Nothing can strike fear in the heart of a nonprofit like receiving the news that it’s been selected for an IRS audit — an audit can be intimidating, not to mention costly and time-consuming. That’s why you need to know about the IRS’s recently released internal guidance for requesting audit information from tax-exempt organizations.
The guidance explains how auditors in the Tax Exempt and Government Entities Division should issue an Information Documentation Request (IDR) to gather information. The guidance, which took effect April 1, 2017, sets a timeline and certain requirements for its auditors to follow to ensure that all taxpayers are treated in a fair and consistent manner.
The initial contact
The IRS auditor will mail your nonprofit — and, if applicable, anyone with a power of attorney — initial contact letters when your tax return is selected for audit. The auditor will then wait at least 10 business days before making phone contact.
Your organization may not have filed a power of attorney form with the IRS unless your CPA or attorney has needed to deal with the IRS in the past.
The IDR discussion
The phone call will include discussion of the issue being examined and the items that will be requested on the IDR. The discussion may lead the IRS auditor to modify the IDR before sending it to you. If the request seeks more than one item, the auditor will group the items on a single IDR.
Before the auditor sends the IDR, you and the auditor should agree on the deadline for your response. If you can’t agree on a date, the auditor will assign one. The IDR also will identify the date that the auditor plans to review your responses for completeness.
Interestingly, while you’re required to commit to a response date, the auditor commits only to a date by which he or she plans to review it. The guidance further indicates that the auditor “should make his or her best efforts to review the response” by the agreed date.
If your response is deemed complete, the auditor must inform you by phone. If the auditor decides your response wasn’t complete — or if you didn’t respond — you might be granted an extension. This decision must be made within five business days, and you could get two extensions.
The auditor will grant the first extension if, after talking to you about the missing or incomplete items, he or she determines an extension is warranted. Such an extension may run as long as 15 business days.
If you don’t respond to the extension approval letter or your response is still incomplete, you might get a second extension of up to 15 business days. In this case, though, the auditor must first consult with his or her manager and obtain approval. If you don’t provide the missing information after this second extension, the auditor will start the enforcement process.
In the past, the IRS has been willing to grant extensions when it believed a not-for-profit was acting in good faith. Some extensions had been for several months. That discretion is no longer available — at most, you’ll get two 15-day extensions before the IRS begins enforcement.
The enforcement process
The auditor will prepare a delinquency notice, call you to determine an appropriate due date for your response and mail the notice with the due date noted. The auditor must obtain a manager’s approval if providing you more than 10 business days to respond.
The auditor will review your response within 10 business days. If it’s complete, the auditor will notify you, and the enforcement process ends. If you didn’t respond or your response was incomplete, you’ll receive a proposal of tax adjustment, summons or proposal of revocation of tax-exempt status.
The new guidance firms up the IDR timelines for contact between the IRS and not-for-profits. You should have corresponding processes in place to ensure prompt and complete responses.
Sidebar: How your IRS auditor might — or might not — lighten your load
When the IRS published its new guidance on how auditors in its Tax Exempt and Government Entities Division should handle Information Document Requests (IDRs), it also outlined some nonmandatory best practices intended to make the overall process more effective for auditors —which could, in turn, save nonprofits time and resources.
For example, the IRS suggests that, during the initial contact phase, its auditor mail the draft IDR along with the contact letter. That would allow the nonprofit to better prepare for the phone discussion with the auditor, potentially expediting it and even narrowing the eventual request.
The agency also recommends that its auditors reach out to not-for-profits two or three business days before their IDR response due dates, instead of waiting until that date has passed. Such a reminder would be helpful for an organization juggling deadlines. But remember, this step is just a recommendation — you’d need to set up your own tickler, because you can’t count on an IRS reminder. Give us a call if you have any questions. We are here to help!