What to Expect When the IRS Comes Knocking
May 30, 2014The phrase “IRS audit” strikes fear in most of us. Where did my organization go wrong? What are they going to find? How long is this going to take? If the Internal Revenue Service selects your nonprofit organization for review, understanding their process can help you get through it.
First, the IRS will call or inform you in writing if your organization has been selected for review. It is important to note that the IRS does not use e-mail to initiate contact with an organization.
Is It a Full-Blown Audit or Just a Compliance Check?
If your organization is contacted by the IRS, you’ll want to understand the type of review they plan. The IRS conducts three types of audits of nonprofits:
1. Field audit. If the initial contact letter schedules an agent to visit your
office, the IRS is conducting an in-person examination (field audit). During a field audit, the IRS agent will review the organization’s books and records. Field audits can be conducted at the organization’s location, the organization’s representative’s office or at a local IRS office.
There are two kinds of field audits:
The general program exam, usually conducted by a single IRS agent.
The team examination program audit, which focuses on large complex
organizations and may involve a team of IRS examiners.
2. Office/correspondence audit. If the initial letter asks you to provide
documents to an IRS office by mail, your organization is undergoing a
correspondence audit. A correspondence audit is relatively limited in scope. However, a correspondence audit can expand to become a field audit if the issues grow more complex or if your organization doesn’t respond to the IRS notice. Both correspondence and field audits can expand to include prior and subsequent tax years.
3. Non-audit. If the initial letter indicates that the IRS is conducting a
compliance check, your organization is not being audited. A compliance check reviews whether an organization is adhering to recordkeeping and information
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reporting requirements and/or whether an organization’s activities are consistent with its stated tax-exempt purpose. Compliance checks are an accountability tool, but are simpler and less burdensome than an audit. They can, however, lead to an audit.
What Does the IRS Review?
The scope of an IRS review depends on the type. An audit may cover the following issues:
Whether an organization timely filed all returns and forms as required under the law and whether all returns and forms are complete and accurate
Whether an organization’s activities are consistent with its stated tax-exempt purpose
Annual returns for the tax year under audit and for prior and subsequent tax years, employment tax returns, Form 1099 series information
returns, excise tax and information returns
Whether any tax liabilities were properly paid (e.g., employment taxes, unrelated business income tax)
Whether an organization complied with disclosure requirements for applications for exemption, for Form 990 series returns, and for fundraising solicitations and events
A compliance check, on the other hand, may include a checklist with specific questions or may ask about information and forms that your nonprofit
organization is required to file or maintain, such as forms 990, 990-T, 940, 941, W-2, 1099, or W-4.
The IRS agent will provide a list of documents and records they need to conduct an audit or compliance check. A list of records the IRS is likely to want to see is available at http://www.irs.gov/Charities-&-Non-Profits/Information-Document-Request%E2%80%94Exempt-Organizations-Audit.
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Closing Conference
An IRS audit begins with the initial contact and continues until an IRS agent discusses audit findings in a closing conference with you, issues a closing letter after the closing conference, and completes all administrative and review
processes. The closing conference and letter will explain your organization’s appeal rights.
A compliance check also starts with the initial contact letter, and the IRS may contact your organization again if it needs more information or you don’t respond. The IRS typically issues a closing letter at the end of a compliance check; there is not a closing conference or call.
Help Is Out There
The worst-case scenario is audit findings that include adjustments to a tax liability or to an organization’s tax-exempt status. As discussed above, the closing conference and letter will explain your organization’s appeal rights. If your organization receives a call or letter from the IRS, contact a CPA immediately.
Sidebar: The Selection Process
According to the IRS, nonprofits are selected for review based on a variety of methods, including:
IRS examination initiatives and projects
Complaints about potential noncompliance with the tax law
Risk modeling from the Form 990
Related examinations of other taxpayers, such as business partners, clients or vendors, whose returns were selected for audit,
Document matching — when payer records, such as forms W-2 or 1099, don’t match the information reported
Certain claims for refund or requests for abatement that require further review
Nonprofit organizations that meet certain criteria are required by the IRS to complete a Form 990, Return of Organization Exempt From Income Tax. As noted above, the Form 990 can play a role in the IRS selection process. In fact, in its FY 2012 Annual Report & FY 2013 Workplan, the IRS states: “The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”
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Jasmine Baker, CPA, is a senior manager in the San Ramon, California, office of Lindquist LLP. She has eleven years of experience in audit and accounting services for employee benefit plans and labor organizations. As a senior
manager, Jasmine trains staff and helps develop technical guidance for the firm. Jasmine is a member of the American Institute of Certified Public Accountants. She received a Bachelor of Science degree in accounting from St. Mary’s College.
Our firm provides the information in this e-newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy or timeliness of the
information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
