Even though an organization qualifies for Federal income tax exemption under IRC § 401(a) or 501(a), the organization is required to file annual information returns and any applicable related returns.

Required Filing Checks are necessary to ensure voluntary compliance. Examiners are responsible for determining taxpayers are in compliance with all Federal tax return filing requirements and all returns reflect substantially the correct tax.

Required Filing Checks include a review of all related returns, including all income, employment, excise and information returns. Where required filing checks are not followed the examiner must indicate the reasons on Form 5773. Similarly, group managers must document in the case file if they concur with the examiner’s determination whether an organization’s compliance with all IRS filing requirements is not warranted.

This section contains specific examination guidelines for Exempt Organizations required Filing Checks and jurisdiction.

IRC §§ 6041 - 6053 provide reporting requirements of certain information concerning transactions with persons during the course of business, and wages paid to employees. Generally, the regulations require the reporting of items such as payments made in the course of trade or business to another person, payments of dividends, payments of interest, payments of wages, cash receipts in excess of $10,000, etc. Therefore, it is most important that taxpayers (payors) timely file these returns as required.

IRC § 6041A (Returns Regarding Payments of Remuneration for Services and Direct Sales), provides that if any person engaged in a trade or business pays an independent contractor for services in the course of that business, remuneration of $600 or more in a calendar year, the payor must file an information return.

IRC § 6041(A)(e) provides that the payor must furnish the payee a written statement setting forth the amount of such payments. The statement must be furnished to the payee on or before January 31 of the year following the calendar year for which the return was made.

IRC § 6051I and the regulations thereunder require that any person who, in the course of a trade or business in which such person is engaged, receives cash in excess of $10,000 in one transaction (or two or more related transactions), file a report of the transaction.

IRC § 6051(a) and Regs. 31.6051-1(a) and (b) provide that employers must furnish Form W-2, Wage and Tax Statement, to employees for remuneration paid during the calendar year showing the total amount of wages paid subject to withholding of income tax, the total amount of wages paid subject to FICA tax, and the total amount of income tax and FICA tax deducted and withheld. The statement must be furnished to the employee on or before January 31 of the succeeding calendar year.

Forms W-2 are filed with the Social Security Administration and are due on or before the last day of February following the calendar year in which compensation was paid.

In the interest of conserving resources, increasing compliance, and reducing multiple contacts with taxpayers, it is incumbent upon the EO examiner to include during the examination an appropriate review of other returns filed by the exempt organization to assure the taxpayer is in compliance with all filing requirements. This responsibility also extends to various regulatory and occupational taxes under other Compliance Division’s jurisdiction.

Examiners should be alert to possible liability for other Federal taxes and determine whether the taxpayer has complied with the filing requirements.

Required Filing Checks consist of the analysis of the return information and, when warranted, expansion of the examination to include additional returns.

Group managers are responsible for ensuring the scope and the depth of the required filing check coverage is adequate. If a group manager concludes an examiner’s time determining an organization’s compliance with all IRS filing requirements is not warranted, the group manager must document this in the case file.

The scope of the examination will depend on the adequacy of the taxpayer’s records. However, the examiner is expected to continue the examination to a point where it is reasonable to conclude the return requirements have been fulfilled.

If an examiner finds a required return has not been filed the examiner will solicit the delinquent return (except as provided in IRM 4.75.22, EO Delinquent/Substitute Returns Procedures, when fraud or willful failure to file is indicated). If the examiner secures a delinquent return, the examiner will generally examine such return unless:

The penalty provisions under IRC §§ 6651 and 6652 must also be considered.

An examiner may inspect any return filed by the organization or related entity. The purpose of the inspection is to review a filed return for correctness, accuracy and timely filing. If the return is outside the examiner’s expertise the inspection will be to check timely filing only.

An examiner should not ask questions about an item on the return unless the return is to be examined. Once an examiner requests to look at the return’s books and records, an examination has begun and the organization and/or taxpayer are entitled to an examination report.

EO has examination responsibility for all EO returns, for all related employment tax and information returns, and for exempt organizations not required to file an annual information return due to falling below the filing requirement gross receipt threshold.

The appropriate Compliance Division has examination responsibility for other Federal tax returns. However, EO examiners are required to perform a required filing check to inspect all federal returns to ensure they have been filed properly.

The Compliance Divisions have been assigned the similar task of developing their own employment tax programs. To ensure consistency, both in the approach and in the interpretation and application of law, on going communication between the Divisions is essential. Areas may develop their own systems to accomplish this coordination.

EO has primary examination responsibility for employment tax returns filed by IRC § 501(a) organizations, IRC § 527 organizations, and IRC § 529 organizations. The other Compliance Divisions have primary examination responsibility for all other employment tax returns.

The returns and schedules under EO jurisdiction are listed in Exhibit 4.75.12-1.

Examiners, during the pre-examination phase of the examination, are to verify whether all returns within the taxpayer’s realm of influence have been filed. To decrease taxpayer burden, examiners should use internal sources of information, e.g. Corporate Files on Line (CFOL). CFOL is used to obtain information relating to the taxpayer’s prior and subsequent years, related returns, and any other returns the taxpayer is required to file.

CFOL provides on-line access (research only) to tax account, tax return and other related information through Integrated Data Retrieval System (IDRS). See Document 6209, ADP and IDRS Information, for additional information on CFOL command codes.

Examiners are required to document required filing check actions taken and decisions made in the workpapers and on Form 5773, EO Workpaper Summary Continuation Sheet.

The examiner should specify on Form 5773:

If the taxpayer has correctly filed all required returns, the examiner should identify the specific returns in the comments.

If the minimum required checks are not completed, an explanation is to be included by the examiner and managerial involvement documented in the workpapers.

Required Filing Checks should include questionable Form W-4 procedures, employment tax, excise tax, information returns, pension plan returns, and Form 8300. Although not all-inclusive, the following is a list of the organization’s returns to be inspected:

During the course of an examination, inspect the organization’s retained copy of the exempt organization returns for the prior and subsequent years for proper filing and to evaluate audit potential in instances such as, recurring issues or transactions that may adversely affect the exempt status or tax liability of the taxpayer.

Determine whether increases or decreases in activities and financial data affect the organization’s exempt status or result in tax. Such changes may warrant securing the return for examination.

An inspection is essentially equivalent to the classification of a return to determine if an examination is necessary. Consequently, if the examiner does not initiate an examination, the examiner may not examine records concerning the copy inspected.

When evaluating the returns for issues related to the year under examination:

If the inspection of prior and/or subsequent years return does not result in an examination, inform the taxpayer of the determination and that in no instance will such action preclude the possibility of the return being selected and subject to examination as a result of any other return selection method.

The examiner should document in the workpapers the retained copies inspected and explain why an examination was not warranted.

If the minimum required checks are not completed, an explanation mustbe included in Form 5773 and managerial involvement documented.

If, during the examination of the assigned return, the examiner obtains information that indicates potential substantive noncompliance in subsequent years for which returns have not yet been filed by the same taxpayer, prepare Form 5666.

If the taxpayer is unable to provide copies of the returns, request a transcript (use command code BMFOLT on IDRS) and a BRTVU printout.

An examination of prior or subsequent year returns may be warranted if:

If adjustments are made to the return(s) under audit, the examiner must specifically document why the other years were not examined.

Obtain group manager approval to extend an examination into either the prior and/or subsequent years. The examiner will document the group manager’s approval to extend the examination to prior or subsequent years in the workpapers or in the Case Chronology Record. Additionally, the group manager should prepare a written statement of approval for inclusion in the workpapers.

Examine prior/subsequent year return(s) concurrently with the assigned return. Ensure sufficient time remains on the statute of limitations before starting an audit of a prior year return. See IRM 25.6, Statute of Limitations.

The examiner shall inform the taxpayer of the decision and ask whether the prior/subsequent year return(s) is under examination. Examiners will verify the presence or absence of an examination indicator on a primary return before initiating an examination. If an examination indicator is present, the examiner will take appropriate steps to coordinate before contacting the taxpayer.

In order to establish cases on AIMS using retained copies of taxpayer’s returns, Form 5597 (EO IMF/BMF Request), or Form 5588, (EO Non Master File Request) should be prepared and forwarded for input as soon as the examiner knows an examination will be initiated.

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If the examiner is unable to secure the original return or if closing would be delayed by awaiting receipt of the original, the examiner may close the case based on the taxpayer’s retained copy. However, the original returns must be secured in the following instances:

If the case is closed based on a retained copy, the Settlement Codes printed on Form 5546 (Examination Return Charge-Out Sheet) will ensure that the tax shown on the retained copy is the same as the tax assessed. Use Command Code BMFOLT or IMFOLT to secure a record of the taxpayer’s account.

Employment tax obligations are an integral part of the examination of an exempt organization. At a minimum, all employment tax returns must be inspected to ensure required filing compliance. A separate employment tax audit may be necessary if inspection does not reveal compliance.

IRC §§ 3401 and 3402 set forth the requirements for claiming an exemption and the withholding rules. Employers must comply with the W-4 requirements in accordance with Reg. 31.3402(f)(2)-1(g).

Under IRC § 6001 and Reg. 31.6001-5(a), employers are required to keep records of all remuneration paid to employees and make them available for inspection by authorized IRS personnel. When an employer is reluctant or refuses to permit an inspection of payroll records, advise them of their obligations under the Code and Regulations.

Required filing check procedures must include certain compliance checks outlined below for every examination of an exempt organization.

When these checks are not performed, the reasons must be indicated on Form 5773 (EP/EO Workpaper Summary Continuation Sheet).

Certain information returns are the primary input documents for computerized matching programs to detect potential unreported income and nonfilers. Policy Statement P-4-4 (see IRM 1.2) and these "Required filing check " provisions spell out EO’s responsibility to ensure the timely and correct filing of information returns.

Examples of information returns include:

Group managers and reviewers are responsible for ensuring that examiners properly document their workpapers to reflect adequate coverage of information return issues.

If the examination of an organization reveals that the organization maintains an employee benefit plan, the examiner must conduct certain inspections of the benefit plan(s) in order to ensure compliance with all employee plan requirements. The examiner should:

Determine the type(s) of retirement plan(s) maintained by the organization. Complete Form 4632-A for each plan to determine whether a referral should be made to Employee Plans.

If an organization has a profit sharing plan exempt under IRC 401(a), determine the affect on the organization’s exempt status. Also, submit referral to Classification to forward to EP for IRC 401(a) consideration.

For examinations of employee welfare benefit plans exempt under IRC 501(c)(9), (c)(17), (c)(20), and IRC120 review plan documents and complete Form 6212-B, Examination Referral Checksheet B. If any item on Form 6212-B is checked in the right hand column, you must forward the form to the appropriate Pension and Welfare Benefits Administration of the Department of Labor (DOL) The case should not be closed until the earlier of receipt of response from DOL, or 20 workdays after the date of submission of the document to DOL.

Determine if fringe benefits are taxable wages. Review the chart of accounts for more obvious employee benefits. Secure a copy of the personnel department’s employee benefits and executive benefits procedures.

Complete Form 4632-A for each plan for which a deduction is claimed. Form 4632-A will remain in the case file. See Exhibit 4.75.12-2 for a sample of Form 4632A.

The completion of Form 4632A will assist in the preparation of Form 4632, Employee Plans Referral, if necessary. See Exhibit 4.75.12-3 for a sample of Form 4632, Employee Plans Referral.

If it is concluded that a referral is warranted due to other issues or circumstances not covered by Form 4632-A, the referral may be accomplished by a narrative explanation of the particular issues or circumstances.

IRC § 527 explains the extent to which political organizations are taxed. Basically, only the political organization’s income from investments, less the expenses directly attributable to such income including a specific deduction of $100.00, is taxed at the highest corporate rate. Neither the net operating loss deduction or the special deductions allowed for corporations are allowable pursuant to IRC § 527(c).

An IRC § 501(c) organization, on the other hand, is taxed under IRC § 527 on the lesser of the amount expended for political purposes "exempt function" activities, or the organization’s net investment income.

Net investment income, for purposes of IRC § 527(f), means the gross amount of interest, dividends, rents, royalties, plus the excess (if any) of gains from the sale or exchange of assets over the losses from the sale or exchange of assets, over the deductions directly connected with the production of this income. To avoid double taxation (and double deductions), IRC § 527(f)(2) provides that income and deductions taken into account for purposes of the tax on unrelated business income of IRC § 501(c) organizations under IRC § 511 are not to be included as either income or deductions in determining net investment income under IRC § 572(f).

For purposes of IRC § 527, expenditures for "exempt function" (political) purposes, are expenditures for the purpose of influencing the outcome of an election to public office. Political expenditures do not include any expenditures for the purpose of influencing legislation regardless of whether those "lobbying" expenditures are for germane lobbying, non-germane lobbying, or grass roots lobbying.

Ascertain whether a separate segregated fund described in IRC § 527(f)(3) is maintained by the organization. Also, determine if the organization has expended any amount from its funds during the taxable year directly (or through another organization) for an exempt function under IRC § 527(e)(2). If so, a Form 1120-POL may be required. Check the minutes and other correspondence files for indications of political contributions. Also check disbursements for possible political expenditures.

Compare the amount of political expenditure per Form 990, Part IV, Question 81 to the amount of political expenditures on Form 1120-POL. Also, reconcile the investment income and expenses per return with those reported on the Form 1120-POL. If adjustments are present, secure the return.

If the IRC § 501(c) organization has $100 or less net investment income, no return or tax is due from the 501(c) organization under IRC § 527 regardless of the amount of its political expenditures.

Tax Exempt Bond required filing check guidelines are currently under development and will be incorporated into this IRM when completed.