Nonprofits, Avoid these 6 IRS Audit TriggersOctober 22, 2015
Though there is no surefire way to avoid an IRS audit, nonprofit organizations can monitor at least six areas to reduce their level of audit risk.
The IRS has very strict rules concerning the way tax returns, and specifically the Form 990, are prepared. Closely following these rules is important as you do not want to subject your Organization to an IRS audit. Your chances of being audited depend on a number of factors, such as the nature of your income, and the business you are engaged in (read our blog “What Prompts an IRS Tax Audit?”).
For nonprofit organizations, IRS audits are largely based on ensuring that the organization is truly run for public, rather than private interests. Fortunately, even though there is no surefire way to avoid an audit, there are some precautionary measures your organization can take to defend against a dreaded call from the IRS.
Why would the IRS target NFPs?
Nonprofit IRS audits have increased in recent years due to the IRS’ intent to ensure tax compliance in all areas of business. The IRS wants to make sure that nonprofits are fully invested in public, charitable interests.
6 reasons your nonprofit might be audited
- Unrelated business income- The IRS will be looking to see that your organization files employment tax returns and Form 990-T if it allocates expenses to reflect any unrelated business income or wages. It is crucial that you document your reasoning behind all allocations. (For more information on UBIT read our recent blog: “IRS Examines Unrelated Business Income Tax Reporting for Nonprofits”)
- Reactions from government agencies or the general public- The IRS has a form that the general public can submit if suspicious or inappropriate activity is suspected to be happening in your organization.Form 13909- Tax-Exempt Organization Complaint (Referral) Form.
- Media reports- Negative reports from the media that fall in the hands of the IRS will also be an issue for your nonprofit, so be cautious of the image you present to the public.
- Excessive compensation- If your organization is providing excessive compensation or benefits to employees, this takes away from the “public interest” your nonprofit is supposed to be centered around.
- Lobbying- Participation in lobbying or political campaigns is a tricky area for nonprofits, so you will want to be sure you are complying with the law and not focusing too much on attempting to influence legislation (Read our whitepaper on lobbying).
- Incorrect classification- Is your organization correctly classified as either a public charity or foundation?
There are various other areas the IRS could scrutinize including whether your nonprofit:
- Neglects to fill out required forms;
- Has gambling fundraisers;
- Sponsors travel tours; or
- Joins together with for-profit companies for certain activities
In addition to this, colleges, community foundations, hospitals, and credit counseling agencies have been audit targets in the past.
It is best to be aware of your organization’s presence in the public and to be sure you are complying with IRS regulations and filling out all the required paperwork. Your organization’s tax exempt status depends on compliance with these IRS regulations.
Questions? Contact any member of our Not-for-Profit Services Team.