The notice sends shivers down your spine — the IRS has called or written to inform you that your organization has been selected for an audit. Now what? Understanding the nuts and bolts of IRS reviews can help reduce your risk of running into trouble.
Types of IRS reviews
The IRS conducts three types of reviews of not-for-profit's:
1. Field audit. If your initial contact letter schedules an agent to visit your premises, the IRS is conducting a field, or in-person, examination. Field audits are done at an organization’s location, the organization’s representative’s office or an area IRS office. It usually takes place where the not-for-profit’s books and records are located.
Field audits fall into two categories. A general program exam usually is conducted by a single IRS agent. A team examination program audit focuses on large, complex organizations and may involve a team of examiners.
2. Office /correspondence audit. If the initial letter asks you to deliver documents to an IRS office by mail, you are undergoing a correspondence audit. An agent generally conducts the audit using letters and phone calls to work with the organization’s officers or a representative.
But a correspondence audit can expand to become a field audit if the issues grow more complex or the not-for-profit doesn’t respond. Both correspondence and field audits can expand to include prior and subsequent tax years.
3. Nonaudit. The contact letter might indicate that the IRS is conducting a compliance check, which isn’t an audit but may include a checklist with specific questions. Or the compliance check may ask about information and forms that your not-for-profit is requred to file or maintain, such as Forms 990, W-2 or W-4.
Compliance checks are an accountability tool, like audits, but are simpler and less burdensome and don’t directly determine a tax liability for any particular period. They can, however, lead to an audit.
Selection of organizations
Not-For-Profit's are chosen for reviews based on several methods, including:
- IRS examination initiatives and projects,
- Complaints about potential noncompliance with the tax law,
- Risk modeling from the revised Form 990,
- Related examinations of other taxpayers, such as business partners, clients or vendors, whose returns were selected for audit,
- Document matching — when payor records, such as Forms W-2 or 1099, don’t match the information reported, and
- Certain claims for refund or requests for abatement that require further review.
Form 990 plays a strong role in the selection process. In its FY 2012 Annual Report & FY 2013 Workplan, the IRS delivered this “bottom-line message” to not-for-profit's: “The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”
An audit begins with the initial contact and continues until audit findings are discussed in a closing conference (in person or by phone) and a closing letter is issued. Both the conference and the letter will explain your appeal rights.
A compliance check also starts with the initial contact letter, and the IRS may contact your organization again if it needs more information or you don’t respond. The agency typically issues a closing letter at the end of a compliance check.
During a field audit, the agent will tour your office and interview an officer or representative. For a correspondence audit or compliance check, IRS personnel will review requested items submitted via mail and follow up as needed. They may request additional information.
Don’t go it alone
This can be serious business – worst-case audit findings include adjustments to tax liability or tax-exempt status. If you get a call or letter from the IRS, contact your CPA immediately.
Here are some ways Stockman Kast Ryan + CO can help:
- Corresponding with the IRS on your behalf or assisting you in your correspondence,
- Holding field audits at our office, where we can assist with answering auditor questions, and
- Reviewing documents prior to submission to ensure completeness and accuracy.
Feel free to contact us with questions, clarifications, or assistance with any IRS dealings.