Rev. Proc. 2016-51 and Treas. Reg. — 0618 Publ 4344 (PDF)

commercial locator service, a credit reporting agency and internet search tools.

Third, Form 5500, Return/Report of Employee Benefit Plans, acknowledges the

existence of Missing Participants. Specifically, lines 4l of Schedules H and I of the Form

42 Rev. Proc. 2016-51, https://www.irs.gov/pub/irs-drop/rp-16-51.pdf. 43 26 C.F.R. 1.432(e)(9)-1.

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5500 ask, "Has the plan failed to provide any benefit when due under the plan?" This

question was added in 2009 but the instructions to the form did not include examples of

what constitutes a reportable failure. On July 29, 2016, the IRS issued clarifying

instructions that plan sponsors do not need to report unpaid RMDs for Missing

Participants if the plan has engaged in reasonable efforts or is in the process or

engaging in such reasonable efforts and made reference therein to DOL guidance on

terminated plans. ⁴⁴

Finally, in response to the lack of clear and coordinated guidance for ongoing plans, on

June 7, 2017, the ACT issued a public report of recommendations to the Tax Exempt

and Government Entities Division of the IRS (TE/GE), which included a

recommendation that the IRS issue guidelines on what steps plan sponsors should take

to maintain compliance with the tax qualification requirements where there are Missing

Participants. ⁴⁵ The IRS considered the ACT’s request and issued guidance in the form

of a field directive to EP examiners, dated October 19, 2017 (TE/GE FD 2017). ⁴⁶ The

IRS directed that:

For purposes of [Code Section] 401(a)(9), EP examiners shall not challenge a qualified plan for violation of the RMD standards for the failure to commence or make a distribution to a participant or beneficiary to whom a payment is due, if the plan has taken the following steps: (i) searched plan and related plan, sponsor, and publicly-available records or directories for alternative contact information; (ii) used any of the search methods below: a commercial locator service; a credit reporting agency; or a proprietary internet search tool for locating individuals; and (iii) attempted contact via United States Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers). ⁴⁷

44 https://www.irs.gov/retirement-plans/clarifications-to-instructions-for-lines-4l-of-schedules-h-and-i-form-5500-and- line-10f-of-form-5500-sf. 45 Advisory Committee on Tax Exempt and Government Entities (ACT), Report of Recommendations, p. 49 (June 7, 2017) (https://www.irs.gov/pub/irs-pdf/p4344.pdf). 46 TE/GE-04-1017-0033. 47 Ibid.

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In addition, the IRS issued another field directive to EP examiners, dated February 23,

2018 (TE/GE FD 2018), providing parallel guidance for sponsors of 403(b) plans

(collectively, the “TE/GE Field Directives”). ⁴⁸ The TE/GE Field Directives are helpful as

they provide guidance on one aspect of the Missing Participants problem, but the

various constituents of the EP Community have expressed the need for further

guidance from the IRS.

The EP Subgroup Project

The EP Subgroup took multiple steps to determine the views of the EP Community and

to develop its recommendations regarding Missing Participants. The Subgroup solicited

background information from personnel in the IRS Office of Employee Plans (EP).

Robert S. Choi, Acting Deputy Commissioner of TE/GE and former EP Director,

generously made himself and the EP staff available which helped shape the Subgroup’s

recommendations. Open and informative discussions with staff and managers were

conducted. The EP Subgroup appreciates the time and cooperation from the entire EP

team including Cathy Jones, Acting Director, Employee Plans, Khin M. Chow, Director

of EP Rulings and Agreements, Sean O’Reilly, Acting Director, Employee Plans

Examinations, Tom Petit, former Acting Director of EP Examinations, Lisa Beard, former

Director of EP Examinations, Mark O’Donnell, Director, Communication and Liaison,

William “Buck” Kerr, Manager, Employee Plans Voluntary Compliance, Louis J. Leslie,

Technical Adviser, Employee Plans, and Ryan McDonald, Group Manager, EP

Determinations.

Finally, the EP Subgroup held discussions with a number of professional groups and

associations within the EP Community to assess the concerns and needs of the

community. The EP Community described the current landscape as one in which plan

sponsors want to maintain compliance with applicable law, but unanimously expressed

deep concerns that they need more guidance on how to navigate the challenges that

come with having Missing Participants. The EP Community welcomed the guidance

48 TE/GE-04-0218-0011.

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provided by the TE/GE Field Directives. But, even for plan sponsors that invest the time

and incur the cost of diligently searching for Missing Participants, more guidance is

needed. Further, there are no standard practices in the industry for the frequency or

method of conducting searches. There is a pronounced need for coordinated guidance

from the DOL, PBGC and IRS for ongoing qualified plans.

III. RECOMMENDATIONS

The EP Subgroup recommends that the IRS expand its field directives to EP examiners

and take certain other steps that will help plan sponsors maintain compliance as follows:

Expand the scope of the TE/GE Field Directives to apply to plan distributions other

than RMDs under IRC Section 401(a)(9) including:

Distributions made pursuant to IRC Sections 401(a)(31), 401(a)(14) and 411(a)(11);
Corrective distributions under EPCRS pursuant to Rev.Proc.2016-51, such as a refund under IRC Sections 415, 401(k) or 401(m); and
Distributions made to Missing Participants where a communication is not returned as undeliverable but the participant failed to respond to or take the requisite action needed to commence such distribution.

Modify the TE/GE Field Directives to clarify that if any communication (even if the

envelope does not include a check) was returned as undeliverable with no

forwarding address, and if the Plan Sponsor is subsequently unable to locate a valid

address for such Missing Participant, the requirement under the TE/GE Field

Directives to send a certified letter is waived because it would be imprudent to send

a certified letter and/or check to a known invalid address.

Modify guidance and the instructions to Form 5500, Annual Return/Report of

Employee Benefit Plan, to make clear that sponsors should answer l ines 4l of

Schedules H and I of the Form 5500 question: "Has the plan failed to provide any

benefit when due under the plan?" based on the steps outlined in the TE/GE Field

Directives. By way of background, prior to 2015, the i nstructions to Form 5500 did

not include examples of what is a reportable failure. In 2015, the IRS clarified its

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instructions to explain that a reportable failure includes any unpaid RMDs. Further,

the IRS announced in 2016 that plan sponsors do not need to report unpaid RMDs

for Missing Participants if the plan sponsor has engaged in reasonable efforts or is in

the process of engaging in such reasonable efforts. With the issuance of the recent

TE/GE Field Directives, the instructions to Form 5500 should be revised to specify

that reasonable efforts will be determined in accordance with the TE/GE Field

Directives.

Provide guidance and amend the instructions to IRS Form 5329, Additional Taxes

on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to establish

an automatic waiver from the IRC Section 4974(a) 50 percent excise tax on

insufficient RMDs if the plan sponsor has completed all of the steps outlined in the

TE/GE Field Directives.

Provide guidance and amend the instructions to IRS Form 1099-R, Distributions

From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance

Contracts, etc. to provide direction on when Form 1099-R should be issued with

respect to distributions that remain uncashed.

Issue a Field Directive to EP examiners confirming that distributions for Missing

Participants, as well as uncashed checks, may be forfeited subject to reinstatement

pursuant to Treas. Reg. Section 1.411(a)-4(b)(6) and coordinate such guidance with

the DOL.

Re-open the IRS Letter Forwarding Program under Rev. Proc. 2012-35 for locating

Missing Participants because it is more effective to send official letters from the IRS;

employees are reluctant to respond to letters from former employers given anxieties

about spams, scams and frauds.

Provide support to the Office of the Benefits Tax Counsel at Department of Treasury

to increase by legislation the dollar threshold under IRC Sections 411(a)(11) and

401(a)(31) to an amount greater than $5,000. In doing so, plan sponsors will have a

greater likelihood of being able to make more distributions of vested benefits to

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employees following their termination of employment without their consent, before

they become Missing Participants.

Support the issuance of inter-agency coordinated guidance with Treasury Office of

Chief Counsel, the DOL and PBGC as soon as possible.

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ADVISORY COMMITTEE ON

TAX EXEMPT AND GOVERNMENT ENTITIES

(ACT)

Exempt Organizations Subgroup

Recommendations Regarding Incentivizing Universal E-Filing for Form 990

Natasha M. Cavanaugh, Project Leader

Cindy Lott

Michael J. Engle

June 7, 2018

EXEMPT ORGANIZATIONS

RECOMMENDATIONS REGARDING INCENTIVIZING UNIVERSAL

E-FILING FOR FORM 990

I. EXECUTIVE SUMMARY ................................................................................... 39

II. BACKGROUND ................................................................................................. 39

III. RECOMMENDATIONS ..................................................................................... 47

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I. EXECUTIVE SUMMARY

Much has been written about the benefits of electronically filing Form 990, the annual

return for tax-exempt organizations (EO). A full litany of benefits that could be realized

by the EO sector, the public and the IRS may be found in the 2015 IRS ACT report,

which recommended that the IRS proactively encourage e-filing. ⁴⁹ In the years since the

2015 ACT report, rapid progress has been made toward universal e-filing of Form 990s.

For fiscal year 2017, roughly 57 percent of all Forms 990 and 990-EZ were filed

electronically. Unfortunately, nearly 200,000 returns are still paper filed. Without

universal electronic filing, the goal of machine-readable, digitized data that may be

released easily and efficiently into the public domain remains elusive.

With continuously improving technology and an emphasis on open data across all

government agencies, all Form 990 series eventually will be filed electronically. Paper

returns will be a relic of the past. Nevertheless, the IRS should take steps to speed the

transition. All Form 990 filers should be required or, at least, incentivized to file

electronically. Short of a legislative change mandating e-filing, a range of possible

incentives from the IRS exists. Universal e-filing will save costs, result in more accurate

returns, and improve the availability, reliability and transparency of EO data.

II. BACKGROUND

Users of the Form 990

The forms that most tax-exempt organizations must use to comply with the annual

information return requirement are the Form 990, Return of Organization Exempt from

Income Tax, Form 990-EZ, Short Form Return of Organization Exempt from Income

Tax, or Form 990-N, (e-Postcard). Certain tax-exempt organizations are subject to

special return filing requirements. For example, private foundations submit their

information to the IRS on a Form 990-PF, Return of Private Foundation. Exempt

49 See , https://www.irs.gov/pub/irs-tege/tege_act_rpt_14.pdf.

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organizations separately report their unrelated business income on a Form 990-T,

Exempt Organization Business Income Tax Return.

The Form 990 is relied upon by federal and state regulators and various segments of

the general public for different purposes. ⁵⁰ The primary purpose of Form 990 is

enforcement of federal tax law and to meet the statutory information return requirement

for tax-exempt organizations. State attorneys general and other state officials use Form

990 data primarily for issues of governance and fundraising regulation.

Because the Form 990 includes questions beyond gross income and disbursements,

including, exempt activities, officers’ compensation, governance and investments, the

data are of interest to academics, independent organizations that provide services to

the sector, the media and the public. Form 990 filing organizations also use Form 990

data to compare their organization’s structure, management, compensation or

performance with that of other organizations. Additionally, tax-exempts often use the

Form 990 as a communication tool to provide information about their activities to

donors, potential donors and the public. ⁵¹

For more detailed information on the various uses and users of Form 990, see the

2015 ACT report. ⁵²

The Form 990 Filing Requirement

Every organization exempt from taxation under IRC Section 501(a) must file an annual

information return, unless an exception applies. ⁵³ The use of the term “information

return” is intentional. It is more than a financial snapshot. The information return reveals

more about a nonprofit’s operations than comparable tax forms do about individuals or

private companies. The information return requires information on the organization’s

50 For more detail on the various users of Form 990, see, 2015 ACT Report: “ The Redesigned Form 990: Recommendations for Improving its Effectiveness as a Reporting Tool and Source of Data for the Exempt Organization Community, ” June 2015. 51 Id. 52 Id. 53 IRC Section 6033.

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governance, activities, compensation and related parties. As explained by the IRS in the

information return instructions, “Some members of the public rely on Form 990 or Form

990-EZ as their primary or sole source of information about a particular organization.

How the public perceives an organization in such cases can be determined by

information presented on its return.” ⁵⁴

Many tax-exempt organizations are exempted from filing a Form 990, including, but not

limited to, churches, state institutions (including state colleges and universities) and

instrumentalities of the United States. ⁵⁵ Treasury also has the discretion under IRC

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. ⁵⁶

Electronic Filing Requirement

Any organization may file its Form 990 and related forms, schedules and attachments

electronically. However, only the smallest exempt organizations and the largest are

required to file electronically. Other exempt organizations filing a Form 990 may choose,

but are not required, to e-file.

Small Organizations: “Electronic Postcard” Filing

IRC Section 6033 requires tax-exempt organizations with gross receipts of $50,000 or

less to file electronically Form 990-N. ⁵⁷ Although Form 990-N must be filed online, small

organizations have the option of filing, either electronically or on paper, a Form 990 or

Form 990-EZ.

54 Form 990 instructions. 55 IRC Section 6033(a); Treas. Reg. Section 1.6033-2(g). 56 IRC Section 6033(a)(3)(B). 57 IRC Section 6033(i).

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For fiscal year 2017, more than 600,000 Form 990-Ns were e-filed. Yet, roughly 66,500

Form 990 and 990-EZ returns were paper filed with gross receipts of $50,000 or less

and presumably eligible to e-file Form 990-N.

Large Organizations: Electronic Filing of the Form 990

IRC Section 6011(e) authorizes the Secretary of the Treasury to prescribe regulations

providing for standards for the e-filing of returns. The Secretary is not allowed to require

any taxpayer to file a return electronically unless the taxpayer is required to file at least

250 returns during a calendar year. ⁵⁸ The Secretary is also instructed to consider the

ability of the taxpayer to comply with the reasonable cost of e-filing ⁵⁹ and is further

authorized to implement procedures to provide for “the payment of appropriate

incentives for electronically filed returns.” ⁶⁰

The regulations that were promulgated under IRC Section 6033 in 2005 narrow the

category of exempt organizations that are required to file a Form 990 electronically by

adding an additional $10 million asset threshold; that is, an exempt organization must

file its Form 990 electronically only if it is required to file at least 250 returns in a

calendar year and has total assets exceeding $10 million ⁶¹ The preamble to these

regulations states that exclusion of certain exempt organizations with total assets of less

than $10 million was to “eliminate the potential burden of electronic filing on small

businesses that may not be able to comply at a reasonable cost.” ⁶² Interestingly, this

same concern is not bestowed on private foundations. Private foundations, unlike public

charities, are subject only to the 250 returns threshold. Once this threshold is met, a

private foundation must electronically file a Form 990-PF regardless of asset size. ⁶³

58 IRC Section 6011(e)(2)(A). To determine the 250-return requirement, returns of any type are counted, including information returns, income tax returns, employment tax returns and excise tax returns. Treas. Reg. Section 301.6033-4(d)(3). 59 IRC Section 6011(e)(2)(B). 60 IRC Section 6011(f). 61 Treas. Reg. Section 301.6033-4(f). 62 I.R.B. 2005-10 (March 7, 2005). In promulgating the regulations, however, the Department of Treasury encouraged all organizations to adopt electronic filing as soon as feasible even if not required by the regulations to do so. 63 Treas. Reg. Section 301.6033-4.

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Form 990 in Machine-Readable Format

One of the many benefits of electronically filed 990s is the ability to more easily convert

the data to open formats. The Aspen Institute has devoted significant resources to

studying the Form 990 and its data, the results of which it published in “Information for

Impact: Liberating Nonprofit Sector Data.” ⁶⁴ The Aspen Institute report promotes many

benefits of open Form 990 data, including increasing the transparency for nonprofit

organizations, making it easier for state and federal authorities to detect fraud, spurring

innovation in the nonprofit sector and making the data useful for researchers,

advocates, entrepreneurs and technologists, as well as nonprofit organizations that do

not have the resources to use the data from image files. ⁶⁵

In the summer of 2016, the IRS announced that the publicly available data on

electronically filed 990s would be available for the first time in a machine-readable

format through Amazon Web Services (AWS). ⁶⁶ The publicly available data does not

include donor information or other personally identifiable information. The launch of this

effort was a huge step in ensuring that better, more usable data about the nonprofit

sector is available to the public. As noted by then IRS Commissioner John Koskinen,

“The publicly available information on the Form 990 series is vital to those interested in

the tax-exempt community.” ⁶⁷

Only e-filed Forms 990 are available in machine-readable format. Paper returns are

available only as image files and for purchase from the IRS on DVD. As a result,

64 Novek, Beth and Goroff, Daniel, “Information for Impact: Liberating Nonprofit Sector Data”, The Aspen Institute (2nd edition) 2013; available at www.aspeninstitute.org/publications/information-impact-liberating-nonprofit-sector- data/. 65 Id. 66 IR-2016-87, June 16, 2016. 67 Id.

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roughly 43 percent of all Forms 990 and 990-EZ are not available in machine-readable

format. ⁶⁸

Accounting Firm Practices

Organizations that engage paid preparers are more likely to e-file. In fiscal year 2017,

77 percent of the Forms 990 and 990-EZ prepared and filed with paid preparers were

electronically filed. In contrast, only 14 percent of the Forms 990 and 990-EZ prepared

and filed without paid preparers were electronically filed. Accounting firms prefer to e-file

for the following reasons:

More efficient process that saves time and cost for the taxpayer and the paid preparer;
Electronically filed Forms 990 and 990-EZ are more complete and have less errors than paper filed returns because electronically filed returns must be complete before being accepted for electronic filing;
Electronically filing Forms 990 and 990-EZ reduces the possibility of human error; and
The receipt of an electronic confirmation that Form 990 or Form 990-EZ was accepted or rejected by the IRS.

Although accounting firms prefer to e-file, there are circumstances that require Forms

990 and 990-EZ to be paper filed. For instance, if an organization changes its name or

amends a Form 990 or 990-EZ, those returns must be paper filed because the IRS is

unable to process these returns electronically.

68 Note that even those data that are available in machine-readable form are not necessarily released in a form useful to the public, including skilled academics. In 2017, the Aspen Institute and its data coalition partners Guidestar, Urban Institute, Indiana University’s Lilly Family School of Philanthropy, Charity Navigator, Syracuse University, Johns Hopkins University, George Washington University and American University, held their first “datathon” for creating usable digitized data from the information now publicly available through the IRS on the Amazon Web Services platform. See https://www.aspeninstitute.org/blog-posts/aspen-institutes-program-philanthropy-social-innovation-psi- hosts-nonprofit-datathon/.

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Lessons Learned from Abroad

As a point of comparison, albeit limited, both the Australian and New Zealand

governments have had good experiences with incentivizing charities to electronically file

both registrations and returns. Interviews with charities regulators in both countries

reveal that when government across the federal landscape institutes electronic filing

and communication, not only for exempt organizations but for many or all federal

interactions, charities have responded well.

Over the last five to eight years, Australia has established in one sustained initiative an

online platform for Australian charities registration and filing -- the Australian “Charities

Passport” system. ⁶⁹ In New Zealand, there was a major push for the entire federal

government to use electronic filing and communication, so charities were simply one of

many sectors to transition from paper to electronic interactions with the government. Of

note, of course, are the much smaller and more discrete populations of charities in

these two countries. Australia has approximately 55,000 registered charities ⁷⁰ and New

Zealand has less than 30,000. ⁷¹ In contrast, the United States has roughly 1.5 million

tax-exempt organizations. ⁷²

Australia incentivized e-filing in several ways. Some of their actions, however, could be

considered simple encouragement rather than incentivization. First, organizations that

registered electronically were listed on the official government website as a registered

organization within 15 days of electronically filing appropriate registration paperwork;

those organizations that registered on paper were officially listed in about 28 days. Such

quick and public acknowledgement of an organization’s registration with the government

allows organizations to pursue fundraising opportunities sooner. Notably, the Australian

government did not charge a fee differential based on e-filing versus paper filing.

Second, the Australian government tracked which organizations did not e-file and sent

69 See http://www.acnc.gov.au/ACNC/About_ACNC/Redtape_redu/Charity_Passport/ACNC/Edu/Charity_Passport.aspx. 70 https://acnc.gov.au/ACNC/FAQs/FAQ_Are_there_too_many_charities.aspx#Q2. 71 See https://charities.govt.nz/. 72 See http://nccs.urban.org/frequently-asked-questions.

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them letters, specifically noting that the government was aware the organization elected

to paper file and informing the organization that e-filing was more efficient, easier and

quicker than paper filing. Third, the Australian charities regulators set expectations

publicly that electronic filing was the default, but acknowledged that there would never

be 100 percent participation for e-filing. If an organization wanted to paper file, the

government would send them the form upon request.

In New Zealand, electronic filing was part of a larger campaign to have residents use

online systems in various contexts across government offices. Today, 95 percent of all

filings by charities in New Zealand are submitted online. New Zealand embedded

incentives into their filing system to encourage such electronic filing, including:

The country charges a higher fee for paper filings than it does for electronic filing;
If submitted digitally, information is released to the public almost immediately, as opposed to a delay as is true of paper documents;
The country has an online system that provides pre-population of data, which makes annual filings more efficient over time; and
New Zealand has developed an authentication system so there is shared access among an organization’s designated representatives to file electronically within a shareable document.

To support an enabling environment, the country made a large push for broadband to

be available in even the most remote areas. Overall, New Zealand has found that ease

of use is the best incentive.

Hurdles

Security

Form 990 filers often cite data security as a major deterrent to e-filing. Even though all

data included on Form 990 and 990-EZ is available to the public (save Schedule B

information), exempt organizations are concerned about protecting their donors’

information. The IRS is required by law to maintain the confidentiality of donor

information. However, because of highly publicized security breaches and general

technology failures at the IRS, the public questions the security of IRS systems. As

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EXEMPT ORGANIZATIONS

indicated in the 2015 IRS ACT report, the IRS must ensure that its online systems are

as secure as possible to maintain confidentiality of donor information and to avoid data

breaches. Discussions with accounting firms and taxpayers reveal that if exempt

organizations were more confident about the security of the IRS online systems and the

IRS’s ability to maintain confidentiality, organizations might be more willing to file

electronically the Form 990 and 990-EZ.

Technology

The “digital divide” is another rationale for maintaining the paper filing option. There still

exists some concern that small organizations, particularly those in rural areas, might not

have affordable, quality access to the internet. ⁷³ Fortunately, the digital divide is

dwindling and technology is rapidly evolving to provide easy-to-use online platforms for

filings. As noted in President Obama’s Fiscal Year 2016 Revenue Proposals, requiring

electronic filing is unlikely to impose a large burden on tax-exempt organizations, since

they generally maintain financial records in electronic form and either hire a tax

professional or self-prepare returns using tax preparation software that enables

electronic filing. ⁷⁴ The fact that more than 600,000 Forms 990-N were e-filed instead of

paper filing a Form 990 is a telling sign that even the smallest organizations have the

ability to e-file.

III. RECOMMENDATIONS

Government-Wide Effort is Needed

As far back as 2013, exempt organizations specialists urged Congress to pass a

mandatory electronic filing law for exempt organization returns and suggested new

processes for exempt organization filings, including electronic filings to a third-party

73 Perrin, Andrew, “Digital Gap Between Rural and Nonrural America Persists,” Pew Research Center (May 19, 2017). 74 Department of Treasury, General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (Feb. 2015), available at https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations- FY2016.pdf.

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platform in the form of “open,” machine-readable data. ⁷⁵ In 2017, GuideStar, Foundation

Center and Aspen Institute’s Nonprofit Data Project submitted written comments to the

U.S. House Ways and Means Committee in support of a statutory requirement for

mandatory electronic filing as part of IRS information technology modernization. ⁷⁶ In

addition, this same coalition submitted written recommendations to the Treasury

Department and the IRS for the 2017-2018 Priority Guidance Plan Notice 2017-28,

including a recommendation to continue releasing electronically filed data (Forms 990),

as well as changing requirements on the 990 return to specify types of federal

government funding. ⁷⁷ Both sets of public comments to the Ways and Means

Committee and the IRS referenced the 2015 IRS ACT report (EO Subgroup) on

electronic filing. The IRS has made progress as evidenced by its public release of

electronically filed 990 data. Despite this progress, over 40 percent of Form 990 and

990-EZ returns are paper filed and, thus, unavailable in a machine-readable format.

The U.S. is a member of the Open Government Partnership, a group that was launched

internationally by dozens of countries in 2011 “to provide an international platform for

domestic reformers committed to making their governments more open, accountable,

and responsive to citizens,” ⁷⁸ including “e-government,” which is a fundamental aspect

of these goals. The call to action to modernize IT for the U.S. federal government

generally has been sustained and is emphasized again in “The Report to the President

on Federal IT Modernization, 2017.” ⁷⁹ The upgrade of all federal IT security, cloud

capabilities and mandatory use of machine-readable data through electronic filing

certainly will create an environment conducive to e-filing for exempt organizations. In

February 2018, a bipartisan group of Congress members introduced the Grant

75 See, Information for Impact: Liberating Nonprofit Sector Data, supra note 15. 76 Statement in Support of Mandatory Electronic Filing/Open Form 990 Data and Technical/Communications Improvements, submitted on behalf of GuideStar and the Nonprofit Data Project of the Aspen Institute (October 4, 2017). 77 Public Comment on the 2017-2018 Priority Guidance Plan, submitted by GuideStar, Foundation Center and the Nonprofit Data Project of the Aspen Institute (June 1, 2017). 78 https://www.opengovpartnership.org/ 79 Report to the President on Federal IT Modernization (December 2017); available at https://www.scribd.com/document/367105969/Federal-IT-Modernization-Report#download.

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Reporting Efficiency and Agreements Transparency (GREAT) Act (H.R. 4887), which

intends to standardize and modernize all grantee reports for federal grants, including

requirements for structured and machine-readable data. If enacted, the GREAT Act

surely will impact directly the many nonprofits that are federal grantees. Similarly, the

House passed several IT modernization bills in the wake of the 2017 tax filing deadline

being delayed by a day because of an outage in the IRS payment application. One such

bill is the 21 ^st Century IRS ACT, which would codify the IRS Chief Information Officer

role, which would be responsible for the development, implementation and maintenance

of IT at the IRS.

These efforts, from the broad quest to modernize federal government to specific calls

for open data for exempt organizations’ filings, provide an ecosystem for mandatory

electronic filing. The IRS should support government-wide efforts to provide open data

and IT modernization. As other countries have found, once efforts are made across the

entire federal landscape for digitized data requirements, machine-readable data and a

continued movement toward open data, the exempt organizations sector will be swept

up in the same swell of electronic evolution.

Mandate Electronic Filing

Based on the ACT’s informal conversations with various stakeholders, there appears

to be overwhelming support for e-filing of the Form 990 series returns. We recommend

that IRC Sections 6011(e) and 6033 be amended to make electronic filing of the Form

990 series mandatory for all tax-exempt organizations. ⁸⁰ We recognize that such a

change requires Congressional action. Nevertheless, as recommended in the 2015

ACT report, the IRS should encourage and support a statutory fix.

80 Removing the 250-return threshold from the IRC (even with the $10 million asset threshold remaining) would require more entities to e-file. But, this change alone would not achieve universal e-filing.

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Eliminate the $10 Million Asset Threshold

Until e-filing of the Form 990 series is mandatory through an amendment to the IRC,

the IRS should encourage the Department of Treasury to eliminate the $10 million in

assets threshold on mandatory electronic filing that is set forth in the regulations under

IRC Section 6033 and to add this action item to the Priority Guidance Plan. IRC

Section 6011(e) states that taxpayers may not be required to electronically file unless

they are required to file at least 250 returns during a calendar year. The statute does

not place a minimum asset requirement on this restriction. In 2005, when the

Department of Treasury promulgated the electronic filing regulations, it added the $10

million limitation for Form 990 filers to eliminate a perceived potential burden to smaller

organizations that may not be able to comply at a reasonable cost with e-filing. In

2018, this perceived burden may not be eliminated in all cases, but most exempt

organizations should have the ability, through staff, volunteers and advisors, to e-file

the Form 990. Thus, to increase e-filing, the IRS should encourage the Department of

Treasury to eliminate the $10 million threshold for mandatory e-filing, which is not

required by the IRC.

Encourage and Provide Incentives for Voluntary E-Filing

Treasury is authorized to implement procedures to provide for the payment of

appropriate incentives for electronically filed returns. ⁸¹ The IRS should support Treasury

in considering measures to provide incentives for organizations to voluntarily e-file Form

990 and 990-EZ. For example, Treasury should consider allowing organizations that e

file to be exempt from filing Schedule B. If this is not feasible, then Schedule B should

be eliminated for all Form 990 filers. Eliminating Schedule B would reduce concerns tax

exempt organizations have regarding overall security and confidentiality of donor

information. More organizations would likely elect to e-file if donor information were not

81 IRC Section 6011(f)(2).

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required. This is just one option. Treasury, with IRS support, should consider other

appropriate incentives for electronically filed returns.

Prioritize the Development of Online Accounts for Organizations

The IRS should prioritize the adoption of online accounts that can accommodate free e

filing for tax-exempt organizations. Only 14 percent of self-prepared Forms 990 and

990-EZ are e-filed. For organizations that self-prepare, the lack of freely available

software is a major impediment to e-filing. The IRS has taken steps to create individual

online accounts. However, it has been slow to do so for organizations. One hurdle to

creating online accounts for organizations is ensuring secure and authorized account

access. Though, in recent years, the IRS has made great strides in e-authentication -

individual users identifying themselves to the system and their subsequent re

authentication.

The FATCA Online Registration System serves as a good example. The Foreign

Account Tax Compliance Act (FATCA), which was passed as part of the HIRE Act,

generally requires that foreign financial institutions and certain other non-financial

foreign entities report on the foreign assets held by their U.S. account holders or be

subject to withholding on certain payments. ⁸² The FATCA registration system is a one

stop registration website that is available 24 hours a day, seven days a week and

contains features that provide online communications and efficient delegation of

authority for purposes of online registration. This gives financial institutions the flexibility

to manage information among branches and related entities. The IRS touts that FATCA

registration can be accomplished most efficiently and effectively through the online

registration process, which avoids the need to print, complete and mail paper forms.

The same would be true of an online account system for tax-exempt organizations.

82 See , Hiring Incentives to Restore Employment Act, 26 U.S.C. Section1471.

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We recognize that online accounts might require resources to update IRS systems and

platforms and to train IRS personnel. However, the FATCA system provides the

necessary building blocks and serves as a model for the implementation of online

accounts for tax-exempt organizations. In addition, the immediate cost savings and

efficiencies that the IRS would reap from an online account system justify the

investment.

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ADVISORY COMMITTEE ON

TAX EXEMPT AND GOVERNMENT ENTITIES

(ACT)

Indian Tribal Government Subgroup

Recommendations Regarding IRS Sharing of Taxpayer Information with Tribal

Government Tax Programs

Marcelino R. Gomez, Project Leader

Jean Swift

June 7, 2018

INDIAN TRIBAL GOVERNMENT

RECOMMENDATIONS REGARDING IRS SHARING OF TAXPAYER INFORMATION

WITH TRIBAL GOVERNMENT TAX PROGRAMS

I. EXECUTIVE SUMMARY ................................................................................... 55

II. BACKGROUND ................................................................................................. 57

III. RECOMMENDATIONS ..................................................................................... 62

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I. EXECUTIVE SUMMARY

Internal Revenue Code (IRC) Section 6103 generally prohibits the disclosure of

taxpayer information. ⁸³ There are several exceptions to the disclosure prohibition rule

identified in IRC Section 6103 that allow for the disclosure of taxpayer information. One

disclosure exception authorizes the IRS to share tax information by entering into

agreements with governmental agencies for tax administration purposes. ⁸⁴ IRS

information sharing programs provide for an efficient utilization of limited government

resources through partnerships between the IRS and federal, state and municipal

governmental agencies. The goal of these programs is to enhance voluntary

compliance with tax laws. This includes facilitating the exchange of taxpayer data,

leveraging resources, providing assistance to taxpayers to improve compliance and

communications and identifying and reporting information on emerging tax

administration issues.

Currently, the IRS can only enter into intergovernmental agreements with states and

municipalities because IRC Section 6103(d)(1) does not specifically mention tribes. This

failure to include tribal governments is a problem for two reasons. First, it means that

that a tribal government is unable to enter into an agreement directly with the IRS to

allow a tribal tax administration agency to either share information with, or receive

information from, the IRS. All taxpayers subject to tribal taxes are also subject to federal

taxes of various kinds. It would be mutually beneficial to the tribal tax administrator and

the IRS to be able to share information related to the reporting of mutual taxpayers. This

shared information would allow for the tax administrators to verify compliance with the

tax requirements of both governments.

Second, state tax agencies are not allowed to share information with tribal tax

administrators if they received that information from the IRS pursuant to their own

agreements under IRC Section 6103(d)(1), as the tax sharing agreements between the

83 IRC Section 6103(a). 84 IRC Section 6103(d)(1).

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IRS and states prohibit either side from revealing to any third-party information obtained

pursuant to the agreement. Even in situations where there is an intergovernmental

agreement between a tribal government and a state, the state is unable to provide

information to the tribal government, because it is shared information they received from

the IRS pursuant to an intergovernmental agreement under IRC Section 6103(d)(1).

The ability to enter into an agreement with the IRS would enhance a tribal government’s

ability to effectively and efficiently administer its tax program.

Tribal governments understand there must be a written agreement in place between the

IRS to begin the sharing process. Tribal governments also recognize that significant

safeguards must be in place before information can be shared. A congressional

amendment of IRC Section 6103(d)(1) adding Indian tribal governments is required to

allow for the sharing of taxpayer information with tribal tax administrators just like the

IRS does with states and municipalities. The Treasury Department has recognized the

mutual benefits to compliance activity that information sharing will provide. An

amendment of IRC Section 6103(d)(1) has been consistently recommended by the

Department of the Treasury since Fiscal Year 2010. ⁸⁵

However, some information sharing could occur without a legislative amendment of the

IRC. This taxpayer information sharing could be handled administratively under IRC

Section 6103(l)(7). That section requires the Social Security Administration and the IRS

to disclose taxpayer information to “any Federal, State, or local agency administering”

identified social service programs to determine eligibility and the correct amount of

benefit under the program. Taxpayer information should be available to agencies

administering specified needs-based programs to allow for more accurate

determinations of both eligibility for benefits and the amount of benefit properly

available. So, in the absence of a clear exclusion of an Indian tribal government agency

85 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals, https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2010.pdf, Facilitate Tax Compliance with Local Jurisdictions at p.102.

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administering identified social service programs, the IRS is allowed to share the

taxpayer information.

The ITG Subgroup makes recommendations that focus on practical ways to allow for

the sharing of tax information among the federal government, tribal governments and

state governments to improve tax administration in Indian Country.

II. BACKGROUND

Indian tribal governments are distinct political communities, having territorial

boundaries, within which their authority is exclusive, and having a right to all the lands

within these boundaries, which is not only acknowledged, but guaranteed by the United

States. ⁸⁶ The United States has a trust responsibility to each federally recognized tribal

government that includes the protection of the sovereignty of each tribal government.

Congress, through statutes, treaties and the exercise of administrative authorities, has

recognized the self-determination, self-reliance and inherent sovereignty of Indian

tribes. Indian tribes possess the inherent authority to establish their own form of

government. ⁸⁷ The tribal right of self-government flows from the inherent sovereignty of

Indian tribes and nations. The United States recognizes a special government-to

government relationship with Indian tribes, including the right of the tribes to self

governance, as reflected in the United States Constitution, treaties, federal statutes and

in the course of dealings of the United States with Indian tribes. ⁸⁸

The power to tax is an essential attribute of Indian sovereignty because it is a necessary

instrument of self-government to raise revenues for its essential services. “[I]t derives

from the tribe's general authority, as sovereign, to control economic activity within its

jurisdiction, and to defray the cost of providing governmental services by requiring

contributions from persons or enterprises engaged in economic activities within that

86 Worchester v. Georgia, 31 U.S.515, 557, 559, 561 (1832). 87 Indian Tribal Justice Support Act, 25 U.S.C. §§ 3601-3631 (2012). 88 Indian Self-Determination Act of 1994, Pub. L. No. 103-413, 108 Stat. 4250, 4270-77 (1994).

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jurisdiction.” ⁸⁹ There are 573 federally recognized Indian tribes in the United States. ⁹⁰ A

large number of these tribal governments have enacted tax statutes and created tax

programs to administer the enacted taxes. Tribal governments look to these taxes to

fund a broad range of essential governmental programs, services and activities,

including economic development, community development, human resources, natural

resources, public safety, health services, social services, education, road construction

and maintenance, legislative, and judicial services.

IRC Section 6103 governs the disclosure of taxpayer information by the IRS. It generally

prohibits the disclosure of taxpayer information. ⁹¹ There are several enumerated

exceptions to the disclosure prohibition rule identified in IRC Section 6103. Some of

these exceptions include disclosure to state tax officials and state and local law

enforcement agencies, ⁹² disclosure to State audit agencies, ⁹³ reimbursement to state

and local law enforcement agencies, ⁹⁴ disclosure for combined employment tax

reporting, ⁹⁵ disclosure to persons having material interest, ⁹⁶ disclosure to Committees of

Congress, ⁹⁷ disclosure to the President and certain other persons, ⁹⁸ disclosure to

certain federal officers and employees for purposes of tax administration, ⁹⁹ disclosure to

certain federal officers and employees for administration of federal laws not relating to

tax administration, ¹⁰⁰ statistical use, ¹⁰¹ disclosure of certain returns and return

information for tax administration purposes, ¹⁰² and disclosure of returns and return

information for purposes other than tax administration. ¹⁰³

89 Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 137 (1982). 90 An Introduction to Indian Nations in the United States, at http://www.ncai.org/about-tribes. 91 IRC Section 6103(a). 92 IRC Section 6103(d)(1) 93 IRC Section 6103(d)(2) 94 IRC Section 6103(d)(4). 95 IRC Section 6103(d)(5). 96 IRC Section 6103(e). 97 IRC Section 6103(f). 98 IRC Section 6103(g). 99 IRC Section 6103(h). 100 IRC Section 6103(i). 101 IRC Section 6103(j). 102 IRC Section 6103(k). 103 IRC Section 6103(l).

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Disclosure to State Tax Officials

One disclosure exception authorizes the IRS to share tax information by entering into

agreements with governmental agencies for tax administration purposes. ¹⁰⁴ IRS

information sharing programs provide for an efficient utilization of limited government

resources through partnerships between the IRS and federal, state and municipal

governmental agencies. The goal of these programs is to enhance voluntary

compliance with tax laws. This includes facilitating the exchange of taxpayer data,

leveraging resources, providing assistance to taxpayers to improve compliance and

communications, and identifying and reporting information on emerging tax

administration issues.

Currently, the IRS can only enter into intergovernmental agreements with states and

municipalities, because IRC Section 6103(d)(1) does not specifically name tribes. This

failure to explicitly include tribal governments in IRC Section 6103(d) is problematic for

two reasons. First, it means that that a tribal government is unable to enter into an

agreement directly with the IRS to allow a tribal tax administration agency to either

share information with, or receive information from, the IRS under IRC Section

6103(d)(1). All taxpayers subject to tribal taxes are also subject to federal taxes of

various kinds. It would be beneficial to both the tribal tax administrator and the IRS to be

able to share information related to the reporting of mutual taxpayers. This shared

information would allow for the tax administrators to verify compliance with the tax

requirements of both governments.

Second, state tax agencies are not allowed to share information with tribal tax

administrators if they received that information from the IRS pursuant to their

agreements under this section. The tax sharing agreements between the IRS and states

prohibit either side from revealing to any third party any information obtained under the

agreement. Even in situations where there is an intergovernmental agreement between

104 IRC Section 6103(d)(1).

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a tribal government and a state in place, the state is unable to provide information to the

tribal government, because it is shared information they received from the IRS pursuant

to an intergovernmental agreement under IRC Section 6103(d)(1). Indian tribal

governments have worked cooperatively with their respective state governments on a

sovereign-to-sovereign basis. They entered into numerous compacts and agreements

that clearly demarcate their respective authority over a variety of subject areas,

including tax administration, land use and zoning, natural resource management, law

enforcement, health and social services. This cooperation has focused on the

coordination of tax administration and other activities and the sharing of information on

a regular basis. Some tribal governments have tax sharing agreements with numerous

states in place. ¹⁰⁵ These agreements have proven to be very useful in the

administration and collection of the appropriate taxes. By sharing information, the states

and the tribes can ensure that a taxpayer pays the appropriate tax to the appropriate

sovereign. This sharing process would be much more effective if the IRS was also a

part of the sharing process.

The ability to enter into an agreement with the IRS would greatly enhance a tribal

government’s ability to effectively and efficiently administer its tax program. Tribal

governments understand there must be a written agreement in place between the IRS

to begin the sharing process. Tribal governments also recognize that significant

safeguards must be in place before information can be shared. The IRS provides

guidance to ensure that the policies, practices, controls and safeguards employed by

recipient agencies, agents or contractors adequately protect the confidentiality of federal

tax information. ¹⁰⁶ Tribal governments understand that there are significant burdens and

expenses to comply with these safeguard policies. For that reason, tribal governments

105 The Navajo Tax Commission has tax information sharing agreements with the states of Arizona, New Mexico Utah, Texas and California in place. History of the Navajo Tax Commission at www.tax.navajo-nsn.gov. 106 IRS Publication 1075 at Section 1.2.

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like states and municipalities should have the option to elect whether to participate in

the taxpayer information sharing program. ¹⁰⁷

Some tribal tax administrators have approached the IRS to look at whether the IRS can

make an internal determination that it is acceptable to enter into an agreement with a

tribal government under IRC Section 6103(d)(1). Pursuant to this request, the IRS has

determined that it cannot be handled administratively. The IRC simply does not provide

for agreements with tribes, and there is no way to assume that the use of the word

“states” in IRC Section 6103(d)(1) is intended to include Indian tribal governments as

well. Tribes are not states and cannot be construed as such. Therefore, the

authorization for the IRS to enter into an information sharing agreement with a tribal

government under IRC Section 6103(d)(1) will require amendment of the IRC. The

Treasury Department has recognized the mutual benefits to compliance activity that

information sharing will provide. An amendment of IRC Section 6103(d)(1) has been

consistently recommended by the Department of the Treasury since Fiscal Year

¹⁰⁸

Disclosure to any Federal, State or Local Agency Administering Identified Social

Service Programs

There is one situation, where the sharing of taxpayer information would not require an

amendment of the IRC and could be handled administratively under IRC Section

6103(l)(7). That section requires the Social Security Administration and the IRS to

disclose taxpayer information to “any Federal, State, or local agency administering”

identified social service programs to determine eligibility and the correct amount of

benefits under the program. ¹⁰⁹ Neither IRC Section 6103 (including specifically IRC

Section 6103(l)(7)) nor the Treasury Regulations promulgated thereunder define “local”

107 Comments from participants attending the National Intertribal Tax Alliance Conference September 11, 2017. 108 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals, available at https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2010.pdf, Facilitate Tax Compliance with Local Jurisdictions at p. 102. 109 IRC Section 6103(l)(7)(B).

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or “local agency.” No definition of “local agency” can be found in the IRC or Treasury

Regulations. Treasury Regulations have never been issued under IRC Section

6103(l)(7). The legislative history indicates that IRC Section 6103(l)(7) was expanded in

1984 because “Congress believed that wage and nonwage information should be

available to agencies administering specified needs-based programs . . . to make more

accurate determinations of both eligibility for benefits and the amount of benefits

properly available.” ¹¹⁰ The Congressional intent of Section 6103(l)(7) was specifically to

help agencies make “more accurate determinations of both eligibility for benefits and the

amount of benefits properly available. ¹¹¹ There is nothing in the legislative history of IRC

Section 6103(l)(7) that suggests tribes should be excluded from treatment as a local

agency.

The IRS can and should treat a tribal government entity administering identified social

programs to determine eligibility and the correct amount of benefits under the program

as a local agency under IRC Section 6103(l)(7). This treatment would not require an

amendment of the IRC but can be performed administratively by the IRS.

III. RECOMMENDATIONS

The ITG Subgroup recommends that the IRS provide support for an amendment to

IRC Section 7871 to treat Indian Tribal Governments like states for purposes of IRC