IRS Audits of Nonprofits

Posted on Wednesday, March 07, 2018

Nonprofit organizations that file Form 990 with the IRS may be selected by the IRS for review.  If your organization is selected, you will receive a letter from the IRS Tax Exempt Organizations (EO) Examinations detailing the type of review required. 

• If the letter sets up an appointment for an IRS agent to visit your organization’s office, the IRS is conducting a field audit (examination).
• If the letter asks you to deliver documents to an IRS office by mail, the IRS is conducting a correspondence audit.
• If the letter indicates the IRS is conducting a compliance check, your organization is not being audited but the IRS wants to determine whether specific items have been reported properly.
• If the letter asks you to complete a questionnaire, your organization is not being audited but the IRS wants to better understand how the organization satisfies specific federal tax law requirements.

There are different reasons that the organization may be selected for a review.

• Inconsistent or incomplete information on a filed return.
• The IRS receives a compliant from the public or other regulatory agency about potential noncompliance by the organization.
• The Exempt Organizations Division participates in an IRS-wide examination initiative.
• Returns may be selected when there are issues or transactions with other taxpayers.
• One of the IRS’ document matching programs identifies a discrepancy between information reported by a payor and payee, such as Forms 1099 or W-2.
• A claim for refund or abatement requires further review.

The IRS has issued Audit Technique Guides (ATGs) to help IRS examiners during an audit of a nonprofit organization.  Although the ATG is designed for IRS examiners, it provides helpful information for nonprofit management and boards by explaining specialized business practices and terminology and common issues of exempt organizations.

The ATG for organizations exempt under IRC Section 501(c)(3) for public charities focuses on the following issues specific to nonprofits.

• Procedures to correctly determine the proper foundation status for organizations described in IRC Section 501(c)(3).
• Guidance on determining and addressing the presence of inurement, private benefit and excess benefit transactions.
• Political and legislative activities and how to determine if they are present and their effect on the organization.

These are three key issues for nonprofit organizations.  Failure to follow the requirements in any of these areas could possibly lead to loss of tax-exempt status.  For additional information to make sure your nonprofit is in compliance, you can read the entire ATG for public charities on the IRS website. 

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

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