What To Do If Your Nonprofit is Audited?

For nonprofit and tax-exempt organizations, maintaining compliance with IRS regulations is vital to ensuring the continuation of tax-exempt status. However, audits or appeals related to tax-exempt status can occur, presenting challenges that demand careful navigation. Here’s a comprehensive guide to help your nonprofit handle these situations effectively.

Understanding the IRS Audit Process

An IRS audit is a review of your organization’s financial and operational activities to ensure compliance with federal tax laws. While audits can feel intimidating, they are often a routine part of the IRS’s oversight responsibilities. Common triggers for audits include discrepancies in annual filings (such as Form 990), complaints by third parties, or unusual financial activities.

How to Prepare

1. Maintain Accurate Records

Consistently update and organize financial, operational, and governance records. This includes accounting ledgers, meeting minutes, fundraising reports, and documentation of exempt activities.

2. Stay Proactive About Compliance

Regularly review IRS guidelines for exempt organizations and ensure your activities align with your stated mission and exempt purpose. If your nonprofit evolves, file Form 1023 or Form 1024 amendments to update the IRS on material changes.

3. Respond Promptly to Notices

If you receive an audit notice, review the letter carefully. The IRS typically outlines the scope of the audit and the specific documents required. Promptly gathering these materials and seeking legal counsel can set the tone for a smooth process.

Navigating the Audit Itself

When the audit begins:

Communicate Clearly

Designate a knowledgeable representative to handle communications with the IRS. If possible, work with a tax attorney or accountant who specializes in exempt organizations.

Stay Transparent but Strategic

Provide all requested documents promptly, but avoid volunteering information beyond what is necessary. Inaccurate or inconsistent details could create complications.

Engage Your Board

Keep your board of directors informed about the audit process. Their involvement may be necessary to provide supporting documents or explanations of organizational decisions.

The Appeals Process: Defending Your Exemption

If the IRS proposes revocation of your tax-exempt status, you have the right to appeal. Here’s how to proceed:

1. Request a Conference with the IRS Office of Appeals

Submit a written protest within the required timeline (typically 30 days). Clearly outline the reasons you disagree with the findings and provide supporting evidence.

2. Seek Professional Guidance

Enlist the help of a legal professional experienced in nonprofit tax law. They can craft a compelling argument and ensure compliance with procedural rules.

3. Leverage the Appeals Process

The IRS Appeals Office operates independently, offering a chance to resolve disputes without litigation. Use this opportunity to present additional evidence, clarify misconceptions, and negotiate a favorable resolution.

4. Consider Litigation, if Necessary

If appeals fail, your organization may challenge the decision in Tax Court. While litigation is a last resort, it can be effective for resolving complex disputes.

Avoiding Future Issues

To minimize future risks:

- Conduct annual internal audits.

- Stay updated on regulatory changes.

- Train staff and board members on compliance best practices.

Successfully navigating an audit or appeal reinforces your commitment to transparency and ensures your nonprofit can continue making a meaningful impact. By staying prepared and seeking expert guidance, your organization can confidently face challenges and thrive in its mission.

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Need Assistance Handling an Audit?

If your nonprofit is facing an IRS audit, appeal, or simply needs assistance maintaining compliance, Prosperity Practiced is here to help. Our law firm specializes in supporting tax-exempt entities with personalized, compassionate legal services tailored to your unique needs. Contact Prosperity Practiced today to learn how we can help your nonprofit navigate these complex processes with confidence and ease.