The IRS’s staffing shortages have been well publicized and audits of individuals have decreased in the past several years. But it’s a mistake to assume that the agency has stopped scrutinizing not-for-profits and conducting audits when it deems necessary. If your organization receives an audit letter, you need to know what the process involves and how you can help resolve it as quickly as possible.
Igniting a spark
An audit begins with the initial contact via letter from the IRS and continues until a closing letter is issued. Before closing an audit, an officer of your nonprofit, your CPA and the IRS agent will discuss the agent’s conclusions at a closing conference. Both the conference and letter will explain your appeal rights.
Audits can cover many areas. For example, the IRS may want to learn whether your organization has filed all returns and forms as required by law. Or it might delve into whether your activities have been consistent with your tax-exempt purpose, or whether unrelated business income tax or employment taxes were properly paid.
The igniting spark for an audit might be an IRS examination initiative or project, or complaints to the agency about potential noncompliance. In general, Form 990 plays a strong role in the selection process. For instance, the IRS may apply risk models to your organization’s Form 990 data related to governance or the incidence of fraud.
Types of audits
If your initial contact letter schedules an agent to visit, the IRS is conducting a field audit, which falls into one of two categories: 1) general program exam, which typically is conducted by a single IRS agent; or 2) Team Examination Program audit, which focuses on large, complex organizations and may involve a team of examiners.
If, on the other hand, your initial IRS letter asks you to deliver documents to an IRS office by mail, the agency is conducting a correspondence audit. An agent generally will perform the audit via letters and phone calls to your officers or representative. If a correspondence audit grows more complex or your nonprofit doesn’t respond to requests, it can turn into a field audit.
The IRS might also contact you to announce a compliance check. This isn’t an audit; it’s a determination of whether your organization is adhering to record-keeping and information reporting requirements. However, a compliance check can lead to an audit.
Handle it right
Whether you’re facing a field or correspondence audit, don’t try to handle the matter yourself.