By: Nick Richards, Esq. And Tatum Perez, Esq.
In our latest Greenspoon Marder Tax Talk podcast, “Tax Exempt: Nonprofit Audits and Compliance,” we explore what IRS audits look like for exempt organizations, the practical risks nonprofits face, and how mission-driven entities can strengthen compliance to minimize scrutiny.
Why This Matters Now
Nonprofits are facing heightened attention from the IRS, driven by data analytics and targeted campaigns. This increased focus means that organizations must be vigilant in their operations and documentation. Common triggers for audits include discrepancies in Form 990 filings, high fundraising expenses, and unrelated business income that lacks proper allocation support. Additionally, complex transactions and political activities can also draw IRS attention.
The audit process typically begins with an Information Document Request (IDR), which outlines the scope and deadlines. This is followed by a scoping conference to identify issues and logistics. Fieldwork involves interviews and document reviews, leading to proposed adjustments if necessary. Organizations have opportunities to respond to and resolve issues through closing agreements or appeals.
Preparation is Key to Navigating an Audit Successfully
Nonprofits should prioritize maintaining comprehensive governing documents, board minutes, and compensation policies. It’s essential to have clear records for unrelated business income, grants, and donor acknowledgments. Proper tracking of lobbying activities and joint ventures is also crucial.
Proactive Compliance Measures
Here are some key actions nonprofits should consider:
- Regular Reviews of Form 990: Ensure accuracy and consistency in filings.
- Test Unrelated Business Income Positions: Verify proper allocation and documentation.
- Update Compensation Policies: Use independent comparability data for adjustments.
- Clear Gift Acceptance Policies: Maintain transparency and adherence to guidelines.
- Document Lobbying Activities: Keep detailed records and ensure compliance with regulations.
- Conduct Mock Audits: Identify and address potential vulnerabilities before an actual audit.
During an audit, it’s important to:
- Centralize Communications: Designate a single point of contact for efficiency.
- Organize Responses to IDRs: Provide well-documented and clear responses.
- Prepare Interview Witnesses: Ensure they are ready and informed.
- Consider Strategic Resolution Pathways: Utilize options like Fast Track Settlement when beneficial.
IRS scrutiny of nonprofits is on the rise, making it imperative for organizations to align their documentation and operations with their mission. A proactive compliance program and disciplined audit response can mitigate risks and protect tax-exempt status. We will continue to monitor IRS trends and provide guidance in future episodes. For tailored audit readiness or risk reviews, feel free to contact Nick Richards at [email protected].
