the expertise of remaining staff members through EO internal continuing education training programs, and the development of Knowledge Management Networks, as described in the section below entitled Relevant, user-focused guidance, akin to former CPE text, are important programs for fostering andmaintaining this expertise.

EO staff members can benefit from attending professional development programming outside of the federal government

In addition to participation in events with the public and nonprofit sector where the IRS staff person serves as an expert speaker, IRS EO staff can benefit professionally from getting out into the field and hearing from those working in the sector. For instance, all EO staff (not only the most senior staff) should be able to reap benefits and be visible to the public by participating in professional development opportunities (such as conferences, symposia, formal continuing education programming) offered by entities outside the IRS, such as professional associations, trade associations, think tanks and academic centers. This exposure is particularly useful for staff members with assignments for knowledge management initiatives and individuals charged with developing educational outreach materials to encourage tax compliance.

We encourage TE/GE leadership to find ways to enable staff to participate in educational opportunities and interactions with the sector itself. As TE/GE looks toward the future, it is important that its staff learn directly from those on the ground about current issues and those issues on the horizon.

Examples of these areas can be found in the unrelated business income (UBI) arena; church (or church-related entity) status and the treatment of these organizations; political activities of Section 501(c)(4) organizations that must be organized and operated primarily for social welfare purposes; religious organizations and their continuing qualification for tax-exempt status in the wake of the Supreme Court's decision in Obergefell v. Hodges; and the policy issues implicated by donor-advised funds. In addition, there are other instances where the guidance is not necessarily vague, but where guidance and resources supporting a particular issue area are scattered in many different forms in various places, see, e.g., those requirements and filings for international tax compliance.⁵⁵ In the 2016 Consolidated Appropriations Act, Congress prohibited the IRS from issuing or revising any guidance (including revenue rulings, regulations, etc.) regarding the definition of social welfare and primarily furthering social welfare.

When the regulators of the sector suffer from a lack of public trust, the sector itself inevitably suffers the same fate. As the exempt organization sector continues its trajectory toward greater complexity in the next decades, the IRS must be given, and take, the opportunity to exercise effective regulatory and enforcement leadership. The failure to do so could hamper the sector's ability to thrive.

ACT interviewees urged EO to provide more resources and responsive assistance. To be prepared to provide responsive service to the sector over the coming decades, EO must focus on 1) providing clear communications to the sector; 2) providing more, useful guidance; and 3) ensuring that there is an "ease of use" in all that it does.

There exists a host of educational materials, online resources, phone lines, determination letters, rulings, opinions, reports, instructions and interactions with EO staff and leadership on which leaders of exempt organizations depend to fulfill their desire to fully comply with the federal tax law. Additionally, many nonprofits and their advisors rely upon the assistance and insights of private individuals, firms, specialized subscription services and associations in their efforts to fully comply with the U.S. tax laws.

Tools must be accessible to all sizes and types of organizations

Additionally, the resources and advice for tax compliance must be accessible to organizations of all sizes, types and areas of focus. Although the nonprofit sector is large (with over 1.5 million organizations recognized as tax exempt by the IRS), most of the organizations in this huge sector are quite small. In July 2015, 90 percent of exempt organizations had revenues of $500,000 or less and 86 percent of exempt organizations had assets of less than $500,000.⁵⁸ This is a sector dominated in sheer numbers by small- and medium-size nonprofits. By definition, these organizations have limited budgets and limited access to fee-for-service expertise. Obliged by their own standards and mission to operate transparently and efficiently, regardless of their size, type or mission, they need to be able to access IRS guidance and educational resources.

Form 990-N filers⁶⁰ and Form 990-EZ filers⁶¹ have a greater propensity to seek assistance with 990 filing issues from the IRS website and the IRS telephone helpline than nonprofits that have more significant budgets and assets.⁶² These small-and medium-size organizations are less likely to consult accountants when they have tax form filing questions (although accountants remain the most prevalent source of support for all types of filers) and are more likely to rely upon free, publicly available resources.

       When you need help completing the Form 990 (N, EZ or full

             Exempt Organization Annual Returns Examined⁶³

        EO -- Examinations and Rulings and Agreements Staffing

The IRS might be reluctant to release more detailed audit information for fear of running afoul of the confidentiality and disclosure rules afforded by Section 6108 of the Internal Revenue Code.⁶⁹ Prior to 1977, tax information was considered a public record and open to inspection under Department of Treasury regulations approved by the President or under Presidential order.⁷⁰ As a direct result of the Watergate hearings, there was increased Congressional and public concern about attempts to use the IRS for political purposes. This concern led to the enactment of Section 6103 as part of the Tax Reform Act of 1976.⁷¹ Section 6103 mandates that tax returns and return information are confidential and not subject to disclosure, except in limited situations.

The ACT recommends that TE/GE release detailed audit information, including: (i) the number and type of organizations reviewed (but not the specific identities of audited institutions), not just the aggregate number of returns; (ii) the most frequently occurring issues that result in tax assessment and penalties and (iii) outcome statistics: modifications of exempt status, revocation of exemption and the average tax assessment per return examined and per organization examined.⁷² Our recommendation, similar to that made in the 2004 ACT report, is to release non-identifiable audit information, not taxpayer-specific return information. Therefore, the restrictions of Section 6103, which involves the sharing of taxpayer-specific information, should not apply. Nevertheless, if the IRS determines that more detailed audit information cannot be shared with the public because of Section 6103, the ACT encourages the IRS to support an appropriate regulatory or legislative fix.

As noted earlier, there is a discrepancy in the amount of information offered: for certain topics, TE/GE has few educational resources and for other topics affecting exempt organizations, TE/GE has a wealth of information. Most of these resources are difficult to understand, difficult to find on the IRS website or simply a restatement of the law, which is not easily understood by non-lawyers.

The CPE text provided an annual technical update for EO revenue agents. Although the text could not be relied upon as precedent, the IRS routinely released the CPE text to the public to help inform the sector about the topics and substance of current issues on which agents were being trained.

Most EO CPE articles published between 1979 and 2004 are available on the IRS website. No articles have been published since 2004. Interviewees praised the CPE text as an invaluable tool that provided glimpses into how TE/GE grappled with applying 1960s law to modern day fact patterns. The 2002 article discussing, in question and answer format, issues concerning political activities by exempt organizations is a sector favorite and a resource that is still used by practitioners.⁷³ There is a dearth of up-to-date resources equivalent to the CPE text.

Formal guidance is valuable. With the shift in responsibility for formal guidance from EO to the Office of Chief Counsel and the associated increase in the private letter ruling request user fee to $28,300, little formal guidance is expected in the future.⁷⁴ This will create a void in guidance resources right at the time when EO is striving to promote a more self-sufficient sector. There is a need and an opportunity for EO to provide the sector with useful, up-to-date, and easily accessed and understood resources, all of which directly support the IRS mission and TBOR.

Current IRS efforts

EO has launched several initiatives that could help answer the sector's call for contemporaneous resources. Those key efforts include the following:

• Knowledge Networks: EO has created six Knowledge Networks (K-Nets) for the following areas: 1) private foundations, 2) hospitals and health care, 3) Section 501(c)(3) exemption issues, 4) other Section 501(c) exemption issues, 5) unrelated business income and 6) employment tax issues (TE/GE-wide). K-Nets are internal staff resources used to train and inform EO staff and will not be made publicly available. Issue Snapshots, on the other hand, which are based on K-Nets, serve as public answers to frequently asked EO questions (such as questions about group rulings). According to EO leadership, they are being generated based on issues seen in the exempt organizations field and are intended to provide transparent public information about a variety of technical issues. The first few Issue Snapshots were released on the IRS website in the first quarter of 2016.⁷⁵ Giving the public a glimpse of these EO resources is helpful because it allows the sector to better understand how EO interprets and intends to apply the applicable law. We encourage EO to make these Issue Snapshots available as swiftly as possible.

• TE/GE Directives: TE/GE provides administrative guidance to its examiners to ensure consistent tax administration. TE/GE directives are released to the public.⁷⁶ The directives do not establish the IRS position on legal issues and are not legal guidance, but these directives provide concise guidance on thorny and timely issues facing TE/GE communities. For example, a 2015 directive addressed the tax treatment of uniforms issued to government employees by fire and police departments.⁷⁷ To date, TE/GE has not released an EO-specific directive.

• Revenue Rulings Review Project: EO has undertaken a long-term project to review all revenue rulings under its purview. Over the next few years, EO, in collaboration with Division Counsel, will review and assess over 1,800 EO revenue rulings that have been issued since the 1950s. EO, working with the Office of the Chief Counsel, will determine which rulings are obsolete, which need to be combined or revised and which rulings need to be retained.

The ACT encourages EO to either expand the scope of the K-Nets initiative to address a broader range of EO topics and ensure that the newly released Issue Snapshots are useful and relevant (rather than reinstatements of existing law), or otherwise develop a consolidated, user-focused resource that applies the law to current and emerging issues in the sector, akin to the former EO CPE text.

The ACT recognizes that EO has limited resources to deploy. In the ACT interviews with international regulators, we learned that international regulators have worked with external professional advisors to provide the public free resources and information. We recognize that the IRS traditionally has not collaborated with the private sector in this manner, but doing so is an option to consider.

In the ACT's interviews with international regulators, some examples of this kind of collaboration were highlighted, among them:

• Australia: The tax regulator developed an accounting program in collaboration with accounting firms allowing a nonprofit to export the exact financial data required by the regulator to the regulator's database with the press of a button. In addition, independent financial and legal consultants and capacity-building nonprofits have helped nonprofits become more self-reliant. The Australia Charities and Not-for-Profits Commission (ACNC) encourages this by convening working groups of key opinion makers within these fields to advise them. This multiplies its capacity to communicate with the sector.⁷⁸

• Ireland: Irish Charities Tax Research (ICTR) is a leadership organization working on behalf of charities to enhance the conditions for a vibrant and independent charity sector in Ireland. ICTR is a membership organization of Irish charities, focused on creating a policy climate in which philanthropy can thrive through a combination of taxation and regulatory reform. ICTR was commissioned by the Department of Community, Equality and Gaeltacht (primarily Irish speaking region) Affairs to implement The Statement of Guiding Principles for Fundraising,a set of overarching principles and guidelines for fundraising in Ireland. The guiding principles seek to help charities that fundraise from the public, take the lead and apply the highest possible standards. There are general codes for charitable organizations as well as more detailed codes for individual fundraisers. Compliance with the codes is voluntary. Examples of some of the papers produced by ICTR are found in the International Resource List in Appendix D of the ACT report.⁷⁹

ACT interviewees highly encouraged the IRS to address this concern, in part, by making its website more effective. The IRS should present information to exempt organizations in a manner that is easy for them to navigate, identify and digest. The IRS website is an excellent resource for exempt organizations -- if they know how to traverse the website and find what they need. Improving the website is especially important as TE/GE strives to support a more self-sufficient sector.

The IRS, in its TE/GE Priorities for FY 2016, stated that it is developing innovative education products to allow customers to find answers to questions and solutions to problems and that it will develop focused training modules for customers to self-train and move customer support to online platforms. This is certainly a welcome development for exempt organizations, but TE/GE must ensure its forthcoming "innovative education products" are easily accessible.

The 2013 ACT report, Exempt Organizations: Leveraging Limited IRS Resources in the Tax Administration of Small Tax-Exempt Organizations, noted that after the IRS unveiled its newly designed website in late 2012, users found it complicated and time-consuming, and that it was especially inaccessible for volunteers and exempt organization staff with limited time to devote to tax-related matters.⁸⁰ Although practitioners and others who frequently search the EO website may know where to look to find what they are trying to access, exempt organizations (and those who manage them) need to be able find the information they are seeking, even if they are not regular visitors to the website.

The authors of the 2013 ACT report and practitioners were especially troubled by the removal of the prominent and direct link to the IRS EO Web page from the www.irs.gov home page. As of the time of this report's submission, the www.irs.gov home page lacks a specific link to the EO Web page. For a new exempt organization trying to navigate the IRS website, this could be especially discouraging.

We acknowledge that a recommendation that the IRS update its website is not a new idea.⁸¹ As part of this report, the ACT continues to recommend that the IRS undertake a review of its website to assess and analyze its ease of use by the nonprofit community, especially by smaller nonprofits that may not have the resources to engage professionals to provide advice on their activities and reporting. Organizations, even those that do not search the IRS website with regularity, must be able to find and access the information they need. At a minimum, as has previously been suggested by the ACT, the IRS home page should have a link to the EO home page to make it easy for an organization to jump from www.irs.gov immediately to the EO portion of the website.⁸²

The IRS also should provide updates to the nonprofit sector on current developments in an easily accessed manner. Organizations that subscribe to paid services have access to publicly released information such as rulings and notices that allow them to stay informed. Organizations without access to these services rely on the IRS website and updates from the IRS for this information. We recommend that the IRS publish a daily or weekly EO Summary Page on the Charities and Nonprofits Web page that provides up-to-date, relevant information for exempt organizations. We understand that EO sends periodic free EO Updates to those who subscribe. The proposed EO Summary Page should be more comprehensive and posted more frequently than the current EO Update. In addition, organizations should be able to access a prior week's or month's update pages, similar to an online periodical, if they want to catch up on past developments.

The federal government is getting smarter on information technology, which can generate efficiencies and reduce costs. As the government's reliance on technology has grown, however, so have its cyber risks. For the fifth consecutive year, the Treasury Inspector General for Tax Administration (TIGTA) has designated security for taxpayer data and employees as the IRS's number one management and performance challenge.⁸³ As identified by the federal government, there are three primary cyber security challenges: 1) outdated technology, 2) fragmented governance and 3) workforce gaps.⁸⁴

For the IRS, fiscal austerity and increased public scrutiny have driven the agency to consider adoption of new technology systems and practices. This focus on new technology is driven by EO's need to utilize its resources as efficiently as possible to reduce costs and increase standardization and speed. Unfortunately, the IRS hasn't had sufficient resources to hire skilled personnel to keep pace with its growing IT needs. Declining resources -- funding for cyber security dropped more than 20 percent from $187 million in 2011 to $149 million in 2015 -- have led to reductions in cyber security positions across the agency.⁸⁵ The IRS "lost several key leaders in the information technology and analytics areas due to the loss of streamlined critical pay authority," according to an IRS spokesman.⁸⁶

The critical pay authority allowed the IRS to appoint or retain people with a high level of expertise for up to four years at salary rates above normal government levels.⁸⁷ IT appointments accounted for most of the positions filled under this program. The "private-sector expertise had been crucial to introducing new leadership to supplement in-house expertise," according to a 2014 report by the Treasury Department's Inspector General.⁸⁸

To absorb significant budget cuts since fiscal year 2010, the IRS has delayed IT projects and substantially reduced employee training.⁸⁹ Paradoxically, the number of IRS cyber security personnel is declining precipitously while the IRS is relying more heavily on technology and online platforms, which increase cyber risks. As the IRS Advisory Council has warned, "recent reductions in funding endanger the significant investments and substantial progress made in the last two decades in modernizing the IRS, and compromises the IRS' ability to deal with the challenges now before us and those to come."⁹⁰

 

Number of IRS Cybersecurity Employees

 

 

 

The dawn of machine-readable 990s is a win for the IRS, the sector and the public. All interested stakeholders will be able to aggregate and analyze tax-exempt organization data. Nevertheless, this change demonstrates how the IRS's desired "future state"⁹⁵ can enlarge cyber security concerns.

Current cyber security efforts

The federal government is striving to address cyber security concerns. The 2016 budget provided $290 million in additional funds to the IRS, a portion of which is for cyber security initiatives. Though none of this additional funding is specifically allocated to EO, EO will benefit indirectly because it relies upon IRS IT resources to address its cyber security concerns. For example, EO has recently worked with IRS IT on security issues in rolling out the electronic 990-N portal on www.irs.gov, which went live on February 29, 2016. EO is currently working with IT to determine how to make the machine-readable 990 data publicly available. Agency-wide, the IRS is partnering with the U.S.

Digital Service to bolster electronic authentication procedures for access to all IRS digital services.⁹⁶ The President's fiscal year 2017 budget proposes further enhancement of cyber security efforts across the federal government. The budget seeks to invest over $19 billion, or a roughly 35 percent increase from fiscal year 2016, to implement a Cyber Security National Action Plan (CNAP). CNAP aims to dramatically increase the level of cyber security in both the federal government and the country's digital ecosystem as a whole.⁹⁷ CNAP will establish the "Commission on Enhancing National Cyber Security," which will make recommendations to strengthen cyber security. CNAP also funds the creation of a new Federal Chief Information Security Officer who will help retire, replace and modernize legacy IT across the government. This is the first time that a dedicated senior official will focus exclusively on cyber security strategy across the entire federal government.⁹⁸ The President's fiscal year 2017 budget also proposes a new $110 million Treasury-wide Cyber Security Enhancement Account to more strategically focus Department of Treasury's cyber security efforts.⁹⁹

What more is needed to address cyber security: Limit & Protect

Protecting sensitive data is critical to stewarding the public trust and to providing quality service to exempt organizations. Current efforts to strengthen cyber security are laudable. To fully recognize the promise of technology and to achieve the IRS desired "future state," however, cyber security must be a top priority.

Recommendations:

For the state offices charged with protecting charitable resources, the current restrictions on information sharing between the IRS and the states is not only hobbling on a substantive front, it creates logistical difficulties and further inefficiencies. In 2011, 43 state attorneys general signed a letter to Senators Baucus and Hatch of the Senate Finance Committee explaining the current untenable situation and requesting a statutory fix:

As in the report by the Aspen Institute in 2013,¹⁰³ electronic filing requirements for the sector have been recommended for several years.¹⁰⁴ President Obama's 2016 budget included a requirement for e-filing, as well as Rep. Dave Camp's draft legislation titled, "Tax Reform Act of 2014." Spurred on by a lawsuit regarding the availability of specific entities' digitized data,¹⁰⁵ the IRS has now publicly announced that it will release electronically that data which it receives electronically, beginning at some point in 2016.¹⁰⁶ Mandatory filing of digitized data and the release of that data, where not legally confidential, would inure to the benefit of the public and the sector, including an increase in transparency, a reduction in fraud and more accurate data collection.¹⁰⁷

Note that although the requirements for electronic filing are being discussed at the federal level, state charities regulators rely on the information the Form 990 provides, whether digitized or not,¹⁰⁸ with their own state-specific requirements adding to the information received by regulators. The "Single Portal" initiative launched by the state charities regulators in the past several years, due to come online in 2016, will enable electronic filing at the state level for those charities that must register within individual states, and it will enable electronic data sharing.¹⁰⁹ When launched, the Single Portal platform can be integrated with the federal electronic data and with other states' data as well. The GAO overtly supports this next, technologically enabled step toward transparency.¹¹⁰ Once publicly available, such digitized data will serve as an invaluable resource to researchers, regulators and the public. To best serve both public and regulatory oversight and research efforts, the IRS and the EO division must utilize the most current technologies to allow access to public data about regulated entities. Whatever leaps in technology occur for digitization and interoperability of data sharing, the ACT urges the IRS to make adoption of those technologies a priority.

An opportunity for exempt organizations to "identify and resolve frequently disputed or burdensome tax issues that are common to a significant number of entities" has come with the issuance of Revenue Procedure 2016-19. The Industry Issues Resolution (IIR) Program -- historically available only to members of the Large Business and International (LB&I) and Small Business and Self Employed (SB/SE) operating divisions -- is now open to Tax Exempt and Government Entities (TE/GE).

Per the IRS, "[t]he objective of the IIR Program is to identify and resolve frequently disputed or burdensome tax issues that are common to a significant number of entities. Resolving issues through pre-filing guidance rather than post-filing examination is a goal of the Internal Revenue Service (IRS) and the Office of Chief Counsel."¹¹¹

The revenue procedure sets forth guidelines for who (requesters) may submit and what types of issues might be submitted. There is no defined format for submissions, but requesters are instructed to "include an issue statement, a description of why the issue is appropriate for the IIR Program, an explanation of the need for guidance, an estimate of the number of entities affected by the issue, a description of how the requester relates to those entities, and the name and telephone number of an individual to contact if additional information is needed. The submission may also include a recommendation as to how the issue may be resolved."¹¹²

For example, a group representing colleges and universities might request pre-filing guidance through the IIR Program on a Treasury Regulations § 1.512(a)(1)(a) unrelated business expense allocation issue common to all member schools.

The tenets of this revenue procedure are effective as of April 25, 2016.

One recent example of a situation where seeking early input in the development of a proposal could have yielded helpful and efficient feedback is the 2015 charitable gift substantiation proposal. In September 2015, the Department of Treasury and the IRS issued proposed donee gift substantiation regulations and sought formal written comments. The process yielded nearly 38,000 public comments and as a consequence, the proposal was withdrawn. With a greater willingness to talk with leaders in the nonprofit sector prior to issuing the proposed regulations, the IRS could have avoided significant investment of resources of its own staff and that of nonprofit leaders and nonprofit regulators around the nation. Encouragement for seeking input from the regulated public (the nonprofit sector in this case), is further supported by two executive orders, Executive Order 12866 § 6(a)(1) and Executive Order 13563 § 2(c).¹¹³

Public announcements not readily available to charities

EO must work diligently to ensure that its public announcements, press releases and other updates are digitized, searchable and easy for the public to review and download free-of-charge without subscribing to private subscription news services.

The charitable donee gift substantiation proposal also brings to light another issue related to accessibility of the IRS EO information to organizations of all sizes and types.

The IRS issued follow up information that attempted to further explain the charitable substantiation proposed regulations. This supplemental information appears to have been released only to news and subscription services but not published in the press releases or other publicly accessible portions of the IRS website. For those that do not pay for these subscription services, there was no direct avenue from the IRS for them to learn about this important release. We recognize that the proposed regulations were issued by the Department of Treasury, not the IRS. But, given the impact of the proposed regulations on the EO sector, the IRS website should have informed the sector of their release and possible impact.

Although many exempt organization leaders and practitioners find special subscription services to be a helpful and informative way to keep up with IRS news, information and updates, the fees for such services are cost prohibitive for many in the nonprofit community. One interviewee stated concern about the IRS practice of distributing information about charitable nonprofits through expensive channels that grant 'insiders' greater access to information than others.¹¹⁴ By sharing information with, for example, those attorneys and accountants who subscribe to certain services, the IRS creates an uneven and unfair playing field.

Whenever the IRS shares information with one group, it should simultaneously provide equal information to nonprofits and the general public across America, which can be accomplished easily through its website. Implementing this recommendation will help EO achieve greater transparency and fulfill its mission to apply tax law with fairness to all.

Private letter rulings only accessible to the largest exempt organizations

Interviews for this year's ACT report also revealed that stakeholders perceive that IRS staff and other resources are only accessible to the largest nonprofits and their paid advisors, e.g., attorneys and accountants.

Obtaining a private letter ruling is cost prohibitive to all but the largest institutions. At the time of this report (April 2016), the cost of a private letter ruling for organizations with gross income of $1 million or more is $28,300.¹¹⁵ While there are reduced user fees for smaller exempt organizations seeking a ruling request, it tends to be the larger institutions and foundations that request rulings. The high cost for these organizations coupled with the various "no ruling" areas means that there are fewer published rulings and less overall guidance provided to the exempt organization sector as a whole. It is incumbent for EO leadership to engage in conversation with the Office of Chief Counsel to identify the appropriate resources to fill in the gap created by lack of access to equivalent guidance.

Elimination of small and mid-size tax-exempt organization workshops

EO invests considerable time and effort providing staff to serve as speakers and facilitators at conferences and other public and learning events. In the past, a significant number of these events were open to nonprofit organizations of all types and sizes with many specifically focused on the needs of small- and medium-size nonprofit organizations that comprise the greatest share of the exempt organization landscape. However, it appears that most programming that boasted this level of accessibility to the small and mid-size nonprofits has been eliminated with recent budget cutting measures. The elimination of these programs has significantly reduced opportunities for small- and medium-size nonprofit representatives to interact with EO staff members and leadership.

One such initiative was the IRS EO workshop series for small- and medium-size nonprofits (SMS).¹¹⁶ This effort, which began in 2010, featured IRS partnerships with colleges and universities and offered single day workshops geared toward individuals operating small- and medium-size nonprofits as part of EO's overall "effort to help develop nonprofit leaders of tomorrow." The programs were described as covering the "nuts and bolts of tax compliance for exempt organizations, and were designed for board members, officers, volunteers and staff of small- and medium-size 501(c)(3) organizations, tax practitioners and students in nonprofit management programs." Programs were sometimes co-sponsored with a local nonprofit provided that the official host was a university or college. Universities provided the room use, marketing registration, audiovisual needs, staffing for the day of the event and general planning. The IRS provided speakers including their travel and lodging costs and workshop materials. The host was permitted to charge a small fee to participants.

This program was offered regularly since its 2010 inception. The program has now been phased out and has been replaced by the Virtual Small- and Mid-Size Tax Exempt Organization Workshop, described as the "online version of our popular Small- and Mid-Size 501(c)(3) Organization Workshops." This online video series is available for free viewing and download and can be found at https://www.stayexempt.irs.gov/Resource-Library/Virtual-Small-to-Mid-Size-Tax-Exempt-Organization-Workshop. The series provides programs on multiple EO topics as well as a downloadable copy of the SMS instructional handout. EO has also eliminated its educational phone forum series and significantly reduced its webinar offerings though some recorded programs are available via www.irs.gov.

The IRS should be commended for continuing to offer much of this content through this free downloadable video series, but should recognize that the transition to the all-video format shrinks already limited opportunities for small- and medium-size nonprofit leaders to interact with IRS staff and to learn from one another.

The loss of these engagements between the EO staff and exempt organizations results in missed opportunities for EO staff to learn about the key questions and challenges faced by the nonprofit sector as well as a loss of an opportunity for nonprofit leaders to converse with EO staff.

In the ACT's interviews with international regulators, some examples of this kind of interaction were highlighted, among them these comments from Australia:

• Not-for-profit sector organizations are the dominant voice in structuring policies of the Australia Charities and Not-for-Profits Commission (ACNC). Quarterly meetings are held in which nonprofit organizations provide advice to the ACNC. Three groups are involved: Professional Users group (leading accountants and attorneys in the nonprofit sector), Sector Users group (leaders of key nonprofit sector organizations) and Statutory Advisory group (academics and government officials from around the country). ACNC is heavily involved in social media, which aids in the continuing dialogue with state and local governments and the nonprofit sector, and builds trust.¹¹⁷

• Australian Taxation Office (ATO) and ACNC operate in close partnership with each other and with the nonprofit sector. They have quarterly meetings with nonprofit advisory groups to get feedback on how they can do a better job of supporting the sector and to be sure there are strong compliance networks to ensure fairness and confidence in the sector, and they provide the sector with tangible support tools.¹¹⁸ The ATO is interested in finding ways to engage with the nonprofit community. It has a program "Let's Talk" (http://letstalkaustralia.com.au) that provides training and coaching for organizations and individuals on effective communication, meeting human needs in NGOs and leadership skills.¹¹⁹

Decreased access to EO speakers and presenters

Historically, EO has provided speakers and presenters for programs around the nation for audiences that were broad and diverse. The number of speaking engagements, however, has declined in recent years.¹²⁰ With reductions in the number of speaking engagements, opportunities for cross learning between EO staff and sector stakeholders has diminished.

We recognize that significant effort goes into determining where to place limited resources for EO staff members' speaking engagements. Events like the TE/GE Council programs and Nationwide Tax Forums are attractive because they are viewed as national in scope and can reach a broad array of individuals. Nevertheless, the gap created by the decrease in direct EO engagement with the sector should be filled so as to provide resources and advice to nonprofits, in particular the ever-increasing community of small nonprofits.

With a few exceptions,¹²¹ Section 501(c)(3) organizations must file an application (IRS Form 1023 or 1023-EZ) with the IRS to have their charitable status recognized by the IRS. Most other types of tax-exempt organizations under Section 501, such as social clubs and business leagues, may but are not required to file an application (Form 1024) to have their tax-exempt status recognized.¹²² The IRS, following a determination that an organization has been recognized as a tax-exempt organization described in Section 501, sends a letter by mail to the organization. This determination letter typically serves as the IRS's first formal contact following recognition of the organization's exempt status and presents an incredible opportunity to educate the organization on its responsibilities as a tax-exempt entity. It also provides a way for the IRS to offer resources to the organization regarding its federal tax exemption.

The current determination letter sent by the IRS to newly recognized organizations is sparse and for many organizations can be confusing. This may especially be true of an organization filing a 1023-EZ, which may have had little or no education on operating as a charitable organization.¹²³

The ACT recommends that the IRS revamp the determination letter sent to exempt organizations to include more information that will help exempt organizations protect and maintain their tax-exempt status. We have included as Appendix A a proposed determination letter that would provide new exempt organizations with much-needed education regarding their tax-exempt status. The proposed determination letter has been written for newly recognized public charities, but could easily be revised for private foundations and for other types of tax-exempt organizations. This letter should be sent to exempt organizations via a technologically current, accessible platform.

State Offices of the Attorney General and Offices of the Secretary of State often use email to notify nonprofit organizations of approved applications, annual report filings, and due dates for registrations and renewals. For example, the Texas Comptroller of Public Accounts notifies tax-exempt organizations of their qualification for tax exemption via email, and the Connecticut Department of Consumer Protection notifies charities of their charity registration renewal by email. The notification provides taxpayers with several links to obtain more information on their responsibilities and obligations. Because the notification is sent via email, it is timely and the links providing additional education are live and easily accessed. In addition, the ease with which emails can be forwarded means others associated with the exempt organization, including board members, also may receive the information.

Many nonprofit organizations have an official "contact us" email address they share with the public on their websites. The IRS makes submission of this type of contact email address optional, rather than mandatory, on the Form 1023 application. The IRS does not use this email address in any communications with the applicant organization.

The IRS policy of not using email or other current technology to communicate with tax-exempt organizations results in a missed opportunity to reach out to these organizations in a timely, cost-effective way. The IRS could easily communicate with exempt organizations via email to provide notices, status updates, information on missed filing deadlines and other pertinent information. Unlike a paper letter or notice, email allows the IRS to provide accessible linked information regarding educational and compliance topics of general interest to exempt organizations.

The ACT recommends that the IRS require and maintain a primary organizational contact email address for each tax-exempt organization through which the IRS may timely communicate with the organization and provide updates and notices. Preferably, this email address will be an organizational email address that will not change even when there are changes to an organization's staff or volunteers. In addition, the IRS should institute a simple method for exempt organizations to notify it of a change to an organization's email contact address, such as through the Form 990 reporting process, which could request both a mailing address and primary contact email address for each tax-exempt organization. The organization could check a box on its Form 990 if its primary email address has changed since the prior year, as is already done with mailing address changes. Organizations that do not file a Form 990¹²⁵ could voluntarily notify the IRS of a change in primary email address by use of a special form or online method.

Although TE/GE leadership focuses intently on increasing the "self-sufficiency"¹²⁶ of taxpayers (in this case, exempt organizations), taxpayers are not experiencing a correlation between greater online filing and less phone volume. In fact, the January 2016 report from the Taxpayer Advocate Service indicated that despite the fact that the IRS has increased individual tax return e-filing rates from 54 percent to 85 percent, enhanced the Where's My Refund? tool and added information to the www.irs.gov website, "the number of taxpayer calls to its customer service lines has increased by 59 percent" from fiscal year 2006 to fiscal year 2015.¹²⁷

Phone assistance is often difficult to access. Individuals who staff the IRS Customer Service lines, including the line specifically advertised as the line for TE/GE (877-829-5500) are not staff members of the TE/GE Division. They are staff members contracted to provide this service from the Wage and Investment (W&I) Division of the IRS although they receive calls regarding other IRS divisions, including Exempt Organizations. Staff answering live calls do not have access to the EO Knowledge Management files (described in section V.A.1 of this report).

The call volume on this IRS TE/GE phone line is so over-subscribed that at high call volume times, callers hear a recorded message requesting that they call back at another time and are disconnected rather than placed on hold to speak with the next customer service representative.

It is worth highlighting that the fiscal year 2016 omnibus budget appropriates $11.235 billion for funding IRS operations. That represents an increase of $290 million compared to fiscal year 2015 spending. The IRS is to use the additional funding, in part, to make "measurable improvements in the customer service" and to enhance cyber security. The ACT recommends that EO consider offering additional avenues of support beyond phone assistance, such as online live chat.

VI. CONCLUSIONS

With this report, the ACT has tried to reflect the issues that the IRS, as regulator, must tackle today to prepare for tomorrow. Some of these are depicted as challenges, many as opportunities. Above all else, we recognized, as did those we interviewed, that EO is determined to fulfill its designated functions responsibly and effectively. Our recommendations are designed to help the IRS achieve those goals.

We know that the scope of our discussions and the nature of our recommendations do not all fall neatly within the defined responsibilities of the EO division. Indeed, that is one of the chief points we would like to stress to the nonprofit sector, Congress and the federal executive branch: the EO division does not operate in a vacuum. It is part of a community of institutional partners, federal agencies, Congress and state regulators. The EO division can also draw informally on the experience, learning and models of its counterpart regulators around the globe, as well as the knowledge and understanding of the communities it regulates. This report speaks to that broad community in addition to the EO division.

We were particularly struck by comments made during our conversations with other regulators in which it was stressed that successful outcomes depend on proactive engagement and the belief that the nonprofit community is not the opposition; rather, it has an important role to play in the development and support of the process of regulation. This concept was reinforced in the majority of our conversations with professional advisers, with nonprofit leaders and with academics and government advisers. Close engagement with these key stakeholders provides stability, experience and continuity in the volatile environment that is our current and future reality.

The recommendations represent what we (and those with whom we spoke) consider to be the necessary elements of a solid platform on which a regulatory partnership can be built: an adequately resourced regulator, armed with appropriate and available data and tools for the benefit of an educated exempt community, all based on strong, two-way dialogue and shared learning. The ACT recognizes that it is not EO's role to provide technical, precedential guidance. To regulate the sector effectively, however, EO must provide education, awareness and appropriate and timely support. Community and philanthropic engagement through the tax-exempt sector enrich and underpin our communities and society. Freedom of association encourages that engagement, but this is not without risk. Mitigating that risk through education, awareness building and appropriate and timely support are hallmarks of a successful regulator.

We believe that, with the good will of all involved, there should be a bright future ahead for the nonprofit and social sectors of the United States. Such a future can only be achieved with the full participation of all partners undertaking to deliver on their responsibilities; it is not within the power of EO to deliver on all of our recommendations in isolation. Our final, overarching recommendation for this year's ACT report is that the EO division, in serving our exempt communities and the public at large, must serve as a convener and as a focal point for this essential community of support.

• Cathlene Williams, PhD, for her assistance with interviews and report preparation.

• Staff of the Washington, D.C. office of Polsinelli PC for providing meeting space.

• All of the individuals we interviewed (listed in Appendix C) for this report.

Congratulations! We have determined your organization is exempt from federal income tax under Internal Revenue Code Section 501(c)(3). We also want to share with you information that will be helpful to you as you continue with your operations as a charitable organization. Please keep this letter in your permanent records for tax and donor purposes.

Charitable (Section 501(c)(3)) status. We have determined that based on your represented activities, your organization will qualify as a charitable organization within the meaning of Section 501(c)(3). To maintain this status, your organization must continue to be organized and operate in a charitable manner. For more information on charitable activities, please go to https://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Exemption-Requirements-Section-501(c)(3)-Organizations.

Public charity status. At the top of this letter, we indicated your public charity status. You need to be familiar with the requirements to maintain this public charity status. For example, your organization may be subject to a public support test that requires that it receive a certain amount of public support each year. For more information on the various types of public charities and the requirements for each type, visit the IRS website at https://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Public-Charities.

Annual information return. If we indicated at the top of this letter that you are required to file a Form 990/990-EZ/990-N, our records show that your organization is required to file an annual information return (Form 990 or Form 990-EZ) or electronic notice (Form 990-N) with the IRS. Which return or notice you file depends, in part, upon your size:

 Gross receipts or fair market value of assets    Return required

You can find out more information on the annual information return filing requirement at https://www.irs.gov/Charities-&-Non-Profits/Annual-Exempt-Organization-Return-Who-Must-File.

Limitations on lobbying and political activities. As a public charity, your political campaign and legislative activities are subject to these limitations:

• You may not intervene in political campaign activities, either in support of or in opposition to a candidate for public office.

• You may not engage in substantial legislative activities, which means only an insubstantial part of its activities can be influencing legislation (more commonly referred to as "lobbying").

Disclosure requirements. Your organization is required to make the following documents available to the public:

• Its three most recent information returns (including amended returns and including the Form 990-T); and

• Its IRS application for tax exemption, including all documents and statements the IRS required you to file with the application, any statement or other supporting document submitted by you in support of your application and any letter or other document issued by the IRS concerning the application.

• This requirement includes making a copy of your organization's determination letter available to the public.

State law. The IRS has determined that you are exempt from federal income tax law. This does not automatically mean you are exempt from state income taxes or other state and local taxes to which you may be subject. In addition, states may have other filing requirements to which you are subject. https://www.irs.gov/Charities-&-Non-Profits/State-Links. You should contact your state's Secretary of State and Office of the Attorney General to determine other requirements to which you may be subject. For state-specific information, go to http://www.nasconet.org/resources/.

Charitable contributions. Contributions made to you are generally tax-deductible by a donor, subject to certain limitations. A donor may deduct a charitable contribution of cash, check or other monetary amount of $250 or more to you only if the donor has a contemporaneous written acknowledgement from you. A donor cannot claim a deduction for any contribution of cash, check or other monetary gift unless the donor maintains a written record of the contribution, even if the gift is less than $250. Strict rules and additional substantiation may apply for deductions of quid pro quo contributions where a donor receives goods or services in return for a contribution (such as a fundraising dinner) and for noncash gifts. For more information on these contribution and substantiation rules, go to https://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Charitable-Organizations-Substantiation-and-Disclosure-Requirements or read IRS Publication 1771 at https://www.irs.gov/pub/irs-pdf/p1771.pdf.

Private inurement and private benefit. Section 501(c)(3) charitable organizations are prohibited from allowing the earnings of the organization to inure to the benefit of an insider. An "insider" is typically a person who has a personal or private interest in the activities of the organization, such as an officer, director or key employee. An example of private inurement is unreasonable compensation paid to an officer. A Section 501(c)(3) charitable organization is also prohibited from allowing more than insubstantial benefits to be conferred on private persons generally. A charitable organization generally must serve public interests, not private interests.

Unrelated business income. We have determined that your organization is exempt from federal income tax on income derived in the furtherance of its tax-exempt purposes. Tax-exempt organizations, however, are subject to a federal income tax on activities that are unrelated to the exempt functions of the organization, known as the unrelated business income tax (UBIT). Examples of activities that may generate UBIT are advertising income, the provision of certain types of services by a tax-exempt organization and the conduct of travel tours that are not substantially related to your exempt purpose. There are a number of important exceptions to the application of UBIT, such as the volunteer labor exception and the sale of donated merchandise. To learn more about UBIT, go to https://www.irs.gov/Charities-&-Non-Profits/Unrelated-Business-Income-Tax or read IRS Publication 598 at https://www.irs.gov/publications/p598/index.html.

Reporting changes to the IRS. We understand that your organization may change over time. Some of these changes can be reported to the IRS as part of the annual information return filing (i.e., Form 990). Other changes may be more material and require the filing of a notice or form with the IRS. You should familiarize yourself with IRS Form 8940 https://www.irs.gov/pub/irs-pdf/f8940.pdf on which many of these changes may be reported. The instructions to Form 8940 can be found at https://www.irs.gov/pub/irs-pdf/i8940.pdf.

Other matters. For a more complete listing of issues and resources for tax-exempt organizations, visit the IRS Web page at www.irs.gov/eo and review Publication 557, Tax-Exempt Status for Your Organization, at https://www.irs.gov/pub/irs-pdf/p557.pdf.

Again, congratulations on the recognition of your organization's Section 501(c)(3) and public charity status. We encourage you to explore the materials referenced in this letter to ensure compliance with the tax laws and to provide information on the permissible activities and restrictions for a charitable organization.

Adler & Colvin, San Francisco, California: Robert Wexler, Principal

American Institute of CPAs, Washington, D.C.: Chris Cole, Senior Technical Manager, Not-for-Profit Content Development and AICPA Not-for-Profit Expert Panel

Aspen Institute, Washington, D.C.: Cinthia Schuman-Ottinger, Deputy Director for Philanthropy Programs

Association of Healthcare Philanthropy, Falls Church, Virginia: Steve Churchill, President and CEO

Australian Charities and Not-for-Profits Commission, Sydney, Australia: Susan Pascoe, Commissioner, and Murray Beard, General Counsel

Australian Taxation Office, Strategy and Policy Branch, Private Groups and High Wealth Individuals, Sydney, Australia: Rod Walker, Director

Blumberg Segal LLP, Toronto, Canada: Mark Blumberg, Partner

Center on Nonprofits and Philanthropy, Urban Institute, Washington, D.C.: Elizabeth Boris, Director

Center on Philanthropy and Civil Society, Stanford University, Stanford, California: Lucy Bernholz, Senior Research Scholar

Centre for Philanthropy and Nonprofits Studies, Queensland University, Australia: Myles McGregor-Lowndes, Professor

Children's Hospital of Philadelphia, Philadelphia, Pennsylvania: Bonnie Brier, General Counsel

Council for Advancement and Support of Education, Washington, D.C.: Sue Cunningham, President

Council on Foundations, Washington, D.C.: Suzanne Friday, Senior Counsel and Vice President of Legal Affairs, and Katherine LaBeau, (former) Policy Director and Counsel

European Fundraising Association, Austria: Guenther Lutschinger, Chair (and CEO of the Austrian Association)

Evangelical Council for Financial Accountability, Winchester, Virginia: John Van Drunen, Executive Vice President and General Counsel, and Dan Busby, President

Ewing Marion Kauffman Foundation and Philanthropy Roundtable: John Tyler, General Counsel and Corporate Secretary

Exponent Philanthropy, Washington, D.C.: Henry Berman, CEO

Grants Manager's Network, Washington, D.C.: Michelle Greanias, Executive Director

GuideStar, Williamsburg, Virginia: Jacob Harold, CEO

Historic Environment Scotland, Dundee, Scotland: Jane Ryder (former CEO of Office of the Scottish Charity Regulator)

Humanitarian Quality Assurance Initiative, Sydney, Australia: Sue Ann Wallace (former CEO, Fundraising Institute Australia)

Independent Sector, Washington, D.C.: Geoffrey Plague, Vice President, Public Policy, and Allison Grayson, Director, Policy Development and Analysis

International Center for Nonprofit Law, Washington, D.C.: Doug Rutzen, President and CEO

Irish Charities Tax Reform, Dublin, Ireland: Shiela Nordon, Director

Loeb and Loeb, Washington, D.C.: Marc Owens, Partner

National Council of Nonprofits, Washington, D.C.: Jenny Chandler, Vice President, and Tim Delaney, President and CEO

NT Lawyers, Brisbane, Australia: Mark Fowler, Director

NTEN Coalition, Portland, Oregon: Amy Sample Ward, CEO

Simpson, Thacher & Bartlett, Washington, D.C.: Dave Shevlin, Partner

Tennessee Attorney General: Janet Kleinfelter, Deputy Attorney General (and President, National Association of State Charity Officials)

U.S. Conference of Bishops, Washington, D.C.: Michael Giuliano, Assistant General Counsel, Office of the General Counsel

Washington Society of CPAs, Washington, D.C.: Kari Bedell, Executive Director

Charity Regulation in Australia

Australian Charities and Not-for-Profit Commission website http://www.acnc.gov.au/ provides advice for not-for-profits, legal forms that can be adapted for use in particular organizational environments.

Australia Taxation Office, "Let's Talk" website http://letstalkaustralia.com.au provides training and coaching for organizations and individuals on effective communication, meeting human needs in NGOs and leadership skills.

Australia Taxation Office website https://www.ato.gov.au/Non-profit/ provides information on charities to the public and information for charities on how to comply with tax law.

Charity Regulation in Canada

Canada Revenue Agency website http://www.cra-arc.gc.ca/menu-eng.html provides information on charities to the public and information for charities on how to comply with tax law.

Canada Revenue Agency Fundraising Guidelines website http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/fndrsng-eng.html outlines the legal principles that relate to fundraising issues that are connected to federal (CRA) regulation of charities registered under the Income Tax Act, the policies and practices the CRA uses when it assesses fundraising in applications for registration or in audits of existing registered charities and how fundraising expenditures should be allocated for the purposes of completing T3010 -- Registered Charity Information Return.

Charity Regulation in the Republic of Ireland

Irish Charities Tax Reform Group website http://www.ictr.ie. ICTR is a leadership organization working on behalf of charities to enhance the conditions for a vibrant and independent charity sector in Ireland. Irish Charities Tax Research Ltd. is a sister organization to ICTR which has carried out research on VAT and Charities, tax relief on donations and on how regulation of fundraising by means of Codes of Practice can work in Ireland.

Irish Charities Tax Research Ltd and Philanthropy Ireland, "Research into Tax and Regulatory Policy in Ireland to Encourage Greater Philanthropy," September 2009. http://www.ictr.ie/files/Research%20into%20Tax%20and%20Regulatory%20Policy%20in%20Ireland%20to%20Encourage%20Greater%20Philanthropy1.pdf Report containing recommendations for reforms to the Tax Code of Ireland to encourage charitable donations.

Irish Charities Tax Research Ltd, "Regulation of Fundraising by charities through legislation and codes of practice," http://www.ictr.ie/files/R1.%20Regulation%20of%20Fundraising%20Report%20-%20May%202008.pdf.

Irish Charities Tax Research Ltd, "Statement of Guiding Principles for Fundraising," Feb 2008, http://www.ictr.ie/files/R2.%20Guiding%20Principles%20of%20Fundraising%20-%20Feb%202008.pdf.

Irish Charities Tax Research Ltd, "Briefing Notes on the Charities Act 2009," http://www.ictr.ie/files/Briefing%20Note%20on%20Charities%20Act%202009_0.pdf.

Irish Charities Tax Research Ltd., "Good Practice Fact Sheets," http://www.ictr.ie/content/good-practice-factsheets.

Charity Regulation in the U.K.

Charity Commission of England and Wales website https://www.gov.uk/government/organisations/charity-commission provides information on charities to the public and information for charities on how to comply with tax law.

U.K. Fundraising Standards Board website http://www.frsb.org.uk/. FSB is the independent self-regulator for fundraising in the UK. The Board encourages high standards in fundraising so that the public can be confident when they make a donation. The Board has 1,977 members and 50 percent of all voluntary income in the UK is raised by charities that are regulated by the FRSB. They support charities in being accountable for their fundraising and listen and help to resolve any concerns from the public.

Office of the Scottish Charity Regulator website http://www.oscr.org.uk/ provides information on charities to the public and information for charities on how to comply with tax law.

The ACT FSLG Subcommittee took on two projects for this report: a technical revision of internal FSLG Section 218¹²⁸ Trainings and a project to better achieve outreach and education to small local governments. There are 90,056 local government entities in the United States¹²⁹ with 11,933,783 full-time equivalent employees with payrolls in excess of $50 billion,¹³⁰ and currently only 47 IRS FSLG field specialists dedicated to state and local government issues.

Technical experts among the FSLG Subcommittee reviewed and made comments on the FSLG Phase Training, which is the internal program providing specialized knowledge to FSLG employees on the complex compliance issues for state and local government employers. The members of the subcommittee worked with senior FSLG agents to devise a new strategy and syllabus for FSLG internal training on Section 218 (42 U.S.C. 418) matters for new and continuing education.

The ACT FSLG Subcommittee formulated a survey to seek input from small local governments. The survey was distributed through various professional organizations and other outlets. A total of 437 responses were received. There were seven total questions plus an opportunity for free form feedback. The respondents seemed to value the survey as many took the time to provide narrative responses. This survey provides the backbone to the Subcommittee's recommendations.

The ACT FSLG Subcommittee makes the following recommendations (numbered for ease of reference not necessarily importance):

The ACT FSLG Subcommittee took on two projects for this report: a technical revision of internal FSLG Section 218 trainings and a project to better achieve outreach and education to small local governments. Regarding the latter topic, the Subcommittee desired to create a framework regarding how local government entities are identified in the states, and to identify preferred training content and delivery methods.

III. HISTORY

Prior to 1987, state and local government employment taxes (Social Security and/or Medicare taxes otherwise known as FICA) were collected by each State Social Security Administrator (See 20 C.F.R 404.1204) and prior to July 2, 1991, the only way for a state or local government employer to provide Social Security coverage to its employees was through a Section 218 Agreement. In 1987, the IRS was officially tasked to collect employment taxes from these government employers. The IRS in 2000 formed the Federal, State and Local Governments division to provide compliance oversight to state and local government employers. FSLG continues to supply audit, compliance review and outreach products to this customer base of state and local governments. The area of state and local government FICA compliance is exceedingly complex and requires specialized knowledge by IRS agents assigned to FSLG. This specialized knowledge is delivered by FSLG through its "Phase Training."

In regard to outreach to small local governments, even comprehending the landscape is difficult. There are 90,056 local government entities in the United States¹³¹ with 11,933,783 Full-time Equivalent employees with payrolls in excess of $50 billion,¹³² and currently only 47 IRS FSLG field specialists dedicated to state and local government issues. These local government entities range from traditionally understood institutions, like cities and counties, to less known ones, like fire protection and utility districts. (The Subcommittee takes a broad view of what constitutes a government entity, and includes in this definition quasi-government institutions as well.) It is difficult to generalize about the characteristics of these organizations, which can have no employees or tens of thousands of employees. However, a great number of these entities may have reporting obligations with the IRS, and would benefit from information provided from the IRS on a variety of topics. Many of the smaller entities are essentially "off the radar" from the IRS and do not appear to be connected to the FSLG in any way. The Subcommittee wanted to better understand who these political subdivisions might be, determine if they interact with the IRS and determine what content and method of information sharing is preferred.

IV. DUE DILIGENCE

Revision of Internal FSLG Section 218 Trainings:

The Subcommittee has commented on and assisted FSLG with a new strategy and syllabus for the IRS FSLG agents' internal training, both for new hires and continuing education.

FSLG is revising the entire Phase Training components and other internal trainings. FSLG staff provided documents with these new strategies. The Subcommittee reviewed these documents and commented. Phase I training is usually completed in classroom, but may be done virtually in the future. About three weeks after Phase I, an on-the-job instructor (OJI), or senior agent, is assigned to a new hire for real world work assignments of "training cases" that are denoted from project codes in the system.

The OJI is determined by the area manager based upon skill sets for communication, experience levels, interpersonal skills and knowledge sharing. The intent is to have the same OJI assigned to the hire throughout the entire process for continuity purposes.

Recommendations:

FSLG staff provided the training materials, which were edited by the Subcommittee, and agreed to by the agents. We recommend implementation of these changes. (See Appendix A for training recommendations strategy.)

The Subcommittee suggests that the training materials include more focus on state specific laws, knowledge and practices, since after Phase I is completed, a new hire will know the states he/she will be assigned.

Currently, it does not appear that any state auditor's office includes Section 218 or any other employment tax questions in their audit plans for the local entities. The IRS may want to consider partnering with state auditor's offices to include Section 218 questions and other employment tax basic reviews like whether reporting should be done on Form W-2 or Form 1099s in various reporting situations.

FSLG Outreach and Education to Small Local Governments Project

The ACT FSLG Subcommittee spoke with Mr. Paul Marmolejo, FSLG Director, and members of his staff periodically throughout 2015. The ACT FSLG Subcommittee formulated a survey to seek input from small local governments (see Appendix B for survey questions and responses). The survey was distributed through various professional organizations and other outlets (see Appendix C for distribution list). The survey was open for responses from October 9, 2015 through December 31, 2015.

A total of 437 responses were received. There were seven total questions plus an opportunity for free form feedback. The respondents seemed to value the survey as many took the time to provide narrative responses. The target universe was reached; 100 percent responding were from traditional government entities, including, in order of volume, cities/towns, school districts, fire districts and counties.

We asked entities to describe what state level entity they registered with (Question 2). We received a range of responses, and there was -- as one might expect -- no consistent set of agencies that regulated or managed the political subdivisions. The result is not surprising that there are a range of local political entities that have various forms of governance and regulation. This makes it difficult for the IRS/FSLG to partner with state governments as the primary distribution link to reach local government entities.

Many of the entities that responded to our survey indicated that they have more than 20 full-time employees. While the Subcommittee was pleased with the fact that 437 entities responded to the survey, it should be acknowledged that there are estimated to be more than 100,000 small governmental entities nationwide. We also understand that a majority of respondents to the survey resulted via the connection with the National Conference of State Social Security Administrators. Despite the survey results, the Subcommittee believes the majority of government entities in the country have fewer than 20 employees, and outreach needs to be crafted to reflect this reality. Of the types of staffing reported, the vast majority of entities employ internal staff, as opposed to third parties or contractors, to make required IRS filings.

Respondents were then asked in what format they prefer to receive communications regarding IRS education and updates. A clear plurality favored flash releases via email as the preferred method of information distribution. The respondents ranked the formats in the following order: flash news releases via email, quarterly newsletters on various topics via email, 15-30 minute webinars on specific topics, materials posted to the irs.gov website, printed materials, 15-30 minute podcasts and 15-30 minute phone forums.

In terms of preferred topics, there was demand for assistance with IRS reporting requirements (e.g., employment tax and new reporting under the Affordable Care Act), fringe benefit exclusion rules, Payroll 101 and employer-provided cell phones and vehicles.

Recommendations:

Our Subcommittee contacted several national associations to distribute our survey, and had some success. We recommend IRS partner with these national organizations (listed in Appendix C) to further the outreach for information and education exchange to these small local governments. The State Administrator/Retirement System contacts were particularly effective for dissemination of the survey, but further affiliations would be beneficial.

In terms of format, small entities preferred "flash news" items via email over other formats. Webinars and phone forums have been prioritized by the IRS recently, and the subcommittee wants to call attention to the fact that alternative forms of communication may be warranted to supplement webinars. Anecdotal feedback indicates that many respondents view the phone forums as too time-consuming and scripted. The Subcommittee recommends that the IRS/FSLG find better ways to get the word out about their existing email subscription service through partnering with the national associations identified in Appendix C.

Regarding content, the Subcommittee recommends small, topical articles, specific to one subject emailed periodically throughout the year. FSLG should not hesitate to repeat topics of importance using different messaging to capture different audiences, and also to make content easier to understand. The IRS FSLG should not necessarily ensure that materials are comprehensive on all facets, since there is a tradeoff between length of program and quality and volume of participation.

Regarding outreach, it will be key to target internal staff in these entities. It appears that smaller entities need direct training with their employees as opposed to reliance on their CPA firms or other third parties.

The Subcommittee recommends that the IRS FSLG develop a comprehensive plan for how to identify government entities in each state. This plan could involve the use of other professional associations, state associations and state officials.

V. CONCLUSION

The area of state and local government FICA compliance is exceedingly complex and requires specialized knowledge by IRS agents assigned to FSLG. With the limited resources available to the FSLG, it is vitally important to have well-trained staff. By implementing a new strategy and syllabus for FSLG internal training on Section 218 (42 U.S.C. 418) matters for new agents and providing continuing education, the FSLG will have the necessary expertise.

With over 90,000 local government entities in the United States and only 47 agents to ensure compliance, FSLG must rely upon outreach and education to gain the most effect for the efforts of those 47 agents. Outreach to smaller local government entities is even more crucial as these types of entities often times lack the specialized knowledge required and rely on internal staff for compliance. First, the FSLG must develop a system that accurately identifies these small local governments (they are often created and dissolved within each state). Next, the FSLG should find new ways to advertise their existing email subscription service to provide the preferred "flash news" items that can enhance compliance. FSLG should not hesitate to repeat topics of importance using different messaging to capture different audiences, and also to make content easier to understand.

New hires -- classroom training (as it occurs)

The guide will be used in conjunction with Phase I, II, and III* classroom training material. There are generally two basic training materials used in training new hires, a Student Guide and an Instructor Guide (training material). Throughout both training materials, the guide will be referenced. The Instructor Guide will indicate to the instructor what excerpts from the guide such as case studies, examples, etc. to emphasize.

*NOTE: Because of the complexity of the topics in Phase II, we most likely will move or expand some of the topics into Phase III.

New hires -- on-the-job training

At the end of Phase I and II training, the new hires go through an "on-the-job" phase where they work cases with the assistance of an "on-the-job" instructor (OJI) incorporating the concepts learned in phase training and create tools, not in the guide, as issues come up such as, but not limited to:

• Recap Revenue Procedure 91-40

• Job aid defining part-time and how to work that issue

• Form to request modification from State Social Security Administrator

• Job aid on election worker payments

• The form entities may use -- IRS Name Change Notification -- for IRS IDRS updates

• Utilize State and Local Coverage Handbook from SSA

• Job aid on 414(h)(2) "pick up" contributions

• Create or incorporate 218 information in the Internal Revenue Manual (IRM) and FSLG website

• Job aid on mandatory Social Security and Medicare coverage

• Job aid on student services

• Special state provisions noting differences among states

• How to look at modifications

• How to read modifications

• Understand customer bases

• Discuss basic 218 issues such as:

• • Absolute coverage groups (b5)

  • Retirement system coverage groups (d4) or (d6)

  • Mandatory exclusions

  • Optional exclusions

  • Effective dates

CPE is conducted through SABA meeting, a virtual outlet. For fiscal year 2016, each Section 218 group champion will discuss a Section 218 item.

Fiscal year 2017 continuing professional education and subsequent year

Section 218 group champions will discuss reoccurring or problematic issues, segments of the guide to provide additional and/or more detail training, job aids, work papers, legislative changes and other items of significance to FSLG employees.

Social Security and Medicare Coverage for Government Employees Guide

Take the current sections of Phase I and II and combine the topics into chapters that go together in a way that flows best. We can delete, reduce or combine sections as needed. Throughout the document when appropriate, we can cite a "HINT," initial interview #1, IDR or audit procedure. Take all the hints and create a separate job aid/link/exhibit for each type of hint (i.e., a job aid for initial interview). Within the document, we could also cite examples from the ACT committee, references to State and Local Handbook or Pub 963 (whatever is acceptable).

*NOTE: There are other sections in Phase I and II training that cite Section 218 Agreement items. We may want to just look at those sections to ensure that correct information is included.

1 Legislative History

2 Public Retirement Systems

3 Section 218 Coverage

• Basic Section 218 Concepts

• • Glossary of Terms

  • State Enabling Legislation

  • Original Agreement

  • Modifications

• Mandatory Section 218 Exclusions

• Optional Section 218 Exclusions

• Coverage Groups

• • Absolute Coverage Group

  • Retirement System Coverage Group

  • • Majority Vote Referendum

    • Divided Vote Referendum

    • Medicare HI-Only for Pre-86 Hires

• Mandatory Social Security Coverage

• • Exclusions

• Mandatory Medicare Coverage

• • Exclusions

  • Continuing Employment Exception

6 Teachers

7 Steps to Determine Social Security and Medicare Coverage

8 Effective Dates of Coverage

9 Form 8821

1 A Review of Social Security and Medicare Coverage of State and Local Government Employees

2 Retirement System Coverage

• System-wide

• Entity

4 Retirement Plan Ineligibles

5 Rehired Annuitants

• New Hire vs New Member

• Frequently Asked Questions

7 Dates Associated with Section 218 Modifications

8 Reporting New Government Components

9 Error Modifications

10 Continuation of Coverage Rules

• Majority Vote Retirement System

• Divided Vote Retirement System

12 Review of Modification Examples

 

* * * * *

 

 

APPENDIX B

 

Survey of Small Local Government Entities

 

(including narrative comments)

 

 

[ Editor's Note: Appendix omitted. To view the Appendix,

 

See , p. 173.]

 

 

* * * * *

 

 

APPENDIX C

 

National Associations and Professional Organizations

 

The Indian Tribal Governments (ITG) Subcommittee chose for its project the preparation of a survey covering the effectiveness of the Internal Revenue Service communication methodologies and the compilation of the results of that survey. Also included in the survey were questions focused on substantive areas of taxation and the understanding of tribal governments about these substantive areas of taxation and their impact on tribal governments. There have been discussions at different tribal meetings regarding the effectiveness of the communication and training provided by the IRS to tribal governments and entities. This project provides feedback to the IRS/ITG office from Tribal governments and their entities. Through the use of the survey, the ITG Subcommittee believes we can provide recommendations to improve communication, training and interaction with tribal governments and their entities. It is mutually advantageous to both the IRS and the tribal governments to make information about its programs and practices as easy to access and utilize as possible. This report also addresses some of substantive tax topics identified in the survey as concerns of tribal governments. These include the "employer mandate" and "Cadillac Tax" under the Patient Protection and Affordable Care Act of 2010 (ACA),¹³³ and under the Tribal General Welfare Exclusion ACT (GWEA) of 2014.¹³⁴

II. INTRODUCTION

Based on the survey results and responses, the recommendations made by the ITG subcommittee are as follows. First, the ITG should continue to participate in annual or semiannual meetings of tribal organizations such as the National Congress of American Indians and the Native American Finance Officers Association to update tribal organizations on important tax topics. Second, the ITG should continue to present relevant and timely webinars that can be virtually attended by tribal finance personnel as well as tribal leaders. Third, the ITG should provide training to ITG field agents on substantive tax topics such as the GWEA and tribal government responsibilities under the GWEA. Fourth, the ITG should provide timely regional face-to-face training to tribal governments and entities on substantive tax topics. Fifth, the IRS should exempt tribal governments from the employer mandate imposed by the ACA. Sixth, the IRS should abandon the payment model under Notice 2015-52, both as a matter of law and tax policy in favor of allowing employers to calculate and pay the tax themselves on any excess benefits they may provide. Seventh, the IRS should resolve uncertainties that have arisen since the passage of the GWEA by clearly defining undefined terms and clarifying confusing language.

III. HISTORY

The United States government has a unique legal relationship with Indian tribal governments as set forth in the Constitution of the United States, treaties, statutes and court decisions. Tribal government powers includes the authority to establish, within tribal boundaries, the form of the tribal government, determine tribal membership, regulate tribal and individual property, levy taxes, establish courts and maintain law and order. Generally, Indian tribes provide governmental services, such as transportation, education and medical care to Indian tribal members.

The general rule in the field of Indian law is that unless there is specific delegation of authority provided by Congress, state laws generally do not apply to Indians on tribal land. Thus, Indian tribes are sovereign entities within the borders of the states in which they reside. Tribal sovereignty is the foundation upon which the government-to-government relationship stands. Sovereignty is neither granted by, nor negated by federal statutes, acts or treaties. It is inherent.

Over the years, Presidential Executive Orders have directed federal government agencies, to the extent permitted by law, to "respect Indian tribal self-government and sovereignty, honor tribal treaty and other rights, and strive to meet the responsibilities that arise from the unique legal relationship between the federal government and Indian tribal governments." (Executive Order No. 13175, 65 FR 67249, Nov. 6, 2000.) This relationship is not intended to prevent representatives of the IRS from carrying out official government business.

The mission of the ITG is to provide ITG customers top quality service by helping them to understand and comply with applicable tax laws, and to protect the public interest by applying the tax law with integrity and fairness to all. The ITG is guided by principles of respect for Indian tribal self-government and sovereignty. The ITG maintains a functional and interactive government-to-government relationship between the IRS and Indian tribal governments as envisioned by Presidential Executive Orders. The ITG was established to assist Indian tribes with their federal tax matters. Tribal governments and tribal associations provided valuable input into the design of ITG, which is focused on providing a single point of contact for assistance and service in addressing tax matters.

IV. DUE DILIGENCE

Evaluation Process

Because ITG cannot contact the tribal governments for this type of project, the ITG Subcommittee members formulated a survey to be distributed to ITG's customers. The survey (using the www.surveymoney.com online tool) asked ITG's customers to respond to questions regarding their experience with the training, information, communication and experience with the IRS.

The survey announcement was publicized through the use of the following organizations:

Survey Results

A total of 40 people responded to the survey. Most of the people who responded were tribal government employees (77 percent) who had responsibility for tribal government financial matters including federal taxes. Twenty-one percent were from nonprofits.

 

Q3 Please identifying your type of tribal organization.

 

 

 

In the survey, we asked each respondent to identify the number of employees within their tribal organization. Sixty-seven percent of the organizations had less than 500 employees, 19 percent had between 501 and 1,000 employees and 14 percent had more than 1,000 employees. Ninety percent of the organizations prepare their own payroll reports.

 

Q4 How many employees are employed by

 

your Tribal organization?

 

 

 

 

Q7 Does your Tribal organization plan to prepare

 

reports related to the Affordable Care Act?

 

 

 

Some survey questions were asked related to the information on the ITG website related to the ACA and GWEA. Eighteen percent feel there is sufficient information related to the ACA to meet their organization's needs on the ITG website. Fifty-five percent indicated there is not sufficient information on the ACA. Twenty percent feel there is sufficient information related to the GWEA to meet their organization's needs on the ITG website. Thirty-nine percent indicated there is not sufficient information on the GWEA.

 

Q13 Is there sufficient information available

 

regarding the General Welfare Act to meet

 

your needs on the ITG website?

 

 

 

 

Q9 Is your Tribal organization aware of

 

the ITG website?

 

 

 

 

Q11 Do you find it easy to access the

 

information on the ITG website?

 

 

 

Thirty-six percent receive the IRS ITG newsletter. Sixty-four percent do not receive the newsletter including 26 percent who are not aware of its existence. Most who do not receive it plan to subscribe in the future to IRS ITG newsletter.

 

Q16 Have you participated in an IRS webinar?

 

 

 

Sixty-six percent of the respondents have received IRS notices in the last two years. Sixty percent of the respondents have been involved in an IRS audit, compliance check or review in the past five years. Thirty-eight percent have had an overall positive experience with the IRS. Thirty-three percent have had a moderately successful experience. Thirty percent have had a less than a moderately successful experience with the IRS.

 

Q23 Has the Tribal organization received

 

any IRS notices in the last 2 years?

 

 

 

 

Q24 Has the Tribal organization been

 

involved in an IRS audit, compliance check,

 

or review in the past 5 yrs.?

 

 

 

 

Q27 Please rate on how the IRS exhibited knowledge and recognition

 

of tribal cultural traits.

 

 

 

 

Q28 In the past year have you contacted

 

your regional ITG specialist?

 

 

 

We will provide a discussion of three principal topics resulting from the survey that were identified as major concerns by the survey participants. First, the need for a tribal exemption from the ACA's employer mandate; second, the negative impact of the Cadillac Tax excise tax on high-cost tribal employer-sponsored health coverage -- IRS Notice 2015-52 on Section 4980I of the Internal Revenue Code (the Code) and third, the ongoing need to provide guidance related to the GWEA.

Tribal Exemption from the ACA's Employer Mandate

The employer shared responsibility rule (also known as the employer mandate) will impose a significant financial hardship for Tribal employers, undercut the right of American Indians and Alaska Natives (AI/ANs) to obtain health care free of charge at Indian Health Service (IHS), Tribal and Urban Indian Organization health facilities (collectively, I/T/U) and nullify various AI/AN-specific protections in the ACA. Many Tribal workforces are largely comprised of Tribal members who are otherwise exempt from the ACA's individual mandate to obtain coverage, and who are eligible to obtain care free of charge through the IHS system. Requiring tribes to either incur the cost of purchasing insurance for their member employees (who already have a right to free care) or pay a penalty is fundamentally inconsistent with the federal trust responsibility and will impose a significant economic burden on Tribal governments. With the employer mandate implementation deadline fast approaching, it is imperative the IRS take immediate action on a Tribal exemption as soon as possible.

In light of the federal government's trust responsibility, many Tribal employers have not historically offered health coverage to all their employees. The majority of many Tribal workforces qualify for IHS services, and the remote location of many I/T/U facilities means that they are frequently the only viable health care option available for these employees in any event. This means that application of the employer shared §§ 136.11 and 136.12. responsibility rule to Tribal governments will impose significant costs on Tribes to provide coverage for AI/ANs for whom the federal government is already obligated to provide care. Federal responsibility for the provision of such health services would allow Tribal governments to allocate and expend scarce resources elsewhere.¹³⁷

The Employer Mandate is Unaffordable for Many Tribal Employers.

Compliance with the employer mandate forces Tribes to either absorb the cost of employee health insurance or pay non-compliance penalties of up to $2,000 per year per full-time employee.¹³⁸ This is a costly burden for Tribes that are already faced with significant financial hardships.

For example, the Oglala Sioux and the Rosebud Sioux Tribes are among the poorest in the United States, with Tribal member unemployment rates estimated at 89 percent and 83 percent, respectively.¹³⁹ Each Tribe has over 800 full-time employees working for the Tribal government alone, excluding casino employees. Although neither Tribe can afford the costs of offering their employees health insurance, each Tribe would face approximately $1.6 million in annual penalties under the mandate.¹⁴⁰ Tribal governments are not like private businesses, whose opposition to the employer mandate may be motivated solely by concern over lost profits. Rather, Tribes are sovereign, governmental entities that are directly responsible for the health and welfare of their people, to whom the United States owes a trust responsibility, and are also often the only major employers on the reservation. Forcing Tribes to pay millions in penalties -- or, alternatively, to purchase costly insurance for Tribal member employees who are otherwise exempt from the individual mandate and eligible for free care through the IHS system -- will directly result in a reduction in workforce size, a limitation on the scope of Tribal enterprises, and a diminishment of essential governmental services such as social, health and public safety. While all employers subject to the employer mandate must account for insurance costs when making decisions concerning expansion or hiring, the stakes are comparatively much higher when a Tribe might have to choose between purchasing employee health insurance and funding an adequate reservation police force. If applied to Tribal governments, the employer mandate has the potential to critically limit basic Tribal governmental functions.

First, as a general matter, health plans generally require employees to pay some portion of premium costs. In the case of AI/AN employees, they would be required to "pay" for health care in violation of the trust responsibility. Depending on the type of plan and whether the AI/AN employee visits facilities that are in or out of network, AI/AN employees may also be subject to copayment, deductible and coinsurance requirements.¹⁴² The trust responsibility protects AI/ANs from having to involuntarily make these types of personal health care expenditures.

Second, the employer mandate would result in a redundant payment cycle in which 1) Tribal employers use their own funding (most likely a combination of federal funding and outside revenue) to purchase employee insurance; 2) many employees visit the local IHS health program for services; and 3) the employee's insurer then reimburses IHS. In these circumstances, the employer mandate essentially requires Tribes to use Tribal funding to purchase insurance from private companies which then pay IHS for providing health services while keeping between 15-20% of the premium payments off the top.¹⁴³ Requiring Tribal governments to involuntarily subsidize IHS by providing IHS with a Tribally-funded source of third-party resources does not respect the government-to-government relationship between Tribes and the United States nor the obligations of the trust responsibility.

First, Congress exempted AI/ANs from the ACA's individual mandate out of recognition that AI/ANs are entitled to federal health care benefits and therefore should not be forced to obtain and pay for non-IHS coverage.¹⁴⁴ When Tribal employers are required to offer such coverage anyway, AI/AN employees are given two choices: either accept the coverage and be personally responsible for any applicable employee share of premiums or cost-sharing, or else reject the coverage and lose eligibility for Marketplace tax credits. Under either scenario, the individual AI/AN is "paying" for health coverage in the form of actual plan costs or lost tax credit eligibility.

Second, many Tribes and Tribal organizations have aggressively sought to facilitate AI/AN enrollment in Marketplace plans so as to take advantage of the Marketplace's Indian-specific cost-sharing protections, which help defray the cost of AI/AN enrollment.¹⁴⁵ However, employers are not subject to the employer mandate penalties unless a full-time employee subsequently enrolls in an ACA Marketplace plan and obtains a tax credit or cost-sharing reduction,¹⁴⁶ which includes the AI/AN cost-sharing protections set out in section 1402 of the ACA.¹⁴⁷ Tribes are therefore placed in a bind with regard to their AI/AN employees: on the one hand, they may not be able to afford to provide them with employer-sponsored coverage, and instead may prefer to assist with Marketplace enrollment. But, if a Tribe does steer employees toward ACA Marketplace plans rather than providing employer coverage, the employees will almost certainly qualify for a cost-sharing reduction or tax credit, thus triggering employer liability under the ACA. This discourages Tribes from guiding AI/AN employees into the Marketplaces (as opposed to comparably less generous coverage options like Medicaid), which both prevents AI/ANs from taking full advantage of their benefits under the ACA and decreases the overall pool of Marketplace applicants. Neither of the outcomes benefit Tribal employers, insurance consumers nationwide nor the federal government.

Third, AI/ANs are further incentivized toward participating in Marketplaces through the availability of premium tax credits: because the IRS excludes various types of Indian-specific income when calculating AI/AN eligibility for the tax credits, it is comparatively easier for AI/ANs to qualify.¹⁴⁸ In light of the fact that AI/AN eligibility for IHS services acts as a natural disincentive for enrollment in private insurance plans that require the individual to pay premiums and cost-sharing, the availability of tax credits may well be a deciding factor for AI/AN participation in the Marketplace. However, employees are automatically disqualified from tax credit eligibility merely upon receiving an offer of coverage from their employer.¹⁴⁹

This creates an exceptional burden on Tribes and AI/AN employees. Tribes that seek to comply with the mandate on a limited budget often find that the only available options are very expensive for employees, have high cost-sharing amounts or are less comprehensive than plans available to a large, urban employer.¹⁵⁰ The remote location of many I/T/U facilities creates additional difficulties in locating plans that treat Tribal facilities as in-network or otherwise preferred providers. The end result is that the Tribe must either bear the burden of paying for expensive and/or low-quality coverage or else subjecting itself to significant employer mandate penalties, while the AI/AN employee must choose between paying for his or her own coverage in violation of the AI/AN individual mandate exemption or losing their tax credit eligibility. These are not desirable outcomes under the ACA.

Notwithstanding these provisions, should the IRS nevertheless apply the excise tax to covered Tribal employers, ITG offers the following comments regarding a matter of particular concern on which the IRS solicits input. Specifically, we believe that Notice 2015-52's proposed excise tax payment/reimbursement methodology, under which the "administrator" of a self-insured plan (if determined to be an entity other than the employer itself for purposes of Section 4980I) would pay the tax on the employer's behalf and then bill the employer for the cost after grossing up the amount of the entity's non-deductible excise tax to account for income tax on the reimbursement, is impermissible as a matter of statutory interpretation and very problematic as a matter of tax policy.

Under well-recognized rules of statutory interpretation, Congress's exclusion of Tribal governments from Code Section 4980I must be considered deliberate. First, statutes of general applicability that interfere with rights of self-governance, such as the relationship between Tribal governments and on-reservation Tribal businesses and their employees, require "a clear and plain congressional intent" that they apply to Tribes before they will be so interpreted.¹⁵⁶ Although Congress repeatedly referenced Indian Tribes in the ACA,¹⁵⁷ and specifically discussed governmental entities in Code Section 4980I, it did not include Tribes at all in the statutory provision concerning the coverage of the excise tax. This clearly indicates that Code Section 4980I does not apply to Tribal employers that administer their own plans.¹⁵⁸

Second, there are numerous provisions in the Code that explicitly mention Tribal governmental entities,¹⁵⁹ include Tribally-sponsored benefits within the definition of "governmental plans" in various contexts¹⁶⁰ or specifically note when Tribal governmental entities are to be treated identically to state governments for the purposes of a given rule.¹⁶¹ These provisions almost all cite the definition of "Indian tribal government" set out in Code Section 7701, a provision that the ACA repeatedly referenced and amended.¹⁶² Congress clearly knows how to include Tribal governments or their health plans within the scope of a particular Code provision.¹⁶³ The ACA explicitly amended the Code section that includes a commonly-cited definition of "Tribal government."¹⁶⁴ Congress did not mention Tribes in Code Section 4980I's discussion of governmental entities. "[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act; it is generally presumed that Congress acts intentionally and purposefully in the disparate inclusion or exclusion."¹⁶⁵ Code Section 4980I must and reasonably should be construed to exclude Tribal plans from the excise tax.

First, Tribes face many hurdles in maintaining a viable workforce. For example, Tribes in more remote areas often have trouble recruiting and retaining employees (particularly, health care professionals or other individuals with advanced degrees), while ongoing funding disparities and the nonprofit status of many Tribal entities can make it difficult for Tribes to offer competitive wages. As an alternative, many Tribes structure their employee benefits packages to be comparatively generous in order to attract applicants. These non-salary benefits, which can be virtually the only way for a Tribal employer to compete with non-Tribal counterparts, are a necessary cost for Tribes to do business, despite seeming inflated in a vacuum when compared to insurance costs for national or international employers that can better spread risk across thousands of urban employees.

Second, applying the tax to Tribal employers would disproportionately affect American Indians and Alaska Natives. The alleged purpose of the excise tax is to drive down health care costs by encouraging individuals to be more judicious in their use of health services. As this logic goes, in order to avoid the excise tax, employers will revise their plans by 1) reducing plan options, covered benefits, or the scope of provider networks for employees; and 2) increasing employee cost-sharing by offering plans with higher deductibles or other out-of-pocket costs. When employees subsequently must pay more for visits, tests, procedures and medications, they will be more selective and only engage in "medically necessary" visits, tests, procedures and medications (thus driving down service usage and overall costs).

But this theory is premised on the notion that the provision of "Cadillac" plans encourages employees to frivolously overuse the health care system. To whatever extent this might be true among the general population, American Indians and Alaska Natives' interactions with health care providers is neither frivolous nor over utilized. Rather, these individuals suffer from chronic diseases at a significantly higher rate than the general population,¹⁶⁷ have an increased rate of poverty¹⁶⁸ and are often entirely reliant on remote and drastically underfunded IHS facilities for their care.¹⁶⁹ If applied to Tribes, the excise tax would therefore diminish the ability of American Indians and Alaska Natives to obtain services that are more likely to be medically necessary and less likely to be readily available, and increase out of pocket costs for a patient population that can least comfortably bear that burden. This not only fails to advance the nominal purpose of and logic underpinning the excise tax, but it undercuts the federal government's trust responsibility toward American Indian and Alaska Native health.

Third, and at the Tribal level, being subject to the tax would force Tribal employers into one of the following scenarios:

• Option 1: Pay the tax. Tribes must then divert their limited and finite funding away from necessary services such as law enforcement, health care and other governmental requirements in order to "pay" the IRS. The Tribe might then be forced to increase employee contribution amounts or cost-sharing in its self-funded plan to make up a portion of the difference, which would additionally burden the individual employees.¹⁷⁰

• Option 2: Replace its existing plan, which has been carefully tailored according to the needs of the Tribal workforce and the realities of market pressures, with lower-cost insurance. The replacement coverage may be less comprehensive, include fewer in-network providers or have higher costs for the individual employee. This will result in dissatisfaction and potentially lower health outcomes for employees and difficulties for the Tribe in employee recruitment and retention.

• Option 3: Eliminate employer-sponsored coverage altogether. The Tribe will then become potentially liable for the ACA's employer mandate penalty, which would again force the Tribe to divert funding back to the federal government. The Tribe will also be placed at a significant disadvantage from a human resources standpoint and the employees would lack access to employer-sponsored care.

Coverage for Tribal member employees, however, is not excluded from income pursuant to Code Section 106, but rather by virtue of Code Section 139D, which excludes from an individual's gross income the value of:

• Any health service or benefit provided or purchased, directly or indirectly, by IHS through a grant to or a contract or compact with a Tribe or Tribal organization, or through a third-party program funded by IHS;

• Medical care provided, purchased or reimbursed by a Tribe or Tribal organization for, or to, a Tribal member (including the member's spouse or dependent);

• Coverage under accident or health insurance (or an arrangement or plan having the effect of accident or health insurance) provided by a Tribe or Tribal organization for a Tribal member (including the member's spouse or dependent); and

• Any other medical care provided by a Tribe or Tribal organization that supplements, replaces or substitutes for a program or service relating to medical care provided by the federal government to Tribes or Tribal members.¹⁷³

Code Section 4980I(c)(1) states that the "coverage provider" is liable for paying the excise tax. In the context of self-insured plans, the coverage provider is "the person that administers the plan benefits."¹⁷⁵ According to Notice 2015-52, because the latter phrase is undefined in the Code or related statutes:¹⁷⁶

First, the IRS interpretation would impose an effective tax rate on an employer that exceeds the rate specified in Code Section 4980I. In the event that an employer provides excess benefits, Code Section 4980I(a) imposes an excise tax "equal to 40 percent of the excess benefit."¹⁷⁸ But by authorizing a TPA to pay the excise tax and bill the employer, and to additionally bill a grossed up income tax amount to cover the TPA's own income tax liability with respect to the reimbursement payment, the employer's liability for tax does not equal 40 percent of the excess benefit; it exceeds it. For example, in the event of an employer's $2,500 excess benefit, and assuming an effective income tax rate on the TPA of 20 percent, the TPA would pay the excise tax of $1,000, and then bill the employer for that amount, plus the $250 the TPA will owe in income tax on the reimbursement of the non-deductible excise tax and related reimbursement of the income tax itself. That would mean that a Tribe, or any other tax-exempt entity operating a self-insured plan through a taxable TPA, would actually pay $1,250 of tax on an excess benefit of $2,500, or an effective tax rate of 50 percent.¹⁷⁹

In addition, the application of this proposed methodology leads to a vicious cycle of increasing excise tax liability for the employer. In determining the cost of applicable coverage subject to the excise tax, Code Section 4980I(d)(2)(A) provides that "any portion of the cost of such coverage which is attributable to the tax imposed under this section shall not be taken into account." While the drafters acknowledge in the Notice that the computation of the excess benefit under the employer's plan will not include the excise tax reimbursement, the Notice indicates that reimbursement of the TPA's income tax most likely will be added to the cost of coverage subject to the Code Section 4980I tax.¹⁸⁰

In practice, this means that should any ultimate implementing regulations treat the TPA as the person administering the plan benefits, and implicate the proposed pay-and-reimburse model, employers will be stuck in a cycle through their reimbursement of the TPA's income tax expenses will subsequently increase the employer's own cost of coverage. Unless the employer amends its plan, this increase in coverage cost will subsequently increase the employer's excise tax liability and its TPA income tax reimbursement obligation. This itself will once again increase the deemed cost of coverage and further gross up the employer's excise tax liability, thus triggering the entire cycle in perpetuity.

This has the potential to drastically compound an employer's effective liability under the statute without any increase of benefits under its plan. For instance, one Tribe has calculated that it would be liable for approximately $250,000 in penalties on an excess benefit of $625,000. Applying the IRS "income tax liability" formula would result in an additional $62,500 owed to a TPA with a marginal income tax rate of 20 percent, which would then increase the Tribe's cost of coverage to $712,500 and its excise tax payment to $275,000: a $25,000 increase in liability. In imposing the Code Section 4980I excise tax as being "equal" to 40 percent of the excess benefit, Congress did not leave room for an interpretation under which the end-result is an effective tax rate will almost always exceed this stated statutory amount if a TPA is responsible for administration of the plan under the terms established by the employer.

Second, and as noted above, the IRS states that this payment and reimbursement process is necessary because "Section 4980I does not define the term 'person that administers the plan benefits'" who is liable to pay the tax.¹⁸¹ But this is not accurate: Code Section 4980I(f)(6) defines the "person that administers the benefits" as the "plan sponsor if the plan sponsor administers benefits under the plan," while Code Section 4980I(f)(7) then defines "plan sponsor" through the incorporation of Section 3(16)(B) of the Employee Retirement Income Security Act of 1974, as amended. This provision states, in relevant part, that the plan sponsor in this context is "the employer in the case of an employee benefit plan established or maintained by a single employer."¹⁸²

We believe that the most natural reading of these provisions as a whole is that the employer should be considered the person that "administers benefits" under the plan, in that the employer has the ultimate administrative authority to set the plan terms, pick the TPA and usually make final benefit decisions. If that were the case, the employer itself would calculate and pay the tax, without having to involve third parties. That seems a much more logical application of the tax than the complex TPA reimbursement scenario Notice 2015-52 suggests, particularly with respect to any Tribe or other tax-exempt employer.¹⁸³

Third, as a matter of practical implementation and tax policy, requiring that employers coordinate tax payments with a TPA invites a host of administrative difficulties that would not exist if employers simply paid the tax themselves.¹⁸⁴ For example, Code Section 4980I(e) penalizes the "employer or plan sponsor" for failure to properly calculate the tax, which, per the Notice, could mean the TPA. But how will the TPA ensure that the employer has properly calculated the tax amount, which it would then send to the TPA for payment? What recourse would the TPA have if the employer failed to calculate the tax amount accurately and in a timely manner? This would seem to suggest that TPAs would have to oversee or otherwise "check the work" of the employer; would the TPA be authorized to pass through the costs of these added burdens to the employer? Would such pass through increase the employer's cost of coverage?¹⁸⁵

These are just some of the many difficulties and potentially lawsuit-inducing adversarial situations that could arise under Notice 2015-52's pay and reimburse model. As a practical matter, Congress cannot have intended to subject both employers and TPAs to the cost of undertaking such a complex and expensive system, particularly as compared to the relatively straightforward option of simply having the plan sponsor (defined as the employer, in the case of a self-insured plan) calculate and pay the excise tax on its own.

Absent clear statutory direction for doing so, the IRS should not unnecessarily complicate an already complicated calculation.¹⁸⁶

The ongoing need to clarify and educate on the Tribal General Welfare Exclusion Act

The GWEA was enacted by Congress to amend the Code to exclude from gross income, for income tax purposes, the value of an Indian general welfare benefit. The GWEA defines "Indian general welfare benefit" as any payment made or services provided to or on behalf of a member of an Indian tribe under an Indian tribal government program if: 1) such program is administered under specified guidelines and does not discriminate in favor of members of the governing body of the Indian tribe; and 2) the program benefits are available to any tribal member, are for the promotion of general welfare, are not lavish or extravagant, and are not compensation for services.

The GWEA also directed the Secretary of the Treasury to: 1) establish a Tribal Advisory Committee to advise the Secretary on the taxation of Indians; 2) establish and require training and education for IRS field agents on federal Indian law and the implementation of the GWEA; and 3) suspend audits and examinations of Indian tribal governments and members of Indian tribes and waive any interest or tax penalties related to the exclusion from gross income of Indian general welfare benefits.¹⁸⁷

The GWEA dealt with Tribal concerns with the IRS interpretation of the new statutory requirement that the benefits be "for promotion of general welfare" as requiring a determination of individual or family financial need (as IRS has required in the past in evaluating tribal programs). The GWEA legislative history clarifies that Congress intended that the IRS will apply this requirement in a manner no less favorable than the safe harbor approach provided for in Revenue Procedure 2014-35, and in no event will the IRS require an individualized determination of financial need where a Tribal program meets all other requirements of new Code Section 139E, as added by the GWEA.

V. CONCLUSION

It is the recommendation of the ITG Subcommittee that the IRS continue its relationship with Tribal governments consistent with trust status the Tribes have with the U.S. government and its agencies in all decision-making policies. The creation of an effective and clear communication process with Tribal governments and their entities through the ITG will allow for more effective decision-making.

• ITG staff should continue to participate in annual or semiannual meetings of tribal organizations such as the National Congress of American Indians and the Native American Finance Officers Association to update tribal organizations on any decision-making policies.

• IRS should continue to present relevant and timely webinars, which can be virtually attended by tribal finance personnel as well as tribal leaders. ITG should provide timely regional face-to-face training to tribal governments and entities on substantive tax topics.

The mandate also forces Tribes to subsidize IHS programs and insurance company profits, and acts as a federal directive that many AI/ANs pay for their health care in direct conflict with the federal trust responsibility. The fact that AI/ANs must (directly or indirectly) pay for such private insurance similarly undercuts the ACA's AI/AN exemption from the individual mandate, acts as a disincentive for enrollment in Marketplace plans, and can result in disqualification from tax credit eligibility. The ITG Subcommittee therefore recommends that the IRS exempt Indian Tribes and Tribal Entities from the employer mandate.

Code Section 4980I has the potential to seriously affect a Tribe's ability to structure employee benefit packages in accordance with Tribal-specific needs. Because the statute excludes Tribes from the list of covered governmental entities, and by its terms does not apply to health benefits provided by a Tribe or Tribal organization to a member of an Indian Tribe, ITG Subcommittee does not believe that Tribal employers who administer their own plans should be subject to the excise tax. Should the IRS disagree on this point, however, we believe that the Notice 2015-52's proposed pay and reimburse model will impermissibly inflate Tribes' excise and income tax based liabilities far beyond the statutory rate specified in Code Section 4980I. The IRS should abandon this payment model both as a matter of law and tax policy in favor of allowing employers to calculate and pay the tax themselves on any excess benefits they may provide.

ITG Subcommittee strongly recommends that the IRS resolve uncertainties that have arisen since the passages of the Tribal General Welfare Exclusion Act. The IRS should clarify issues and communicate the information to the tribal governments. The IRS should consult with the newly-established national Tribal Advisory Committee within Treasury and the ITG Subcommittee to advise the Secretary on matters of Indian tax policy including general welfare determinations.

We are members of the IRS Advisory Committee on Tax Exempt and Governmental Entities also known as the "ACT." We are writing to ask you to complete the enclosed survey to assist us in our information gathering for a public report that we are preparing for the IRS and the public from the ACT.

We do not work for the IRS. Rather we were appointed to the ACT to represent the interests and concerns of tribal governments and tribal entities in matters of federal tax administration. The TEGE ACT is an organized public forum for discussion of relevant employee plans; exempt organizations; tax-exempt bonds; and federal, state, local and Indian tribal government issues. We serve on the ACT in a volunteer capacity. In our professional lives we work for or on behalf of tribal governments and entities.

One of our responsibilities as members of the ACT is to provide feedback from tribal governments and tribal entities to the IRS regarding tax administration matters affecting tribes and tribal governments. This year we have decided to prepare a report regarding tribal governments and entities interaction and communication with the IRS and the use and awareness of the IRS Indian Tribal Governments' website.

As part of our information gathering for this report, we are seeking your valuable input regarding these matters by completing the enclosed survey or having an appropriate person or persons at your tribal organization complete the survey. You need not sign the survey if you prefer not to do so. However, if you are willing to be contacted for further discussion of the issues in the survey, please provide your name and contact information.

We will not share any specific answers that you provide to us with the IRS or include any specific answers in the report, only compilations of data gathered from all of the surveys.

If you choose to provide your name so that we can contact you further, we will not share your name or your tribe with the IRS.

We would really appreciate your taking the time to respond to the survey and respond to it on or before November 6, 2015. You may begin survey on the following link:

https://www.surveymonkey.com/r/ITG2015Survey

We will be happy to share our findings with you. Our report will be completed and available to the public in the June 2016 IRS TE/GE Advisory Committee Annual Report.

If you have any comments you may reach the 2015 ITG Advisory Committee at 2015ITGvolunteer@gmail.com

 

* * * * *

 

 

APPENDIX B

 

Example ITG Survey Questionnaires

 

 

[ Editor's Note: Appendix omitted. To view the Appendix,

 

See , p. 237.]

 

 

* * * * *

 

 

APPENDIX C

 

Indian Tribal Government Subcommittee TE/GE Survey

 

Survey Graph Results

 

 

[ Editor's Note: Appendix omitted. To view the Appendix,

 

See , p. 243.]

 

 

* * * * *

 

 

ADVISORY COMMITTEE ON

 

TAX EXEMPT AND GOVERNMENT ENTITIES (ACT)

 

 

Tax Exempt Bonds:

 

 

Recommendations for Continuous Improvement and Enhancing

 

Resources in the Tax Exempt Bond Market

 

 

David Danenfelzer

 

William Johnson

 

Floyd C. Newton III

 

 

June 8, 2016

 

The Tax Exempt and Government Entities (TE/GE) Division of the Internal Revenue Service is in a time of transition, and the role of the Bond Subcommittee is changing as well. Rather than focusing on projects involving specific regulatory or interpretive changes, the role of the Bond Subcommittee is more advisory, serving as a sounding board for changes being considered by the Tax Exempt Bond division (TEB) in TE/GE, as well as making recommendations about improvements to outreach, education and operations. To further this role, and the effectiveness of the Bond Subcommittee, the Bond Subcommittee recommends more regular communication between the Bond Subcommittee and TEB. The Bond Subcommittee also recommends more targeted outreach by TEB and further review of TEB publications to enhance the effectiveness of these efforts and to better leverage TEB resources. The Bond Subcommittee further recommends revisions to IRS Form 8038, including electronic filing, as a means of providing better information about market segments which need additional examination for tax compliance, and those segments and transactions that may not need frequent examination, other than on a random basis. The Bond Subcommittee recommends that examinations be more targeted and focused in recognition that requesting extensive documentation from issuers which is not related to the focus of the examination is disruptive to, and expensive for, issuers and is not an effective use of TEB resources. Finally, the Bond Subcommittee compliments TEB for its outreach efforts, and recommends further involvement by TEB with industry associations and market participants as a means of more effectively using TEB resources.

II. INTRODUCTION

TE/GE has gone through organizational changes in recent years. These changes have moved lawyers previously embedded in parts of TE/GE to the Office of the Chief Counsel of the IRS, and with those moves, the role of the Subcommittee on Tax-Exempt Bonds (the Bond Subcommittee) of the IRS Advisory Committee on Tax-Exempt and Government Entities (the Act) has changed as well. In the past, many of the projects undertaken by the Bond Subcommittee¹⁸⁸ have proposed specific regulatory or other interpretive changes in the law or regulations relating to the exclusion of interest on state or local bonds from federal income taxation; consideration of most of those changes, however, now falls into the Office of Chief Counsel or to representatives of Treasury responsible for tax policy.

Nonetheless, the view of the Bond Subcommittee is that the Bond Subcommittee can, and does, serve a valuable function to the IRS and to the tax exempt bond community generally, although the role of the Bond Subcommittee has evolved and will continue to. Rather than focusing on "projects," the principal focus of the Bond Subcommittee is becoming more of a "sounding board" for changes being considered by TEB. In some instances, that advisory function may relate to enforcement policies or changes to review procedures, and addressing their impacts on issuers and market participants. In other instances, the advisory function may be to assist TEB in assessing the effectiveness of its outreach efforts, assisting TEB in preparing and evaluating education materials or identifying additional areas for education or guidance, and assisting TEB in identifying ways to focus its efforts, both in outreach and in enforcement, to better utilize the limited resources available to TEB, while at the same time providing better guidance for issuers and market participants and lessening the negative impact on issuers of routine TEB examinations. Last year's report by the Bond Subcommittee¹⁸⁹ discussed a number of ways in which knowledge management and other tools could be used by TEB to improve the efficiency of TEB's efforts and operations. At the same time, a more efficient and focused effort by TEB would also lessen the impact of enforcement activities on market participants.

With that view in mind, this year's work by the Bond Subcommittee has been less "project" oriented, and more advisory. We expect this trend to continue. One of the objectives of this report is to describe and make some recommendations as to improving this advisory function.

III. RECOMMENDATIONS

Recommendation: Establish Regular and More Extensive Communication between the Bond Subcommittee and TEB.

The Bond Subcommittee and TEB have established, and recommend to TE/GE, a standard pattern of calls and other communication between Bond Subcommittee representatives and members of the ACT who are interested in Bond Subcommittee matters and representatives from TEB. As the primary members of the ACT interested in Bond Subcommittee matters, we have found these calls to be interesting and informative. The regularity of the periodic calls (generally monthly in our case, although supplemented with additional calls when there is a need) has led to a level of familiarity and trust that has produced effective and frank communication on various issues. While there may not always be agreement on the solution to an issue, or in fact, whether there is an issue, the Bond Subcommittee believes that increasing the level of communication leads to better and more consistent results, and avoids unnecessary burdens on both TEB and the industry. Of course, all these communications must occur within the applicable rules regarding taxpayer confidentiality under Section 6103 of the Code. We also believe that the value of these communications would be greatly enhanced by periodic in-person meetings between ACT representatives and TEB. While issues relating to the overall IRS budget in recent years, and the budget allocation to TE/GE in particular, have greatly limited the ability of TE/GE to subsidize the cost of "in person" meetings between members of the ACT and TE/GE, there is no substitute for the enhanced value of periodic face to face communication. In fact, the Bond Subcommittee endorses the concept behind the former plan for four "in person" meetings of the ACT with TE/GE management during the year. These meetings are a valuable opportunity for members of the Bond Subcommittee and TEB management to learn of efforts going on within other portions of the ACT and TE/GE, which might also work well for the Bond Subcommittee and TEB. Another alternative would be to consider having ACT members pay for their own travel expenses. If a member was unable or unwilling to his or her own expenses, then the currently available conference call option could be utilized.

As an example of the value of these regular communication efforts, TEB instituted very helpful programs relating to voluntary compliance which encourage issuers and other market participants to monitor compliance with the oftentimes complex requirements relating to tax exempt bonds. For efficiency reasons, some of these programs specify "standardized" means of settling issues which might otherwise be identified in normal TEB enforcement activities as "non-compliance." Voluntary compliance programs can be very helpful in avoiding unnecessary time and expense on the part of an issuer which might otherwise be entangled in a time-consuming enforcement action, while at the same time focusing the resources of TEB on resolving questions in a manner which is more fair and predictable. We believe that the Bond Subcommittee has provided valuable input to TEB on some of these proposed programs both as to their scope, efficiency and as to the terms of standardized closing agreements.

Recommendation: More Targeted Outreach.

Similarly, in the outreach area, the Bond Subcommittee has had discussions with TEB representatives about outreach programs and the target audiences, the appropriate level and complexity of outreach materials and publications, and their effectiveness, and other similar discussions. All of these discussions serve to better inform issuers and market participants, and make the efforts of TEB more effective and efficient. TEB publications oftentimes must balance the need for providing information to a large group of issuers which access the capital markets infrequently, with the needs of more sophisticated issuers and market participants which access the market frequently. We recommend further review of publications and other informal guidance in the tax exempt bond area with an eye toward targeting these outreach efforts for maximum effectiveness.

Recommendation: Revisions to IRS Form 8038; Institute Electronic Filing.

Section 149(e) of the Internal Revenue Code sets forth certain information reporting requirements which must be satisfied with respect to tax exempt bonds. In order for issuers to satisfy these requirements, the IRS published Form 8038 and its instructions. There are several variations of Form 8038 for different types of bonds, and even some variations of Form 8038 which relate to the payment and reporting of arbitrage rebate payments.

Section 149(e)(2) sets forth certain basic information to be included in the information filing. The list in this section includes the name and address of the issuer, the date of the issue, the amount of net proceeds of the issue, the stated interest rate, term and face amount of each bond which is part of the issue, the amount of issuance costs, the amount of reserves of the issue and certain other information. The section further provides that such form shall contain "such other information as the Secretary shall require."

Since Section 149(e) became part of the Internal Revenue Code, a number of changes have been enacted which permit tax exempt bonds to be issued for different purposes, or which change the requirements for bonds issued for a particular purpose to be treated as tax exempt bonds. These changes have led to a proliferation of Form 8038 variations as described above.

Form 8038 filings provide the primary source of information regarding the amount and types of tax exempt bonds which are issued, and are a valuable resource, not just to TEB but for tax policy purposes. In addition, the Form 8038 filings can assist TEB in determining what segments of the bond market may need additional examination for tax compliance, and, maybe more importantly, those segments and transactions that may not need frequent examination, other than on a random basis. For these reasons, Form 8038 filings can serve an important function for TEB, issuers and other market participants.

In recent years, the availability of technology has expanded to the point where virtually every issuer has the ability to make electronic filings. To date, however, Form 8038 filings must be made on paper, and then presumably are transcribed or scanned into IRS records. This process is wasteful and time-consuming, both for the issuers who have to complete and mail the forms, and for the IRS, which has to process the forms. In addition, it runs the risk of transcription errors which may lessen the quality of the data. While we acknowledge the limited resources that the IRS has available to it for technological changes, we believe that an investment in electronic processing for Form 8038 filings is long overdue, and we recommend a move to electronic filing of these forms.

For a number of years, recommendations have been made about changes to the information required as a part of Form 8038. In fact, the Eleventh Report of the Bond Subcommittee, issued in June 2012, made a number of recommendations regarding specific changes to information reporting relating to tax exempt bonds, including detailed revisions to certain of the information reported and even suggested the addition of a new Form 8038-N for notification of certain events, including the establishment of a defeasance escrow. While we do not necessarily endorse all the changes recommended by that Subcommittee, they do provide a very thoughtful analysis and will be useful in making revisions.

More recently, TEB management has described to the Bond Subcommittee members some of their own views regarding the need for revisions to Form 8038 filings. Those ideas are generally consistent with the ideas of the current Bond Subcommittee members and include:

• Establishment of a "core" Form 8038, which contains basic information such as the name of the issuer, the address of the issuer and certain basic information about the bonds which are the subject of the form and provide much of the information required by Section 149(e) of the Code;

• Supplemental schedules to this core form which would provide information regarding the type and purpose of the bonds which are the subject of the form. For example, in the case of private activity bonds, the supplemental schedules would ask for information which would demonstrate compliance with any additional requirements of Sections 142 to 145 of the Code which may be applicable, as well as compliance with Section 146 of the Code (relating to volume cap) and Section 147 of the Code (requirements relating to private activity bonds, including the public hearing requirement, 2 percent cost of issuance limitation, limitation on land acquisition and other similar requirements).

• Inclusion of a specific schedule for refundings which would identify whether the transaction is a current or advance refunding, and if an advance refunding, whether the escrow established was funded with securities purchased from the Bureau of Public Debt, State and Local Government Series (commonly referred to as SLGs) or with other securities purchased on the open market. Similarly, the schedule could also provide information regarding whether any reinvestment of amounts in the escrow is contemplated during the term of the escrow.

We view that the point of these changes is not to make completion of the required filing forms more difficult or time-consuming, but rather to enhance the value of the information collected. While some would argue that this may provide TEB with a "roadmap" for its enforcement efforts, our view is that issuers and market participants would be better served by providing sufficient information to the IRS for TEB to be more productive. For example, as a general matter, the Bond Subcommittee's view is that an escrow for defeased bonds which is funded with SLGs as opposed to open market securities is unlikely to present a transaction which is worthy of examination on the question of whether a market price was paid for the escrow. Similarly, better information in filings might eliminate the wasted effort in examining bond issues which have been retired for several years prior to the commencement of the examination.

Recommendation: More Targeted Enforcement Efforts Make Sense for the IRS and the Industry.

The theme of the Bond Subcommittee portion of the 2015 ACT Report was doing more with less in a time of diminished resources. That report encouraged a number of steps intended to improve TEB efficiency, including knowledge management improvements in TE/GE and changes to examination efforts in TEB. We continue to advocate for more targeted examination efforts of transactions which present profiles which make them better candidates for examination as opposed to more random examinations or examinations in very broad market segments. We also support and recommend further efforts by TEB to focus document requests and information requests during the examination process. Routinely asking for volumes of information not clearly related to the rationale behind the examination is disruptive and potentially a waste of issuers and examination team resources. We believe improvements and enhancements to the Form 8038 filings would aid TEB in making more focused examination efforts which is beneficial to issuers and a more effective use of TEB resources.

Recommendation: More Involvement by TEB in Industry Outreach and Education.

Finally, we compliment TE/GE and TEB in particular for their efforts with outreach and communication with issuers and with market participants. We believe that those efforts further better compliance. We note that issuers in the tax-exempt bond space have their own motivations to assure compliance with the applicable rules in the Internal Revenue Code and regulations relating to tax exempt bonds. The issuers face political risk from instances of non-compliance which are uncovered, as well as adverse reactions from investors which can affect future access by the issuer to debt markets. In short, issuers and the IRS generally share a common interest in compliance with the applicable rules. While there are occasionally instances of market participants who may, for their own reasons, push positions which are not in compliance with applicable Code provisions and regulations, we believe that those instances are rare, and that an effective enforcement program and vigorous pursuit of those participants who are not operating in compliance with applicable Code and regulations would limit these instances.

TEB is very active in terms of its interaction with issuers and market participants. In addition to its periodic publication of guides and other materials, representatives from TEB make appearances at various gatherings of industry participants, and participate in meetings of the National Association of Bond Lawyers and the 103 Committee of the American Bar Association's Tax Section. We believe these efforts are a very effective use of TEB resources which serves the industry and the efforts of TE/GE well. We recommend and urge continued participation in these efforts, even in a time of diminishing resources.

We also encourage further communication by TEB with industry participants and press regarding issues and concerns of TEB regarding developments in the industry. While Section 6103 of the Code appropriately protects the disclosure of information regarding tax returns and limits certain communications, we believe that further communication from TEB about its efforts and concerns would further compliance in the market. For example, TEB management is very careful not to disclose market segments which it has identified for examination efforts; however, we believe that the disclosure of this information would actually result in greater compliance efforts by market participants. Finally, we note that additional communication by Bond Subcommittee with industry participants, including ACT members focused on Bond Subcommittee matters as well as with member of the National Association of Bond Lawyers and members of American Bar Association committees would allow TE/GE to leverage the thoughts and efforts of TEB personnel in a time of diminishing resources.

IV. CONCLUSION

In a time of limited resources, TEB, issuers and market participants must continually re-examine their relationship and operations to continue to improve compliance with respect to tax exempt bonds, use resources more efficiently and reduce the burden on issuers. This continuous improvement effort has changed the role of the Bond Subcommittee and its functions with respect to TEB. Enhanced communication between TEB and the Bond Subcommittee can improve compliance and limit unnecessary burdens being imposed on issuers. Similarly, the outreach and education efforts of TEB which are already in place should be expanded to enhance the flow of information between TEB and issuers. Further improvements in information reporting on Form 8038, including revision of the form and instituting electronic filing, would be beneficial to both TEB and to issuers, as well as improve efficiency and accuracy. While examinations are necessary to assure compliance, both on a targeted and on a random basis, targeted examinations should be more focused on the particular issues being targeted as a means of lessening the disruption of examinations on issuers and using TEB resources more effectively.

² The recommendations in this Report are solely those of the EP Subcommittee. The information provided by Director Choi and his staff was strictly background in nature.

³ By contrast, a six-year remedial amendment cycle will continue to apply with respect to pre-approved master and prototype and volume submitter plans under Rev. Proc. 2007-44, 2007-28 IRB 54.

⁴ This right predates the 1974 adoption of the Employee Retirement Income Security Act (ERISA).

⁵ Rev. Proc. 2005-66, 2005-2 C.B. 509, August 26, 2005.

⁶ A determination letter "may not be relied upon after a change in material fact or the effective date of a change in law, except as provided." See Rev. Proc. 2016-6, 2016-1 IRB 200, Section 21.01(1).

⁷ If a plan is tax-qualified, employer contributions and earnings on contributions are not included in the employee's taxable income until such amounts are distributed (even though the arrangement is funded and even if benefits are vested). Additionally, if tax-qualified, many plan distributions can be rolled over to another type of retirement plan or IRA for further deferral of income inclusion. In the case of a taxable employer, the employer is entitled to a current deduction (within certain limits) for contributions even though the contributions are not currently included in employees' income. The contributions and earnings are held in a tax-exempt trust, which enables the plan's assets to grow on a tax-free basis until distribution.

⁸ The EP Subcommittee believes that implementation of all the steps described in the examples would be useful.

⁹ IRS Notice 2016-3 IRB 278 (Jan. 19, 2016).

¹⁰ Notice 2016-3 also provides that controlled groups and affiliated service groups that made joint filings during remedial amendment Cycle A by January 1, 2012 (the final day of the prior Cycle A submission period) may again make such a submission by January 31, 2017. Further, the Notice allows an individually designed defined contribution plan that a plan sponsor wishes to convert to a pre-approved plan format has until April 30, 2017 to adopt such a plan and apply to the IRS for a determination letter.

¹¹ See Rev. Proc. 2016-6, https://www.irs.gov/irb/2016-01_IRB/ar12.html.

¹² 31 U.S.C. 9701.

¹³ See IRM Section 1.32.19.9.1; 1.32.19.18; 1.32.19.19.

¹⁴ See the Taxpayer Advocate's report for your reference and consideration at http://www.taxpayeradvocate.irs.gov/reports/2015-annual-report-to-congress.

¹⁵ The term "PPA" refers to the Pension Protection Act of 2006, Pub. L. 109-280.

¹⁶ Davis-Bacon Act of 1931, 40 U.S.C. 3141, et. seq.

¹⁷ Announcement 2015-19, IRB 2015-32, 157.

¹⁸ 2014 ACT Report, p. 47, https://www.irs.gov/pub/irs-tege/tege_act_rpt13.pdf.

¹⁹ Pub. L. 107-56.

²⁰ A "DROP," or deferred retirement option program, is an arrangement pursuant to which a governmental employee agrees to retire at a certain date and freezes his or her future accruals under the employer's defined benefit pension plan in exchange for the establishment of an individual account into which the annuity payments he or she would have otherwise received during the DROP period are deposited and credited with earnings. The account is distributed in a single sum when the designated date of retirement occurs.

²¹ See Joint Committee Report, S. 1096 and H.R. 2676 at https://www.gpo.gov/fdsys/pkg/CPRT-105JPRT45842/html/CPRT-105JPRT45842.htm.

²²Ibid.

²³Survey Results Relating to Point 1. Survey Respondents indicated that a 10-year cycle would still be better than having an unknown time period that may or may not allow a plan to come into the IRS for a new determination letter. Fifty-six percent of Survey Respondents considered federal law changes as one of their top two situations where a periodic determination letter would be useful. The EP Subcommittee asked Survey Respondents for which types of plans and situations it is important to have periodic determination letters be available. Results from Survey Respondents were as follows:

• Very large plans (e.g., those holding assets in excess of $500 million or at least 15,000 participants)

• • (86.05 percent of Survey Respondents said large plans based on number of participants was most or very important);

  • (71.78 percent of Survey Respondents said large plans based on amounts of assets was most or very important);

• In mergers and acquisitions (35.55 percent of Survey Respondents said this was most important);

• To lessen the risk that more plans will be terminated (51.55 percent of Survey Respondents said they were still trying to evaluate what their response to these changes would be awaiting future IRS guidance, which could include deciding to terminate the plan now or in the future based on their concern of the risks of retroactive disqualification);

• To encourage new plan designs (68.89 percent of Survey Respondents said this situation was most or very important);

• To safely incorporate significant changes in federal law (56.13 percent of Survey Respondents said that this situation was most or very important);

• To deal with plan type changes (22.70 percent of Survey Respondents said that situation was most or very important); and

• To accommodate state law changes for governmental plans (9.62 percent of Survey Respondents said this situation was most or very important).

²⁵ The term "EGTRRA" refers to the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16.

²⁶Survey Results Relating to Point 2A. The EP Subcommittee asked Survey Respondents for which types of situations it is important to have modifications made to the pre-approved program. Results from Survey Respondents indicated that the IRS needs to:

• Modify the pre-approved plan program to allow legacy formulas and prior benefit structures to be included as an addendum (81.70 percent of Survey Respondents selected this response); and

• Allow multiple eligibility and benefit formulas to be permitted within a single pre-approved plan document (74.27 percent of Survey Respondents selected this response).

• Modification of the pre-approved plan program to broaden the minor modifications permitted (for example, a change from five-year vesting to three-year vesting (69.5 percent of Survey Respondents selected this response);

• Modification of the pre-approved plan program to allow frozen plan provisions to be included in an addendum (68.17 percent of Survey Respondents selected this response);

• Modification of the pre-approved plan program to allow ERISA provisions (loan procedures, QDRO procedures, claims procedures, trust or custodial account procedures, fiduciary provisions) to be included as addenda, rather than a mandatory part of the main pre-approved plan document (59.42 percent of Survey Respondents selected this response);

• Modification of the pre-approved plan program to allow separate trust documents (53.05 percent of Survey Respondents selected this response);

• Modification of the pre-approved plan program to allow more than six flexible provisions within a volume submitter plan document (28.65 percent of Survey Respondents selected this response); and

• Modification of the pre-approved plan program to reduce the requirement from 15 employer clients to a lesser number to receive approval for sponsoring a volume submitter plan document from the IRS (26.79 percent of Survey Respondents selected this response).

• Modification of the pre-approved plan program to allow more fill-in-the-blank options (57.75 percent of Survey Respondents selected this response);

• Modification of the pre-approved plan program to allow non-safe harbor hardship withdrawals (44.79 percent of Survey Respondents selected this response);

• Modification of the pre-approved plan program to allow fail-safe provisions for 401(a)(4) testing failures (44.51 percent of Survey Respondents selected this response);

• Opening the pre-approved program to plan types that are not allowed in the pre-approved program currently, such as cash balance plans and statutory hybrid plans (40.56 percent of Survey Respondents selected this response);

• Modification of the pre-approved plan program to allow multiemployer plans to use the pre-approved plan program (27.32 percent of Survey Respondents selected this response);

• Modification of the pre-approved plan program to allow church plans (23.385 percent of Survey Respondents selected this response); and

• Modification of the pre-approved plan program to allow 401(h) accounts (16.06 percent of Survey Respondents selected this response).

²⁸ The term "HEART" refers to the Heroes Earnings Assistance and Relief Tax Act of 2008, Pub. L. 110-245.

²⁹ The term "WRERA" refers to the Worker, Retiree and Employer Recovery Act of 2008, Pub. L. 110-458.

³⁰ 1975-43, I.R.B. 20 (Oct. 28, 1975).

³¹ See https://www.irs.gov/pub/irs-tege/qab_120709.pdf for 2009 IRS statutory and regulatory guidance on provisions that currently can be incorporated by reference.

³²Id.

³³Survey Results Relating to Point 7. In looking at what issues are obstacles for plan sponsors to convert individually designed plans to a pre-approved plan document format, almost half of the Survey Respondents ranked concerns over problems that might arise during a plan document conversion as their largest concern, and almost 90 percent of Survey Respondents ranked this potential measure as one of the top priorities in light of the Announcement.

³⁴Survey Results Related to Point 9. There were multiple references to this issue raised by the comments from Survey Respondents as well as in the Comment Letters that were submitted to the IRS regarding the Announcement. The general theme of all these comments is that plans have to be formally amended far too often and at different times.

³⁵ We understand that in EO, formal guidance is considered precedential authorities such as revenue rulings, revenue procedures and Department of Treasury regulations, while informal guidance includes private letter rulings and technical advice memoranda. For purposes of this report, however, we are using the term guidance to mean any written or oral communication with the public on exempt organization matters.

³⁶ The five TE/GE functional areas are: Exempt Organizations (EO), Employee Plans (EP), Federal, State and Local Government (FSLG), Tax Exempt Bonds (TEB) and Indian Tribal Governments (ITG).

³⁷ https://www.irs.gov/Government-Entities/IRS-Makes-Changes-to-Its-Advisory-Committee-on-Tax-Exempt-and-Government-Entities-ACT.

³⁸https://www.irs.gov/Charities-&-Non-Profits/About-IRS-Exempt-Organizations.

³⁹ IR-2014-72 (June 10, 2014) https://www.irs.gov/uac/Newsroom/IRS-Adopts-Taxpayer-Bill-of-Rights;-10-Provisions-to-be-Highlighted-on-IRSgov,-in-Publication-1.

⁴⁰ Protecting Americans from Tax Hikes Act of 2015 § 401.

⁴¹https://www.irs.gov/irm/part1/irm_01-001-023.html.

⁴²https://www.irs.gov/pub/irs-tege/TEGE_Priorities_for_FY2016.pdf.

⁴³ Congress appropriated $290 million to the IRS for fiscal year 2016 that was earmarked for cyber security, identity theft and customer service.

⁴⁴ http://www.cincinnati.com/story/news/2014/01/09/irs-chief-rebuilding-public-trust-will-take-all-our-mettle/4396361/.

⁴⁵https://www.irs.gov/uac/Newsroom/IRS-Statement-On-Get-Transcript.

⁴⁶https://www.irs.gov/uac/Newsroom/IRS-Statement-on-the-Get-Transcript-Application.

⁴⁷http://webarchive.urban.org/publications/904643.html.

⁴⁸ In a recent study, the IRS received one of the lowest favorability ratings (42 percent) of the 17 federal agencies and departments surveyed. Pew Research Center, "Beyond Distrust: How Americans View Their Government" (November 23, 2015). http://www.people-press.org/files/2015/11/11-23-2015-Governance-release.pdf.

⁴⁹ George K. Yin, "The IRS's Misuse of Scarce Compliance Resources in the Exempt Organization Area" (December 5, 2014). Virginia Public Law and Legal Theory Research Paper No. 72. available at SSRN: http://ssrn.com/abstract=2534474.

⁵⁰ Taxpayer Advocate Service, Annual Report to Congress -- v. 1, p. 39 (2015).

⁵¹ The Texas Society of Certified Public Accountants has urged the IRS to expose its CONOPS plan for general public review and comment, as parts are in development. See Luca Gattoni-Celli, "CPAs Want Public, Practitioner Access to IRS CONOPS Work", Tax Notes, March 10, 2016. The National Taxpayer Advocate also has urged the IRS to discuss the implications of the decisions and actions outlined in CONOPS publicly before the IRS implements them. Taxpayer Advocate Service, Annual Report to Congress, vol 1, p. viii (2015).

⁵² "EO's On-Rolls Examinations and Rulings and Agreements Staffing," FY historical data identified in TE/GE Hiring Plans and HR Reports in the HR Reporting Center.

⁵³ Technical assistance on determinations and examinations is provided by TE/GE Division Counsel. Informal guidance and formal guidance such as PLRs, TAMs, Revenue Rulings and Procedures are provided by the Office of Chief Counsel.

⁵⁴ According to the IRS Quarterly Diversity Report from the 4^th Quarter FY2015, as of the end of fiscal year 2015, 86.1 percent of TE/GE's workforce was over 40 years old compared to 78.8 percent of the IRS workforce over 40 years old.

⁵⁵ See Appendix B for an outline of a proposed International Activities Fact Sheet that could provide a "one-stop reference" for nonprofits with respect to potential required filings and compliance in the international tax arena.

⁵⁶ TE/GE Priorities for FY2016, Message from the TE/GE Commissioner, Sunita Lough, undated.

⁵⁷Ibid.

⁵⁸Nine Things You Might Not Know about U.S. Nonprofits, GuideStar, November 2015.

⁵⁹ 2015 ACT Report: EO: The Redesigned Form 990: Recommendations for Improving its Effectiveness as a Reporting Tool and Source of Data for the Exempt Organization Community, (June 2015).

⁶⁰ Form 990-N filers have gross receipts normally of less than or equal to $50,000.

⁶¹ Form 990-EZ filers have gross receipts of less than $200,000 and total assets of less than $500,000.

⁶² Nonprofits that have more significant budgets and assets are those that filed the full version of the Form 990, which is required for all nonprofits with gross receipts equal to or greater than $200,000 or total assets equal to or greater than $500,000.

⁶³ See IRS Data Book 2010, Table 13; IRS Data Book 2011, Table 13; IRS Data Book 2012, Table 13; IRS Data Book 2013, Table 13; IRS Data Book 2014, Table 13. The number of annual returns examined does not equal the number of organizations examined. EO could examine multiple returns for a single organization.

⁶⁴ "Other Annual Returns Examined" includes Form 990-PF (private foundations), Form 1041-A (certain trusts), Form 1120-POL (certain political organizations) and Form 5227 (certain trusts). See, e.g., IRS Data Book 2014, at 34 note 1.

⁶⁵ The percent of annual returns examined is based on the number of annual returns examined in a given fiscal year compared to the number of annual returns filed during the calendar year ending in that fiscal year. Thus, the percent provided only provides an estimate of examination coverage because the returns examined in a given fiscal year were usually filed in earlier years. See Lloyd Hitoshi Mayer, "The Better Part of Valour Is Discretion: Should the IRS Change or Surrender Its Oversight of Tax-Exempt Organizations?" Notre Dame Legal Studies Paper No. 1523. Columbia Journal of Tax Law, (forthcoming, 2016).

⁶⁶ The GAO Report analyzes the number of charitable organizations examined, while the chart above reports the number of EO returns examined.

⁶⁷ Government Accounting Office Report, Better Compliance and Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations, GAO 15-164. (December 17, 2014).

⁶⁸ 2004 ACT Report, Reviewing IRS Policies and Procedures to Leverage Enforcement ("RIPPLE"): Recommendations to Enhance Exempt Organizations' Enforcement and Compliance Efforts, June 9, 2004.

⁶⁹ IRC § 6108(c).

⁷⁰ 2013 ACT Report, Exempt Organizations: Leveraging Limited IRS Resources in the Tax Administration of Small Tax-Exempt Organizations, September 12, 2013 p. 11.

⁷¹ Pub. L. No. 94-455, 90 Stat. 1520 (1976).

⁷² Some audit data is found in the Statistics of Income Data Book, Table 13, https://www.irs.gov/uac/Enforcement-Examinations.

⁷³ Judith E. Kindell and John Francis Reilly. Election Year Issues, 2002 CPE Text.

⁷⁴ In addition, a number of matters are considered "no ruling areas" which means informal guidance in the forms of PLRs is unavailable on these matters.

⁷⁵https://www.irs.gov/uac/Electronic-Reading-Room.

⁷⁶ All Interim Guidance is published on the www.irs.gov website.

⁷⁷ Paul Marmolejo, Memorandum for Federal, State, and Local Government Employees, "The Tax Treatment of Uniforms Issued to Government Employees by Fire and Police Departments" (June 15, 2015).

⁷⁸ Myles McGregor-Lowndes, Professor, Centre for Philanthropy and Nonprofits Studies, Queensland University of Technology, Australia.

⁷⁹ Sheila Nordon, Director, Irish Charities Tax Reform.

⁸⁰ A recent example is the new 60-day notice requirement for Section 501(c)(4) organizations. When the notice requirement was adopted, a search of "501(c)(4)" on the main EO Web page provided a list of results, the first of which was "local association of employees" (a narrow subset of Section 501(c)(4) entities), while the new notice requirement was listed as the fourth result. As another example, the website link to which a taxpayer is directed when clicking on the User Fee for Form 8940, Request for Miscellaneous Determination, takes the taxpayer to a general IRS page on "Tax information for Charities and Other Nonprofits" with no specific information on the user fees.

⁸¹ One of the recommendations in the 2013 ACT Report was the following: "The IRS should continue to revise its website and improve its accessibility to individuals engaged in managing small exempt organizations. This should include the creation of prominent links beginning with the IRS main web landing page (www.irs.gov) and the addition of links that visitors can use to report problems and that offer visitors guidance for navigating resources available on the site. The IRS should also encourage state charity regulators and affiliate organizations to create links to the IRS website." [Similarly, the 2014 ACT Report contained this recommendation, "The IRS should continue to leverage its use of its electronic database and web based resources to improve and enhance its communication, education, and training. The IRS should continue to improve, update, and enhance the public and tax professional's access to the IRS materials and information available on its website."]

⁸² We note that on March 22, 2016, the IRS announced that it is offering up to $10,000 to the winner of a new competition to enhance its website, with emphasis on designs that will improve the visual layout and style of IRS information for the taxpayer, make it easier for taxpayers to manage their tax responsibilities, and enable taxpayers to make informed and effective decisions about their personal finances. This competition is not specific to the EO portion of the website, but rather is aimed at improving the ease and usability of the overall IRS website.

⁸³ Treasury Inspector General for Tax Administration, "Annual Assessment of the Internal Revenue Service Information Technology Program," 2015-20-094 (September 30, 2015), available at https://www.treasury.gov/tigta/auditreports/2015reports/201520094fr.html.

⁸⁴ Strengthening Federal Cyber Security white paper available at https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/fact_sheets/a_government_of_the_future210.pdf.

⁸⁵ P. Thibodeau, "Who Should Get the Blame in IRS Breach," Computerworld (June 2, 2015), available at http://www.computerworld.com/article/2929857/data-privacy/who-should-get-the-blame-in-irs-breach.html.

⁸⁶Ibid.

⁸⁷ No critical pay employee can have a salary higher than the Vice President, who earns $233,000.

⁸⁸https://www.treasury.gov/tigta/iereports/2015reports/2015IER001fr.pdf.

⁸⁹ U.S. Government Accountability Office GAO-14-534R Internal Revenue Service (April 21, 2014), available at http://www.gao.gov/assets/670/662681.pdf.

⁹⁰ General Report of the Internal Revenue Service Advisory Council, 2014 IRSAC General Report (November 19, 2014), available at https://www.irs.gov/PUP/taxpros/2014-IRSAC-Full-Report.pdf.

⁹¹ Number of employees as of July each year. See, e.g., Treasury Inspector General for Tax Administration, "Annual Assessment of the Internal Revenue Service Information Technology Program," 2015-20-094 (Sept. 30, 2015), available at https://www.treasury.gov/tigta/auditreports/2015reports/201520094fr.pdf.

⁹² 2015 ACT Report. Public.Resource.org v. United States Internal Revenue Service, Not Reported in F.Supp.3d, 2015 WL 393736 13-CV-02789-WHO (N.D.Ca. January 29, 2015).

⁹³ Statements by Tamera Ripperda, Director of EO, at Urban Institute's "Data Collection, Sharing, and Transparency in the Tax-Exempt Sector" seminar (December 1, 2015, attended by ACT members C. Lott, A. Coates Madsen and A. Watt) and Sunita Lough, TE/GE Commissioner, at the Washington Nonprofit Legal and Tax Conference, (March 18, 2016) as reported by the EO Tax Journal (March 29, 2016).

⁹⁴ See, e.g., Americans for Prosperity Foundation v. Harris (December 29, 2015).

⁹⁵ The term "future state" is being used inside the IRS to represent where the agency would like to be in five years. See comments of William J. Wilkins, IRS Chief Counsel, as delivered to attendees at the American Bar Association's National Institutes on Criminal Tax Fraud and Tax Controversy in Las Vegas on December 11, 2015, reported in Matthew R. Madara," IRS to Expand Online Access as Agency Looks to the Future," Tax Notes (December 15, 2015).

⁹⁶https://www.treasury. gov/about/budget-performance/budget-in-brief/Documents/FY17FactSheet.pdf.

⁹⁷ Strengthening Federal Cyber Security whitepaper, available at https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/fact_sheets/a_government_of_the_future210.pdf.

⁹⁸ https://www.whitehouse.gov/the-press-office/2016/02/09/fact-sheet-cybersecurity-national-action-plan.

⁹⁹ The President's FY2017 budget has not been approved as of the date of the submission of this ACT report.

¹⁰⁰ Pension Protection Act of 2006, Pub. L. No. 109-280 (Aug. 17, 2006) §§ 6103, 6104.

¹⁰¹ Letter from the National Association of Attorneys General to the Honorable Max Baucus, Chairman, Committee on Finance, United States Senate and the Honorable Orrin Hatch, Ranking Member, Committee on Finance, United States Senate (Oct. 28, 2011).

¹⁰² Hugh R. Jones, "The Importance of Transparency in the Governmental Regulation of the Nonprofit Sector: Room for Improvement?," Columbia University Academic Commons (2013), http://dx.doi.org/10.7916/D86H4FG7; Justin Duncan, "In the fight for open nonprofit data, everything changed in one month," Data Transparency Coalition (July 2, 2015), http://www.datacoalition.org/in-the-fight-for-open-nonprofit-data-everything-changed-in-one-month/.

¹⁰³ Beth Simone Noveck and Daniel L. Goroff, Information for Impact: Liberating Nonprofit Sector Data, 2nd ed., The Aspen Institute, (Sept. 26, 2013), http://www.aspeninstitute.org/sites/default/files/content/docs/pubs/Information_for_Impact_Report_FINAL_REPORT_9-26-13.pdf.

¹⁰⁴ As we were "going to press" with this report, the Senate Finance Committee leadership proposed the "CHARITY Act" (S. 2750) which contains several items that could affect EOs in the future. Included in this proposal is mandatory electronic filing for all nonprofits. It will be interesting to see how this bill fares in 2016.

¹⁰⁵Public.Resource.org v. United States Internal Revenue Serv., 78 F. Supp. 3d 1262, 1266 (N.D. Cal. 2015), appeal dismissed (June 24, 2015).

¹⁰⁶ Tamera L. Ripperda, Director, Exempt Organizations, Internal Revenue Service, remarks at the Urban Institute's Emerging Issues in Philanthropy Seminar: Data Collection, Sharing, and Transparency in the Tax-Exempt Sector: at the Intersection of Regulators, Technology and Sector Stakeholders (December 1, 2015).

¹⁰⁷ The Aspen Institute, Transparency, Accuracy, and Innovation: Electronic-Filing of IRS Forms 990 for Open Data, http://www.aspeninstitute.org/sites/default/files/content/images/Form%20990%20E-filing%20One%20Pager%207-31-15.pdf.

¹⁰⁸ A total of 39 states require that the 990 also to be filed with the respective states in which the entity registers. See Draft of Memorandum from the National Association of State Charity Officials to the National Association of Attorneys General 2 (Jan. 2016) (on file with author).

¹⁰⁹ Multi-State Filer Project, supra note 18 ("The most recent version of the URS [Unified Registration Statement] is v. 4.02, which was released in March 2014. Version 4.02 supports 37 jurisdictions (36 states and the District of Columbia), and requires (and includes) supplemental forms for 13 jurisdictions.").

¹¹⁰ U.S. Government Accountability Office, Highlights of GAO-15-164, Report to the Ranking Member, Committee on Homeland Security and Government Affairs, U.S. Senate; Tax-Exempt Organizations: Better Compliance Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations 40-41(2014) ("The challenges to information sharing between IRS and state charity regulators are related to uncertainty about what is permissible under the PPA. The lack of information impedes state charity regulators' ability to identify and prosecute bad actors for violating state laws and hinders states' ability to inform donors of scam charities. . . . Congress should consider expanding the mandate for 501(c)(3) organizations to electronically file their tax returns to cover a greater share of filed returns."); see also Beth Simone Noveck and Daniel L. Goroff, Information for Impact: Liberating Nonprofit Sector Data, The Aspen Institute (2nd Ed., Sept. 26, 2013), http://www.aspeninstitute.org/sites/default/files/content/docs/pubs/Information_for_Impact_Report_FINAL_REPORT_9-26-13.pdf ("[I]nformation contained in the 990s could potentially be far more useful if it were not only public but 'open' data. Open data are data that are available to all, free of charge, in a standard format, published without proprietary conditions, and available online as a bulk download rather than only through single-entry lookup. Making the Form 990 data truly open in this sense would not only make it easier to use for the organizations that already process it, but would also make it useful to researchers, advocates, entrepreneurs, technologists, and nonprofits that do not have the resources to use the data in their current form. We argue that open 990 data may increase transparency for nonprofit organizations, making it easier for state and federal authorities to detect fraud, spur innovation in the nonprofit sector and, above all, help us to understand the potential value of the 990 data.").

¹¹¹ Rev. Proc. 2016-19.

¹¹² Rev. Proc. 2016-19.

¹¹³ See Executive Order 12866 § 6(a)(1) ("before issuing a notice of proposed rulemaking, each agency should . . . seek the involvement of those who are intended to benefit from and those expected to be burdened by any regulation"); Executive Order 13563 § 2(c) ("Before issuing a notice of proposed rulemaking, each agency . . . shall seek the views of those who are likely to be affected, including those who are likely to benefit and those who are potentially subject to such rulemaking").

¹¹⁴ The ACT reviewed the fees for several associations and subscription services. The fees varied from less than $125 to more than $3,000. Each subscription service has its own dues and fees schedules and bases its rates on different metrics related to variables such as the individual subscriber's position and experience, the type of firm represented by the subscriber and tenure.

¹¹⁵ Rev. Proc. 2016-1. Appendix A: Schedule of User Fees (as of February 1, 2015).

¹¹⁶ According to TE/GE staff members, the cost per IRS workshop was approximately $1,500 per day for travel for their subject matter experts to attend each SMS program. This does not include the actual staff time or the loss of time away from the revenue agents' existing caseloads.

¹¹⁷ Susan Pascoe, Commissioner, Australian Charities and Not-for-Profit Commission (ACNC), and Murray Beard, General Counsel, ACNC.

¹¹⁸ Rod Walker, Director, NFP Hub, Strategy and Policy Branch, Australian Taxation Office (ATO).

¹¹⁹ Mark Fowler, attorney and member of the ACNC Professional Users Group.

¹²⁰ For instance, in calendar year 2013, EO staff sent speakers to over 150 programs, some hosted by the IRS (including the series mentioned above) and some hosted by outside entities. In calendar year 2014, the number of speaking engagements was halved to 74 and by 2015, this number was approximately halved again.

¹²¹ Churches, conventions or associates of churches, integrated auxiliaries of a church, small organizations with gross receipts that are normally not more than $5,000 annually and subordinate organizations covered by a group exemption are not required to file a Form 1023 to have their Section 501(c)(3) status recognized by the IRS.

¹²² Certain employee benefit organizations, prepaid tuition plans operated by private educational institutions, health insurance insurers and credit counseling organizations that desire exemption as social welfare organizations are required to timely apply for recognition of exemption.

¹²³ In the past, the letter sent by the IRS was accompanied by a booklet that set forth organized information for the organization including information on its Form 990 filing requirements, maintaining tax-exempt status, restrictions on lobbying and political activity and the disclosure requirements for tax-exempt organizations. In 2014, the IRS stopped sending this booklet to the organization with the determination letter. This booklet (Pub. 4221-PC Compliance Guide for 501(c)(3) Public Charities) is now available online and a link is provided in the determination letters that are sent out. As a result, the determination letter mailing contains very little information to educate a recently formed exempt organization on the federal income tax requirements for maintaining its newly recognized tax-exempt status.

¹²⁴ The IRS provides an EO Update via email. This function is pursuant to an "opt in" listserv. As the ACT discussed in its 2014 report, the listserv is voluntary and the email addresses in the listserv are not linked to registered nonprofit organizations. See, "Analysis and Recommendations Regarding Unrelated Business Income Tax Compliance of Colleges and Universities," page 82.

¹²⁵ Tax-exempt organizations that are exempt from the Form 990 filing requirements include churches, their integrated auxiliaries, conventions of associations of churches, the exclusively religious activities of a religious order, state institutions (including state colleges and universities), instrumentalities of United States, schools affiliated with a church or operated by a religious order, and organizations that are part of a group exemption and included on a group return filed by the central or parent organization. The IRS also has the discretion under Section 6033(a)(3)(B) to relieve additional organizations from the Form 990 filing requirements where it determines the filing is not necessary to the efficient administration of the internal revenue laws, which it has done, for example, for government units and affiliates of governmental units.

¹²⁶ Sunita Lough, TE/GE Priorities for FY 2016.

¹²⁷ 2015 Annual Report to Congress, Most Serious Problem, Taxpayer Advisory Service, January 2016.

¹²⁸ "Section 218" refers to a process under which a governmental employer provides voluntary Social Security and Medicare coverage to its employees.

¹²⁹http://www2.census.gov/govs/cog/g12_org.pdf.

¹³⁰http://www2.census.gov/govs/apes/12locus.txt.

¹³¹http://www2.census.gov/govs/cog/g12_org.pdf.

¹³²http://www2.census.gov/govs/apes/12locus.txt.

¹³³ P.L. 111-148 Patient Protection and Affordable Care Act of 2010.

¹³⁴ P.L. 113-168 General Welfare Exclusion Act of 2014.

¹³⁵ 25 U.S.C. § 1601(1)-(2).

¹³⁶ 42 C.F.R. §§ 136.11 and 136.12

¹³⁷ We note that the federal government's budgeting and expenditures do not come close to meeting the requirements of the trust responsibility: IHS is only funded at approximately 56 percent of need, and the most recent contract support cost shortfall was estimated at $90 million. NATIONAL TRIBAL BUDGET FORMULATION WORKGROUP'S RECOMMENDATIONS ON THE INDIAN HEALTH SERVICE FISCAL YEAR 2015 BUDGET 3, 6 (2013).

¹³⁸ See generally 26 C.F.R. § 54.4980H-4.

¹³⁹ See Vincent Shilling, Indian Country Today, "Getting Jobbed: 15 Tribes With Unemployment Rates Over 80 Percent," (Aug. 29, 2013), available at http://indiancountrytodaymedianetwork.com/2013/08/29/danger-zone-15-tribes-unemployment-rates-over-80-percent-151078.

¹⁴⁰ We recognize that in order for the penalty to apply, at least one full-time employee must enroll in a Qualified Health Plan through a Marketplace and receive either an advance premium tax credit or a cost-sharing reduction to help pay for coverage. 26 U.S.C. § 4980H(a); 26 C.F.R. § 54.4980H-4(a). However, Tribes have reported that many employees are enrolling in the Marketplace (with active assistance by the Tribes) and have qualified for tax credits, thus subjecting the Tribes to a penalty.

¹⁴¹ See generally SAMANTHA ARTIGA ET AL., HENRY J. KAISER FAMILY FOUNDATION, HEALTH COVERAGE AND CARE FOR AMERICAN INDIANS AND ALASKA NATIVES (2013), available at http://kff.org/disparities-policy/issue-brief/health-coverage-and-care-for-american-indians-and-alaska-natives/ (last visited July 18, 2014).

¹⁴² Along these lines, Tribal employees also might be offered coverage that does not include their local I/T/U facility, thus potentially setting up the Tribal health program for a dispute with the insurer over payment rights as a non-network provider if the employee chose to visit his or her local I/T/U as is otherwise their right.

¹⁴³ See 45 C.F.R. § 158.210 (establishing acceptable insurance medical-loss ratios in the large group, and individual health markets).

¹⁴⁴ 26 U.S.C. § 5000A(e)(3).

¹⁴⁵ 42 U.S.C. § 18071(d).

¹⁴⁶ 26 U.S.C. § 4980H(a); 26 C.F.R. § 54.4980H-4(a) - 5(a).

¹⁴⁷ Codified as amended at 42 U.S.C. § 18071.

¹⁴⁸ See 26 U.S.C. § 36B(d) (tying tax credit eligibility to modified adjusted gross income); see also 43 U.S.C. § 1620, 25 U.S.C. § 1407, 25 U.S.C. § 171b(a) (exempting various AI/AN-specific income from MAGI).

¹⁴⁹ 26 U.S.C. § 36B(2)(B); 26 U.S.C. § 5000A(f)(1)(B), (f)(2). The offer of coverage must otherwise satisfy the ACA's requirements for minimum essential coverage.

¹⁵⁰ See, e.g., Letter from Monica J. Linden, Commissioner, Montana Department of Securities and Insurance, to Kathleen Sebelius, Secretary, U.S. Department of Health and Human Services (Mar. 10, 2014) (recognizing practical difficulties for Tribal employers in finding and offering adequate coverage and seeking Tribal exemption from employer mandate).

¹⁵¹ See Internal Revenue Service, "Employer-Provided Health Coverage Informational Reporting Requirements: Questions and Answers," available at http://www.irs.gov/uac/Employer-Provided-Health-Coverage-Informational-Reporting-Requirements:-Questions-and-Answers (Dec. 19, 2013).

¹⁵² See Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 9001, 124 Stat. 119, 793 (2010), codified as amended at 26 U.S.C. § 4980I. Unless otherwise noted, references to "Sections" of statutes within this comment refer to sections of the Code in chapter 26 of the United States Code.

¹⁵³ The thresholds are $10,200 for self-only coverage and $27,500 for non-self-only coverage, subject to certain adjustments specified in the statute. 26 U.S.C. § 4980I(b)(3)(C).

¹⁵⁴ 26 U.S.C. § 4980I(d)(1)(E).

¹⁵⁵ The IRS has recognized that the government-specific clause must be read as an integrated whole with the introductory language in 26 U.S.C. § 4980I(d)(1)(A), noting that the fact that the government clause only mentions "civilian" governmental plans implicitly means that Congress intended that military governmental plans are not subject to the excise tax. Notice at 8. This interpretation, and the government clause generally, would not make sense if Congress had intended that the excise tax apply to any government plans other than those specified in paragraph (d)(1)(E). See, e.g., FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000) (courts must "interpret the statute 'as a symmetrical and coherent regulatory scheme,' and 'fit, if possible, all parts into a harmonious whole'") (citation omitted).

¹⁵⁶E.E.O.C. v. Fond du Lac Heavy Equip. & Const. Co., Inc., 986 F.2d 246, 249 (8th Cir. 1993) (Age Discrimination in Employment Act did not apply to employment discrimination action involving member of Indian Tribe, Tribe as employer, and reservation employment); accord Snyder v. Navajo Nation, 382 F.3d 892, 896 (9th Cir. 2004) (Fair Labor Standards Act did not apply to dispute between Navajo and non-Navajo Tribal police officers and Navajo Nation over "work [done] on the reservation to serve the interests of the tribe and reservation governance").

¹⁵⁷ See, e.g., Section 1402(d)(2) (referring to health services provided by an Indian Tribe); Section 2901(b) (referring to health programs operated by Indian Tribes); Section 2951(h)(2) (referring to Tribes carrying out early childhood home visitation programs); Section 2953(c)(2)(A) (discussing Tribal eligibility to operate personal responsibility education programs); Section 3503 (discussing Tribal eligibility for quality improvement and technical assistance grant awards).

¹⁵⁸ To whatever extent that there is uncertainty on this front, the Indian canons of statutory construction require that statutes relating to Indians be "construed liberally in favor" of Tribes. Montana v. Blackfeet Tribe of Indians, 471 U.S. 759, 766 (1985).

¹⁵⁹ See, e.g., 26 U.S.C. § 54F(d)(4) (including "Indian tribal governments (as defined in [Code] section 7701(a)(40))" as qualified bond issuers for certain projects); 26 U.S.C. § 401(k)(4)(B)(iii) ("An employer which is an Indian tribal government (as defined in [Code] section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), an agency or instrumentality of an Indian tribal government or subdivision thereof, or a corporation chartered under Federal, State, or tribal law which is owned in whole or in part by any of the foregoing may include a qualified cash or deferred arrangement as part of a plan maintained by the employer.").

¹⁶⁰ See, e.g., 26 U.S.C. § 414(d) ("The term 'governmental plan' includes a plan which is established and maintained by an Indian tribal government (as defined in [Code] section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or an agency or instrumentality of either. . . .").

¹⁶¹ See, e.g., 26 U.S.C. § 168(h)(2)(A)(i), (iv) (defining "tax-exempt entities" as including both "the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing," and "any Indian tribal government described in section 7701(a)(40)," and then explicitly noting that "any Indian tribal government . . . shall be treated in the same manner as a State").

¹⁶² See ACA Section 9010(d)(2) (incorporating definitions from Section 7701); Section 1409(a) of the Health Care and Education Reconciliation Act of 2010 (adding new subsection (o) to Section 7701).

¹⁶³ See, e.g., City of Milwaukee v. Illinois & Michigan, 451 U.S. 304, 329 n.22 (1981) ("The dissent refers to our reading as 'extremely strained,' but the dissent, in relying on § 505(e) as evidence of Congress' intent to preserve the federal common-law nuisance remedy, must read 'nothing in this section' to mean 'nothing in this Act.' We prefer to read the statute as written. Congress knows how to say 'nothing in this Act' when it means to see, e.g., Pub. L. 96-510, § 114(a), 94 Stat. 2795."); accord Arcia v. Fla. Sec'y of State, 772 F.3d 1335, 1348 (11th Cir. 2014) ("[W]here Congress knows how to say something but chooses not to, its silence is controlling.") (Citations omitted).

¹⁶⁴ See, e.g., Indian Self-Determination and Education Assistance Act, Pub. L. No. 93-638, § 105, 88 Stat. 2203, 2208-09 (1975) (codified as amended at 42 U.S.C. § 215(d), 42 U.S.C. § 2004b) (federal law required to explicitly include Indian Tribes within the scope of statutory benefits previously limited to state and local governments).

¹⁶⁵Dean v. United States, 556 U.S. 568, 573 (2009).

¹⁶⁶ 25 U.S.C. § 1601(1)-(2). We note that the federal government's budgeting and expenditures do not come close to meeting the requirements of the trust responsibility: IHS is only funded at approximately 56 percent of need, and a recent contract support cost shortfall was estimated at $90 million. NATIONAL TRIBAL BUDGET FORMULATION WORKGROUP'S RECOMMENDATIONS ON THE INDIAN HEALTH SERVICE FISCAL YEAR 2015 BUDGET 3, 6 (2013).

¹⁶⁷ SAMANTHA ARTIGA, RACHEL ARGUELLO & PHILETHEA DUCKETT, KAISER FAMILY FOUNDATION, HEALTH COVERAGE AND CARE FOR AMERICAN INDIANS AND ALASKA NATIVES 2 (Oct. 7, 2013).

¹⁶⁸Id. at 1.

¹⁶⁹ IHS is only funded at approximately 56 percent of need, and a recent contract support cost shortfall was estimated at $90 million. NATIONAL TRIBAL BUDGET FORMULATION WORKGROUP'S RECOMMENDATIONS ON THE INDIAN HEALTH SERVICE FISCAL YEAR 2015 BUDGET 3, 6 (2013).

¹⁷⁰ Such an increase could potentially eliminate the Tribal plan's grandfathered status under the ACA, if applicable. See 45 C.F.R. § 147.140(g)(1).

¹⁷¹ 26 U.S.C. § 4980I(d)(1)(A).

¹⁷² 26 U.S.C. § 106(a).

¹⁷³ 26 U.S.C. § 139D(b). This Code provision was implemented pursuant to Section 9021 of the ACA.

¹⁷⁴ In addition, we believe that the regulations should recognize that applying the excise tax to Tribal member plans will frustrate one of the key goals in enacting Section 139D, as Tribes will be less likely to provide such tax-exempt benefits to their members (employee or otherwise) if they are concerned that doing so could subject the Tribal fisc to liability under Section 4980I.

¹⁷⁵ 26 U.S.C. § 4980I(c)(2)(C).

¹⁷⁶ But see infra for a discussion of why this interpretation is not accurate.

¹⁷⁷ Notice 2015-52 at 7.

¹⁷⁸ 26 U.S.C. § 4980I(a) (emphasis added).

¹⁷⁹ See Notice 2015-52 at 8-9 (explaining tax calculation formula under the scenario envisioned by the drafters of the Notice).

¹⁸⁰ Notice 2015-52 at 7-8. However, this interpretation is at odds with the plain language of Section 4980I(d)(2)(A) noting that any portion of cost of coverage "which is attributable to the tax imposed under this section shall not be taken into account." The income tax should be considered to be "attributable to the tax imposed under" Section 4980I and subsequently excluded; if not, the IRS is essentially admitting that it has created the income tax payments sua sponte, without statutory authorization, and in violation of the statutory 40 percent excise tax responsibility.

¹⁸¹ Notice 2015-52 at 7.

¹⁸² 26 U.S.C. § 4980I(f)(7) (incorporating by reference 29 U.S.C. § 1002(16)(B)(i)).

¹⁸³ In addition, the Indian canons of construction demand that the agency avoid such an anti-Tribal interpretation of an unclear statute. See, e.g., Montana, supra.

¹⁸⁴ The IRS acknowledges this point when it requests comments on a number of difficult issues related to the implementation of this process, such as the manner in which the employer can reimburse the TPA for the income tax-specific portion of the transaction, the discussed issue of whether the income tax payment goes toward cost of coverage, the formula used when calculating the income tax and other issues. See Notice 2015-52 at 7-9.

¹⁸⁵ In addition to these tax compliance issues, there would be a number of new contractual issues that would arise out of the employer-TPA relationship once this new tax goes into effect, such as the need to verify the TPA's marginal income tax rate on which a portion of the claimed reimbursement is based. While those matters are separate from the tax compliance issues themselves, they would result from an unnecessary and questionable interpretation of tax law.

¹⁸⁶ The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on Dec. 18, 2015, delayed the effective date of the excise tax on high cost employer-sponsored health coverage from taxable years beginning after Dec. 31, 2017, to taxable years beginning after Dec. 31, 2019.

¹⁸⁷https://www.congress.gov/bill/113th-congress/house-bill/3043.

¹⁸⁸ To obtain copies of the prior reports, See https://www.irs.gov/Government-Entities/Reports-of-the-Advisory-Committee-on-Tax-Exempt-and-Government-Entities-(ACT).

¹⁸⁹ Fourteenth Report of the Advisory Committee on Tax Exempt and Governmental Entities, dated June 17, 2015.