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Surviving an IRS 501(c)(3) Audit – Five Rules

In our last post, we took a look at five of the most common sources that could spark an IRS examination or audit of your 501(c)(3) organization (or other nonprofit).  In this article, we’re going to equip you with five rules you need to know should you get the dreaded notification that your organization is going to be examined.

If you haven’t read the prior article, go here to read it first.

Rule #1:  Don’t panic. Breathe.  Yours is not the first nonprofit to ever be audited.  You can survive this.  I’m not going to lie and say it will be a pleasant experience, because it won’t be.  But, fear causes you to react out of emotion, not logic.  Slowing down and calming your nerves will put you in a much better frame of mind to tackle the next few steps.

Rule #2:  Don’t go it alone. If you could survey every person, business and nonprofit that has ever gone through an audit, I suspect you would find near unanimity about this one.  You need professional representation.  You simply do not have the depth of knowledge or understanding necessary to do this on your own.  It is very much like being your own lawyer at a trial…and you know what they say about that:  “Fool for a client…” Hopefully the professional who helped you prepare your IRS filings is competent to represent you.  Such representation, should it be necessary, is always a part of our preparation services.  A professional understands both the law involved and usually has experience dealing directly with the IRS.  Let them handle it.

Rule #3:  Don’t be helpful…not too helpful, anyway.  The fastest way to turn a small IRS headache into a debilitating migraine is to provide information to the examiner that is outside the stated scope of the examination.  Never, ever do that.  Give them only what is absolutely, specifically asked for…nothing else.  Make sure you only give them information related to the year(s) in review, otherwise you can instantly turn your audit into a multi-year nightmare situation.  Knowing what information to provide or not provide is another reason you need help (see rule #2).

Rule #4:  Don’t be combative. Even if the auditor is nasty (and most are not), keep your cool.  Combative behavior only encourages more scrutiny, so stay polite and professional.  Be a good ambassador for your organization.  You don’t have to be passive…you already know our advice about being too helpful.  If you need to stand your ground, do so (or better yet, have your representative do it for you).  Just be even-keeled in the process.

Rule #5:  Change your ways (if necessary).  Regardless of how you got in this position, learn from it.  If your organization has not been properly conducting itself, take this opportunity to get it right.  Even if you came out with a clean bill of health, why were you targeted to begin with?  You, your board, your members and contributors…none of you want this to happen again, do you?  Not all examinations can be avoided, but your risk can be minimized.  In the paraphrased words of George Santayana, “Those who do not learn from the past are doomed to repeat it.”

We sincerely hope you never have to experience an IRS audit.  But, armed with a little knowledge, you can be a survivor.

Got comments or war stories?  We’d love to hear them.  Just use the comment box below…

Greg McRay, EA

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has One Comment
  1. I’ve been engaged in taxes for lengthier then I care to admit, both on the individual side (all my employed life story!!) and from a legal viewpoint since satisfying the bar and following up on tax law. I’ve rendered a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes utter sense. Please persist in the good work – the more people know the better they’ll be equipped to comprehend with the tax man, and that’s what it’s all about.

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