No one wants to hear the “A” word from the IRS. A tax audit is a serious event with potentially far-reaching consequences for a nonprofit. The IRS audits organizations for a wide variety of reasons, including oddities in the nonprofit’s tax filings, tips from third parties, or excessive levels of unrelated business income. Whether a nonprofit is being audited for a specific “red flag” issue or simple due to the (bad) luck of the draw, it’s important to devote significant resources to preparing for the arrival of auditors.
- Get advice.
The first thing to do after receiving notice of an IRS audit is to engage a tax advisor who can advise the organization throughout the process. A do-it-yourself approach is likely to result in a messier process that takes significantly longer and frustrates the auditors.
- Get organized.
In a tax audit, the auditors may focus on specific areas of an organization’s operations, or they may cast a wide net. Hopefully the organization has a sense of what the auditors will want so it can begin to pull together relevant materials. The document gathering process needs to be handled with care. Mistakes in the preparation stage—materials being lost or misfiled, and so forth—can create doubts about the organization’s good faith.
- Identify risks.
An audit should spark frank discussions among the board, executives, and financial managers about areas of potential risk. The organization’s professional advisors are often in the best position to assist with sorting out where the organization’s risks might be. The goal of identifying risks is to ensure that if a serious issue is present—for example, a transaction with a director’s business that was not approved by the board according to standards for self-dealing transactions—the organization can get ahead of it and, if necessary, be prepared to own its mistakes.
- Get in sync.
The organization’s staff will need to participate in the audit process. Quite often an audit forces people to put aside their day-to-day work to focus on auditor requests. Leaders can go a long way toward improving the audit process by encouraging a positive, cooperative attitude among staff.
The Church Law Center of California assists nonprofit organizations with all manner of governance matters. If your organization is facing an IRS audit, we can help you examine your legal risks and get prepared. Call us at (949) 689-0437 or reach out to us through our contact page.