IRS Releases Nonprofit Audit Guide

Being “audited” does not carry a positive connotation, especially if that audit is coming from the feared entity known as the Internal Revenue Service. However, even though no one (outside the IRS) necessarily thinks of an audit as a joyous occasion, audits do not have to be a feared, loathsome process. Those individuals and entities that fear an audit the most are likely to be those who know they are not compliant with reporting requirements, a self-induced problem. Knowing and managing the compliance requirements for a 501(c)(3) entity is a large part of the battle for any nonprofit organization. It is easy for these organizations to fall behind or let a reporting component slip through the cracks. Though the IRS certainly does not understand this to the point of forgiveness or turning a blind eye, they have recently released Audit Technique Guides (ATGs) in order to help guide nonprofit staff, boards, tax preparers, attorneys, and others who may advise these entities on compliance best practices.

The guide begins with a purpose statement, stating that it “outlines the procedures IRS auditors use to correctly determine the proper foundation status for organizations described in IRC Section 501(c)(3), provides guidance to auditors on determining and addressing the presence of inurement, private benefit, and excess benefit transactions, and discusses political and legislative activities, how auditors determine if they are present, and their effect on charities.” The guide for nonprofit public charities, which is one of nearly 30 such guides published, delves (among other topics) into great detail about how to determine whether a 501(c)(3) organization is a public charity or private foundation based upon how its revenues are received and classified. This is something that many organizations may struggle with, even though the determination is made on the organization’s initial paperwork.

Having great practical value to nonprofit organizations are the guide’s situational examples, such as an explanation of the use of the IRS’s “facts and circumstances” test, which is mostly used to grant a bit of leeway and discretion in their audits. The “intermediate sanctions” section of the IRC is also addressed by the guide, which provides explanations of conflict of interest, excessive compensation, and private inurement situations. Included at the end of the 44-page guide is a hyperlink to a graphic illustration of many points touched on in the guide, which the more visual learner may find helpful. Though the guide was actually developed with IRS auditors in mind, it provides key insight into where nonprofits and their advisers and representatives should focus their energy in striving for IRS compliance. While this guide provides needed guidance, it is important for 501(c)(3) organizations to contact an attorney experienced in nonprofit work with any questions or concerns regarding their compliance obligations.

The Guide can be found here: Public Charities ATG