Section Library
IRS Audit Activities
The IRS states that it audits approximately 1% of all exempt organizations. The possibility of audit increases with the size of organizations and the unrelated business revenues.
The IRS is now focusing most of its audit activity on large exempt organizations. Those organizations that have involved activities and larger amounts of income that might be considered unrelated business income will be particularly examined.
Key elements of the new initiative include:
- Perform the examination of the related entities concurrently in order to determine the true tax impact of the combined entities and their activities.
- Use personnel from other parts of the IRS, including personnel with expertise in employer benefits and qualified plans, employment tax issues, commercial taxation, and computer auditing.
- Focus efforts on larger organizations and areas that warrant the attention. It is likely that there will be a heavy emphasis in the trade association area, the health care and larger section 501(c)3 organizations such as universities. Less emphasis may be placed on smaller organizations.
- The nature of the entity's operations and complexity of its transactions may have more of an impact on the likelihood of examination than any dollar amount measure such as total assets of gross revenues.
Currently, the IRS selects exempt organization returns for examination from four independent sources:
- Most returns are selected from a computerized scoring system similar in approach to that used for other return selection.
- Information from third-party sources.
- Special emphasis programs.
- The Taxpayer Compliance Measurement Program (a random sample of returns).
Surviving an IRS Audit
Notification that you will be audited will arrive in the mail and will include:
- Name and phone number of the agent
- Entity or entities being audited
- Whether 990 and/or 990T audits are included
- Location and time of audit
- List of materials
After receiving notification, you may be able to request a delay to get organized, a change in the place of the audit to the accountant's or lawyer's office, and a change in the list of materials to fewer items.
If a section is undergoing an audit, your goal should be to get the agent in, get through the audit, and get out. Have all the materials requested assembled and identified according to the list. Documents the agent may want to examine include:
- The section's letter of determination for tax exemption
- Section bylaws
- Articles of Incorporation
- Minutes
- Copy of 990 and 990T's for the year(s) being audited, as well as the years immediately before and after
- Payroll tax forms and 1099's
- All books of account
- All records of receipts and disbursements
Designate one individual to deal with the IRS in addition to the professionals handling the audit. Provide only the information the auditor requests and do not volunteer additional information.
After the auditor has finished the examination, you will receive a preliminary finding of the results.
The audit is not complete until the agent's supervisor receives the results and you receive a "Revenue Agents Report." If the IRS concludes that your tax liability has changed, they will ask you to sign a waiver. It is a good idea to seek professional advice before signing.
According to the IRS, the ten most common tax mistakes associations make are:
- Failing to report changes in operations and activities to the IRS. Reporting changes is a requirement.
- Overlooking IRS conditions in ruling letters and not heeding IRS audit changes and cautions.
- Failing to consider obvious and subtle UBIT issues.
- Improper allocations between activities and affiliates.
- Improper transactions between related organizations. Basically, this applies to 501(c)3's which are not allowed to give funds that are used for noncharitable purposes.
- Filing incomplete or inaccurate information and tax returns.
- Failing to maintain adequate books and records.
- Misclassification of employees as independent contractors.
- Noncompliance with applicable lobbying rules and limitations.
- Failing to follow public inspection and fund raising disclosure requirements.