IRS Audits of Non-Profit Organizations

Non-profit organizations are just as susceptible to IRS audits as for-profit ones. For those in the organization, an audit can be a disruptive process even if you have nothing to hide. The IRS will examine your records, books, and tax returns along with extensive interviews which can take a considerable amount of time. It was not long ago that IRS audits of non-profits were relatively rare, but with new emphasis on enforcing laws for both large and small non-profit organizations, you should be prepared for a tax audit.

Why Non-Profits Are Being Audited

There are several reasons why the IRS is auditing non-profit organizations more than ever today. Of course, understanding the reasons why will help you in being prepared and possibly avoiding some tax audit situations.

According to the IRS, the reasons why they audit public charities and other non-profits include, but are not limited to the following;

  • Classification as Foundations or Public Charities
  • Demonstrating that Non-Profits Operate in the Interest of the Public
  • Are Non-Profits running Substantial Taxable Activities
  • Preservation of Assets for Tax-Exempt Reasons
  • Oversee Procedures for Money Paid to Profit-Making Businesses and Individuals
  • Understand if Non-Profits are Participating in Political Campaigns or Activities

It is for these reasons and more that the IRS will audit a non-profit organization. The penalties for non-compliance include excise taxes, penalties, and even revocation of your tax-exempt status.

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Why You May Be Audited

Even if you follow all guidelines, it is possible for the IRS to flag your non-profit organization for an audit.

RICS: This is a computerized system that the IRS uses to select non-profits for audits. While the details of RICS remain a secret, organizations that have received notification for a tax audit will often get an accompanying message that the RICS has identified certain criteria that has marked your return for an examination.

Referrals: An examination group from outside the IRS may notify them that your non-profit should be audited. Such referrals may come from government agencies, Congress, other divisions within the IRS, watchdog groups, and even someone from the general public.

For example, Form 13909 offers individuals the ability to refer issues to the IRS about non-profit organizations. This allows citizens that have seen unusual behavior from non-profits to be examined for auditing purposes. While the IRS does not act on every referral it receives, they can if they feel it is warranted.

Questionable Public Behavior: In addition to individuals using special forms, agents of the IRS can recommend audits if they see questionable behavior by the organization through public media, such as negative news stories. It’s not uncommon for a news story about a non-profit to spark an audit even if the information had nothing to do with the financial state of the organization.

Other reasons why a non-profit organization might be audited include, but are not limited to the following;

  • Working in joint-ventures with profit-making businesses
  • Holding gambling fundraisers
  • Sponsoring travel tours
  • Offering services that include credit counseling agencies, donor funds, and the like
  • Engaging in political activities
  • Not filing the required IRS returns

In addition, hospitals, community foundations, colleges, universities, and student loan organizations all get extra attention from the IRS for a variety of reasons. This means that you may be subject to an audit that is automatic rather than from a specific source. Maintaining proper transparency and accountability are also necessary steps in dealing with the media and all public interactions, lest they draw the attention of the IRS.

Remember to not panic when you receive an audit notification. Be sure to read it fully first and understand its ramifications before acting. What might seem to be a major deal might turn out to be a minor issue.

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How to Keep Good Records

Everything starts with a complete review of your records so far, at least going back a few years to see if you have complied with all the requirements. Knowing where you are at today will help you prepare for tomorrow. Once you have completed the review, the next step is putting in procedures that helps to minimize mistakes and maximize accuracy in your records.

  • Using digital software to track all records
  • Hold frequent meetings to look over the books
  • Keep up with the latest advances in record-keeping for maximum efficiency
  • Investigate mistakes to understand their origin
  • Hire a third-party to oversee your books

Of course, not every entry will be perfect, and mistakes will be made even with the best efforts. However, you can minimize that from happening when you put in the proper procedures that help catch mistakes before they become reasons for an IRS audit.

Hiring Our Tax Firm for Representation

If you run a non-profit organization, having a reputable tax firm by your side is invaluable in protecting your rights. Just like individual and for-profit companies, non-profit organizations may have representation in the form of a tax firm during an IRS audit. The advantages of having a tax firm include but are not limited to the following;

  • Oversees books and records
  • Provides advise on keeping tax-exempt status
  • Offers representation during IRS audits and more

By looking over your books and records, our tax firm can spot any errors and flag possible entries that might draw an IRS audit. This means having an extra set of eyes on your records to ensure that they are correct. In addition, our qualified tax representation firm can provide advise in helping your organization maintain its tax-free status. This means consulting with you on any decisions that might affect your organization in terms of how it is perceived by the IRS.

Finally, having representation by your side during an audit means understanding your rights and knowing what actions to take next. Proper representation can help you avoid potential mistakes or misunderstandings during this crucial time. If your non-profit organization is facing an IRS audit considering getting the proper representation that only a tax firm can provide.

Get a free case evaluation at 877-788-2937.

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