The Internal Revenue Service is asking more charities and tax-exempt organizations to file their information returns electronically as required by the Taxpayer First Act of 2019, but its aging systems are experiencing delays that are frustrating tax professionals.
Members of the American Institute of CPAs’ Exempt Organizations Taxation Technical Resource Panel told IRS officials about the problems they have been experiencing during an online meeting Thursday, and pointed out that many of the issues were connected with the IRS’s Exempt Organizations Business Master File system. They complained that the inability to update the system in a timely manner has caused plenty of disruptions for many tax-exempt organizations.
While similar processing issues have existed for a long time, mandatory e-filing, coupled with IRS processing issues related to the pandemic, have made it even more challenging to file returns for entities that were having issues with the EO BMF this year. Nevertheless, the IRS is continuing to roll out more e-file forms and requiring tax-exempt organizations to use them as part of a congressional mandate to expand e-filing.
“The Taxpayer First Act requires tax-exempt organizations to electronically file information returns and related forms for tax years beginning after July 1, 2019,” said Rob Malone, director of the IRS’s Exempt Organizations division. “For the Form 990-EZ, for tax years ending before July 31, 2021, the IRS will accept either paper or electronic filing of Forms 990-EZ. For tax years ending July 31, 2021 and later, Form 990-EZ must be filed electronically.”
The IRS is also launching an electronic filing version of Form 1024, Application for Recognition of Exemption under Section 501(a), in the first part of 2022, he noted. “There will be a 90-day grace period for paper filing, but mandatory electronic filing will start in 2022,” said Malone. “The electronic Form 1024 will be easier to submit and reduce incorrect and incomplete forms, which in turn will save you and the IRS time. Applications for recognition of exemption under 501(c)11, 14, 16, 18, 21, 22, 23, 26, 27, 28, 29 and 501(d) will no longer be submitted as letter requests. Instead these requests will be included on the electronic Form 1024. Applications for recognition of exemption under Section 521, currently submitted under Form 1028, will also be able to use the electronic Form 1024.”
He expects the IRS to add more electronic filing forms next year, including the 8038-CP and 5227, in the Modernized e-File platform in 2022.
However, tax practitioners are finding to their frustration that some of the forms are not available through commercial tax software programs in use in many tax practices, and they are forced to use the IRS’s own systems to file the forms and returns.
“One of the things we see is that platform is an IRS-specific platform, and it’s not like the other filing platforms like the 990 or an 1120, so that doesn’t get handled through our software provider so it will be similar to the 1023 and the 1024-A,” said one AICPA official during a press conference. “We’ve learned how to use it, but it’s not super user friendly.”
The EO BMF has been one of the main sources of problems, according to the AICPA. It’s the IRS’s basic record source for information about tax-exempt organizations, and it includes the subsection of the Internal Revenue Code under which an organization is exempt, the foundation classification for Section 501(c)(3) entities, the main return the organization is required to file, and a code that indicates whether contributions to the organization are deductible.
But the system also has been erroneously auto-revoking the exempt status of many organizations. Paper-filed returns have been part of the problem. Especially given the IRS lag time in processing paper-filed Forms 990 and extensions due to the pandemic, some organizations have received notifications that their tax-exempt status has been revoked for not filing returns that had physically arrived at the IRS site but had not yet been processed.
Another problem is incorrect tax year-end information, as a mismatched accounting period between the return and the EO BMF will reject an electronic filing. That affects organizations that had a change in their accounting period reported during the pandemic as well as entities with legacy issues they didn’t know existed. These organizations had past paper filings or electronic filings accepted, prior to recently rejected e-filings.
Yet one more problem has been incorrect entity names or name changes not being reflected in the EO BMF system. Similar to the problem with the incorrect year-end issue, organizations that have changed their names have experienced e-filing rejections of current year Forms 990.
Some organizations are not even listed in the EO BMF or they’re listed under the wrong subsection of Section 501(c) of the Tax Code. Some organizations that have completed the IRS’s exemption recognition process and received their exempt status letter have had their e-filed Form 990 rejected with the explanation that the EO BMF doesn’t match the information reported on Form 990, the AICPA panel pointed out.
Another problem occurs with group rulings and subordinate organizations, and the AICPA has found many mismatches in the BMF system for the separate accounts. To fix the e-filing group, each account needs to be updated separately.
Employee Retention Credit headaches
The AICPA is also expecting problems to occur with the Employee Retention Tax Credit, which Congress’s recently passed bipartisan infrastructure law is cutting short prematurely before the fourth quarter of the year. Missy Duce, acting deputy associate chief counsel at the IRS, spoke to the AICPA panel about guidance issued Monday by the IRS on how to handle the abrupt cutoff of the tax benefit for employers who were counting on it for their workers and what penalty abatements would apply (see story).
“The Infrastructure Investment and Jobs Act, which was enacted on November 15 of this year, amended Section 3134(m) of the Code to provide that the Employee Retention Credit, or ERC, only applies to wages paid after June 30 of 2021 and before Oct. 1, 2021 unless the employer is a recovery startup business,” she said. “In that case, if they’re a recovery startup business, they can claim the Employee Retention Credit for wages paid through Dec. 31, 2021. Therefore, the ERC is unavailable for the fourth quarter unless the business is a recovery startup business. This retroactive change obviously led to quite a few questions and on Monday, Treasury and the IRS released Notice 2021-65, and that notice provides guidance to employers that paid wages after Sept. 30, 2021 and received in advance payment of the ERC for those wages or in reduced their employment tax deposits in anticipation of the credit for the fourth quarter, but they’re now ineligible for the credit due to the change in the law. With respect to advances, the notice provides that if employers did request and receive an advance payment for wages paid in the fourth quarter and they’re not a recovery startup business, they’re no longer eligible for the credit and they must repay the advance. The notice clarifies that the repayment must be made by the due date for the applicable employment tax return for that fourth quarter.”
The notice also provides guidance on failure to deposit penalties, she noted. The IRS will no longer waive failure to deposit penalties for employers that reduced deposits in anticipation of the credit after Dec. 20, 2021 unless the employer is a recovery startup business, but for deposits due on or before Sept. 20, with respect to wages paid in the fourth quarter an employer that is not a recovery startup business will not be subject to a penalty for failing to deposit as long as they meet certain requirements in the notice. A recovery startup business is basically defined as one that began operations on or after Feb. 15, 2020 and whose annual gross receipts don’t exceed $1 million.
But the change in rules midstream is bound to produce problems in the IRS’s own processing systems, the AICPA officials pointed out. “Are we going to face some of the erroneous penalty notices or just issues with things that go on because it’s cut off in the middle of the year,” said one official. “At a minimum, I think it’s a challenge for their systems to be able to have to adapt to that, so the execution of that remains to be seen, but that’s a potential issue that I would be aware of.”
A bipartisan group of lawmakers in the House introduced legislation on Tuesday that would reinstate the Employee Retention Credit, which might help avoid such problems, although the prospects for passing it anytime soon or slim. Rep. Carol Miller, R-West Virginia introduced the Employee Retention Tax Credit (ERTC) Reinstatement Act, cosponsored by fellow House Ways and Means Committee members Stephanie Murphy, D-Florida, Kevin Hern, R-Oklahoma, and Terri Sewell, D-Alabama. The bill is receiving support from a number of influential business groups, including the National Federation of Independent Business, the National Restaurant Association, the International Franchising Association and others.
“Whether that passes and gets through, who knows,” said an AICPA official. “But that adds another layer of complexity, so as the IRS is already attempting to reprogram their computers to take out the fourth quarter and they have to put it back in again, what a nightmare.”
The AICPA said it’s closely monitoring issues with the Exempt Organizations Business Master File system and other issues as they progress. “At the end of this tax year, exempt organizations and their tax advisers are wondering if they will ever catch up from pandemic slowdowns and the repeated cycle of receiving and responding to erroneous notices, the IRS not processing responses in a timely matter, and having additional notices issued for the supposed failure of responding to the first notice,” said the AICPA panel. “Taking into consideration the challenges related to the IRS’s budgetary and personnel constraints, quickly fixing these issues will be hard. The status quo is not sustainable and there should be alternatives to accommodate the requests of tax practitioners. The AICPA is continuing discussions with the IRS regarding the appropriate solutions.”