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What Does A Correspondence Audit Mean For Your Non-Profit?

Despite recent accusations that the IRS targets certain types of tax-exempt organizations for audit, non-profits audits generally are rare. That’s because most non-profits owe no or very little tax. However, as the IRS receives funding as part of the Inflation Reduction Act, new agents are expected to be hired for all divisions, including the Tax Exempt and Government Entities Division. Therefore, non-profit compliance checks and audits could potentially increase.

What should you do if your non-profit hears from the IRS?

Initial Letter & Call
If your organization is chosen, it will mostly likely be subject to a correspondence (not an in-person) audit. An IRS agent will send you — and, if applicable, anyone with a power of attorney — contact letters via the U.S. Postal Service. The agent will then wait at least 10 business days before making phone contact.

The initial phone call will include discussion of the issue (or issues) being examined, for example, an incomplete Form 990 or a complaint the IRS received about your non-profit. The agent will ask you to provide items listed on an Information Document Request (IDR), such as:

  • Filed Form 990s and other tax documents
  • Payroll tax records
  • Records of transactions with donors or business partners
  • Unrelated business income documents

 

The phone discussion may lead the IRS auditor to modify the IDR before sending it to you. If the request seeks more than one item, the auditor will group the items on a single IDR.

Communicate & Meet Deadlines
Before the auditor sends the IDR, you and the auditor should agree on the deadline for your response. If you can’t agree on a date, the auditor will assign one.

The IDR also will identify the date that the auditor plans to review your responses for completeness. Deliver everything by the deadline. If the auditor determines your response is complete, you’ll be informed by phone. If, on the other hand, the auditor decides your response isn’t complete — or if you didn’t respond — you might be granted one or more extensions to comply.

If upon reviewing the IDR documents, the IRS decides you’re in compliance, the agent will contact you via phone and mail you a closing letter. Otherwise, the auditor will propose a tax adjustment, tax status change, or even a revocation of tax-exempt status. If you agree to the proposal, you can typically close your case by fulfilling any requirements. Or you can request an appeal with the IRS or via the court system.

Get Help If You Need It
If your non-profit is audited, comply with all requests on time and remain calm and professional when talking with IRS agents. If you need assistance communicating with the agency or assembling information and documentation, we can help. Or contact us with your questions about best practices for avoiding an IRS audit.

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