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IRS Takes Closer Look at Exempt Organizations Employment Tax Compliance

IRS Takes Closer Look at Exempt Organizations Employment Tax Compliance

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The IRS is adding new areas of focus for employment tax examinations and tax-exempt organizations are being closely considered. The IRS Tax Exempt and Government Entities, fiscal year 2018 Work Plan will scrutinize exempt organizations in numerous areas, as we’ve outlined below.

New Compliance Focus

In addition to reviewing complex worker classifications and their fringe benefits, the Tax Exempt and Government Entities 2018 Work Plan will also include a check of the following compliance matters and strategies:

  1. Early Retirement Incentive Plans. Is the proper tax treatment being applied to the cash option or other incentive being provided to employees opting for early retirement?
  2. Combined Annual Wage Reporting (CAWR)
    • Employment Tax. Do the amounts reported on your Forms W-2 and Forms 941/944 match? This Work Plan will look closely at tax-exempt organizations with discrepancies between the two forms.
    • Federal Unemployment Tax. Are you an exempt organization that failed to file Form 940 when required to?
  3. Form W-2/1099 Matches. This may apply to you if you reported payments on Forms 1099 that should have been treated as wages subject to Social Security and Medicare (FICA) tax and income tax withholding.
  4. Employment Tax Noncompliance. Are you an exempt organization or government entity that filed returns which may have a high risk of employment tax noncompliance? You may be if you had substantial credit balances with no returns, and zero to minimal FICA wages paid compared to Form 1099 distributions.
  5. Federal Unemployment Insurance Tax. Are you an IRC Section 501(c)(3) exempt organization that did not pay FUTA tax on employees of a related IRC Section 501(c)(4) organization?
  6. Backup Withholding. Notice CP 2100—did you fail to comply with backup withholding requirements related to mismatched and/or missing Taxpayer Identification Numbers (TINs) on Form 1099?

How to Stay Compliant

In addition to connecting with your auditor or tax advisor on a regular basis, your tax-exempt organization should conduct a monthly or quarterly review of all employment tax related documentation. Consider a regular internal audit of your reporting, including but not limited to:

  • Plan benefit documents
  • Form 1099 reporting
  • Fringe benefits
  • W-2 forms
  • Worker classifications

For assistance with ensuring your organization meets the employment tax compliance requirements, please contact your local Sikich advisor.

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