Your Nonprofit Probably Won’t Be Audited by the IRS, but If It Is …
April 13, 2023

Despite recent accusations that the IRS targets certain types of tax-exempt organizations for audit, nonprofit audits generally are rare. That’s because most nonprofits owe no or very little tax. However, as the IRS receives funding as part of the Inflation Reduction Act, it’s expected to hire new agents for all divisions, including the Tax Exempt and Government Entities Division. So nonprofit compliance checks and audits potentially could become more common.

What should you do if your nonprofit hears from the IRS?

Initial Letter and Call

If your organization is chosen, most likely it will be subject to a correspondence (not an in-person) audit. An IRS agent will send you — and, if applicable, anyone with a power of attorney — contact letters via the U.S. Postal Service. The agent will then wait at least 10 business days before making phone contact.

The initial phone call will include discussion of the issue (or issues) being examined, for example, an incomplete Form 990 or a complaint the IRS received about your nonprofit. The agent will ask you to provide items listed on an Information Document Request (IDR), such as:

  • Filed Form 990s and other tax documents,
  • Payroll tax records,
  • Records of transactions with donors or business partners, and
  • Unrelated business income documents.

The phone 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.

Communicate and Meet Deadlines

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. Deliver everything by the deadline. If the auditor determines your response is complete, you’ll be informed by phone. If, on the other hand, the auditor decides your response isn’t complete — or if you didn’t respond — you might be granted one or more extensions to comply.

If upon reviewing the IDR documents, the IRS decides you’re in compliance, the agent will contact you via phone and mail you a closing letter. Otherwise, the auditor will propose a tax adjustment, tax status change or even a revocation of tax-exempt status. If you agree to the proposal, you can typically close your case by fulfilling any requirements. Or you can request an appeal with the IRS or via the court system.

Get Help If You Need It

If your nonprofit is audited, comply with all requests on time and remain calm and professional when talking with IRS agents. If you need assistance communicating with the agency or assembling information and documentation, we can help. Or contact us with your questions about best practices for avoiding an IRS audit.

© 2023

 

You might also like

Why Nonprofits Should Be Transparent about Compensation

Why Nonprofits Should Be Transparent about Compensation

More and more U.S. workers are calling for “pay transparency,” and nonprofit employers need to listen — and act. Pay transparency is the idea that employers should openly share their compensation policies and practices with job candidates, current employees and the...

read more
Cut Taxes by Reimbursing Expenses with an Accountable Plan

Cut Taxes by Reimbursing Expenses with an Accountable Plan

If you’re looking for another way to attract and retain staffers that won’t bust your nonprofit’s budget, consider offering an accountable plan. It’s an easy and low-cost way to reimburse employees for out-of-pocket expenses free from income and employment taxes....

read more
Make Fundraising a Year-Round Commitment

Make Fundraising a Year-Round Commitment

If your nonprofit focuses all of its fundraising energy on the holiday season and end of the year, it’s not misguided. After all, 26% of charitable giving to nonprofits occurs in December, according to the 2023 M+R Benchmarks Study. But that means almost three...

read more