The U.S. Government Accountability Office (GAO) found that audits of tax-exempt groups have been on the decline. Due to its lack of resources and a dwindling workforce, the IRS has only reviewed 0.7 percent of filing charities’ tax returns. Based…
It’s the beginning of another new year. And along with everything else that comes with a flip of the calendar, the IRS has several things up its sleeve for nonprofits in 2011. Let’s take a look two of the most crucial.
Audits of nonprofits to increase. As if the IRS didn’t have enough to do already, 2011 brings the news that the IRS plans to continue its expansion of audits of 501(c)(3) and other tax-exempt nonprofits. 2010 saw a 12% increase in the number of audits initiated and that trend is expected to continue throughout 2011. More than 100 new auditors have been hired by the IRS since the end of 2008 in order to provide the manpower necessary. The primary source material used to trigger audits remains the Form 990 filed by organizations each year (see below), though collaboration with other agencies, such as the Social Security Administration, is increasingly providing leads worthy of the IRS taking a closer look.
Noncompliance. As the word suggests, noncompliance is the opposite of compliance. But what does noncompliance mean as it relates to your nonprofit? More important still, what is the true cost of noncompliance?
If you have been a client or follower of Foundation Group for any length of time, you have heard us hounding you to get your organization in compliance. In other words, do everything you need to do comply with local, state and federal law regarding your nonprofit. A complete list of compliance items looks rather daunting. It typically includes everything from filing your corporate annual report to properly keeping your books and records to registering with your state’s Solicitations Department. We tend to talk about these things so often, it can come across more as a series of dos and don’ts and, in the process, the true cost of noncompliance can get lost. Let me share with you some real life examples that will help you see what I mean. Each case discussed is an FG client that we have helped to clean up the mess:
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.
There is one phrase in the English language that generates more fear and trepidation than any other out there: IRS AUDIT. Just hearing the words is enough to cause many a fearless person to break out in a cold sweat and to shrink in terror. It is bad enough when an individual has to deal with IRS questions. But when it happens to a nonprofit organization, there is plenty of pain to go around. Directors, employees, members, donors…all can be affected. Plus, just the potential bad publicity is enough to cause nonprofit leaders to reach for the Rolaids.
So how does a nonprofit avoid an IRS examination? It helps to understand some of the situations and events that can trigger an audit. In this article, we are going to look at 5 sources of audits and give you advice on how stay out of Uncle Sam’s cross-hairs.
1. Complaints. One of the most common causes of IRS examinations is a complaint filed by a third party. Such “whistle-blower” situations may or may not have a shred of credibility to them. Typically, if the IRS decides to look into the allegations, it will start out as a compliance exam. It is possible for one of these exams to progress to the status of a full-blown audit, but most do not…at least for those organizations that are operating completely above board.