IRS Scrutiny of Small Nonprofits

Recent activity by the federal government suggests that increased scrutiny will be placed on nonprofit entities. This increased scrutiny includes an increase in the number of audits. Many smaller nonprofits may shrug off this recent development as an issue that does not apply to their organization. The assumption, “we’re too small to be noticed”, would be wrong.

The IRS is currently beefing up their Tax Exempt and Governmental Entities (TE/GE) Division with 155 new employees. 100 of these will work in examinations. What does this mean for your organization? You have a greater chance of receiving an inquiry or being audited. The TE/GE Division expect to conduct around 500 audits of randomly selected exempt organizations.

So, rather than sitting back on your haunches and waiting to see if your entity is unlucky enough to draw the short straw, get proactive! Be audit ready. Below are a few practical measures to consider now.

Organizational documents. Articles, bylaws, determination letters, and other formal documentation will be requested during the audit. Make sure you can put your hands on these and that your organization is operating within the standards set forth in the documentation.

Minutes of meetings. Make sure the minutes reflect all actions of the organization’s governing body and of any committee having the power to bind the organization.

Payroll information. For all employees, make sure you have an employee file containing W-2s, copies of the Social Security card and driver’s license, and insurance documentation. If you have any contract labor, make sure that the contract labor classification is defensible. For descriptions on employment status, see the February 2010 issue of The PPC Nonprofit Update.

Financial records. Ensure that you have good record of all financial statements, receipts, invoices, check registers, bank statements, expense reports, and any other financial documentation that supports your books.

Nonprofits of ALL sizes should be aware of the potential for an IRS audit. Be prepared by following the above suggestions