Form 990: How a Nonprofit Can Survive an IRS Audit

“Death, taxes and childbirth! There’s never any convenient time for any of them.” (Margaret Mitchell, Gone with the Wind) Given my life experiences and chosen profession, I agree with this statement whole-heartedly and would add to the list, an IRS Audit. There is never a convenient time for an IRS Audit, especially if you are a nonprofit organization that files a Form 990. Receiving an IRS Audit notification letter can be a scary moment for even the most seasoned finance professional. So, if you find yourself in this unfortunate circumstance, consider the following suggestions.

Prevention, Prevention, Prevention
The best way to prevent an IRS Audit is by avoiding common audit triggers. Based on the 2012 IRS Annual Report and Priority Guidance Plan, the IRS will focus their upcoming audits on specific types of nonprofit organizations.

Some specific triggers named in the report include organizations with 1) high gross receipts but low compensation to officers, directors and key employees, 2) organizations with significant fundraising income but have little fundraising expense and 3) organizations with lots of foreign grants.

Another area of IRS Audit focus will be on organizations that have significant Unrelated Business Income but pay no income tax. If your organization meets any of these criteria, spend extra time ensuring that your 990 has been filled out properly.

Meet Deadlines and Stay on Point
Be sure to respond to IRS requests in a timely manner, typically 30 days. In addition, only provide the documents or information that the IRS requests.

Stay Organized
Keep a detailed list of all phone calls and correspondence. Be sure to include the who, when, why and what of all communication. Keep copies of all documents that you give to the IRS so you can easily find them again.

Work With a CPA
Consider engaging a CPA to help you manage the audit process. Since IRS audits tend to be an occupational hazard for Public Accountants, CPAs typically have experience dealing with an IRS audit. Hiring a CPA will greatly reduce the time you have to spend managing the process, and in addition, a CPA can help ensure that your organization’s rights are protected.

For more information on how to safeguard your 990 against an IRS Audit or for help if you find yourself in the midst of one, please contact me at 805-963-7811 or ldunne@bpw.com.