IRS reviews of charities and other nonprofits were once relatively rare. For example, only the largest nonprofits would find an IRS audit team at their door. But in recent years the agency has put an emphasis on enforcement in all areas for all sizes of tax-exempt organizations.
Not all IRS reviews are created equal, however. Here’s a rundown of the three main types.
Fielding an audit
If your initial contact letter schedules an agent to visit your premises, the IRS is conducting a field audit or in-person examination. Field audits are done at a nonprofit’s location, their representative’s office or an area IRS office. The audit usually happens where the organization’s books and records are located.
Field audits fall into two categories. A general program exam typically is conducted by a single IRS agent. A Team Examination Program audit focuses on large, complex organizations and may involve a team of examiners.
There are many areas an audit can cover. An audit might explore, for example, whether your organization filed all returns and forms as required by law on time and whether they’re complete and accurate. Or it might delve into whether your activities were consistent with your tax-exempt purpose, or whether any tax liabilities (for instance, employment taxes or unrelated business income tax) were properly paid.
During the audit the IRS will examine various records. The IRS provides a listing of records it’s likely to want to see.
Corresponding with the IRS
If the initial letter asks you to deliver documents to an IRS office by mail, you are undergoing an office or correspondence audit. An agent generally conducts the audit using letters and phone calls to work with the organization’s officers or a representative.
But a correspondence audit can expand to become a field audit if the issues grow more complex or the not-for-profit doesn’t respond. Both correspondence and field audits can expand to include prior and subsequent tax years.
Checking 1, 2, 3
The initial contact letter might indicate that the IRS is conducting a compliance check. This isn’t an audit but may include a checklist with specific questions. Or it may ask about information and forms that your nonprofit is requred to file or maintain, such as Forms 990, W-2 or W-4.
A compliance check is made to determine whether an organization is adhering to record-keeping and information reporting requirements. This is usually related to a specific issue — Form 990 disclosures, for example — and whether the nonprofit’s activities are consistent with its tax-exempt purpose.
Compliance checks are an accountability tool, like audits, but are simpler and less burdensome and don’t directly determine a tax liability for any particular period. They can, however, lead to an audit.
Becoming a target
Nonprofits are chosen for reviews for several reasons. The igniting spark might be an IRS examination initiative or project. Or the agency may have received complaints about potential noncompliance at your organization.
Other reasons for a review include risk modeling from the revised Form 990; related examinations of other taxpayers, such as business partners, clients or vendors, whose returns were selected for audit; and document matching — when payer records, such as Forms W-2 or 1099, don’t match the information you’ve reported. Additionally, certain claims for refunds or requests for abatements also can bring about further review.
In general, though, Form 990 plays a strong role in the selection process. In its FY 2012 Annual Report & FY 2013 Workplan, the IRS delivered this bottom-line message to nonprofits: “The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”
Following the rules
The IRS says its job is to review exempt organizations for a number of reasons, including ensuring that they’re truly operated in the public interest and aren’t engaged in any substantial nonexempt (taxable) activities. If your organization is following the rules, you have nothing to fear from a review. Give us a call- we can give you advice along the way to help make sure your organization is compliant.