Non-Profit IRS Audit Rules

No news is good news from the Internal Revenue Service, so when your nonprofit gets that dreaded audit notice, it's time to batten down the hatches. The audit will thoroughly review your nonprofit's tax returns and records to determine if you're filing accurate returns. It will also examine whether the nonprofit truly qualifies as one, so spending time preparing for the disruption is well-advised. Hiring a tax attorney or independent auditor is highly recommended.

Ensuring Nonprofit Compliance

In recent years the IRS has stepped up the number of nonprofit audits to ensure that all manner and size of charitable organizations are in compliance with federal tax law, according to Nolo. In addition to ensuring that the nonprofit is operating for public interest, it also wants to see if it is operating unrelated, for-profit businesses. The IRS will verify that the nonprofit uses proper accounting procedures and protects its assets wisely. It also will determine whether the nonprofit excessively compensates its employees or engages in political activities.

Penalties Resulting from an Audit

After the IRS completes its audit, it will make a determination of whether the nonprofit is operating by the rules. If it isn't, the IRS has many tools at its disposal to ensure future compliance. The IRS can fine the nonprofit. It can also impose excise taxes on directors, officers, employees and others who didn't follow the rules, according to Nolo. Extreme cases of noncompliance can result in the IRS revoking the nonprofit's tax exempt status.

Questionable Nonprofit Activities

The IRS targets nonprofits that conduct certain types of activities that raise noncompliance issues. These activities include fund-raisers that feature gambling, nonprofits that engage in political lobbying or sponsor travel tours and nonprofits that partner with for-profit companies. Not filing a return will also get the IRS's attention quickly. Other types of nonprofits, such as hospitals, colleges, universities and credit counseling agencies also get extra audit attention. As a result, these nonprofits usually hire professionals who annually audit their books to ensure compliance with nonprofit laws and regulations.

Additional Considerations

Nonprofits that use tax-exempt bonds to finance a project often come under IRS audit scrutiny, as do those that offer retirement plans for their employees. In fact, according to TGCI.com, so many nonprofits make mistakes when recording retirement plan contributions that the IRS has instituted a voluntary compliance policy that permits nonprofits to report mistakes without penalty. Other areas that pop up on an auditor's radar screen are health care conversions, the hiring of independent contractors, payroll taxes and Internet-related activities.

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