Legal Audits pt.1

Legal audits usually serve as an overview of your organization’s non-financial compliance, governance, and risk management issues. Tax-exempt organizations generally consider having a legal audit when new management is in place and they want to start with a clean state, avoiding any costly mistakes. Typically, a standard legal audit will review the following key areas…

Corporate Status
By incorporating a nonprofit or tax-exempt organization, you protect your directors, officers, and members from personal liability. But, to enjoy the benefits of incorporating, your corporation must be in good standing. To review corporate status, you most likely need to provide

• Bylaws
• Corporate filings
• Articles of incorporation

These items are to support that your tax-exempt organization operates in a manner consistent with the law and governance.

Chapters and Affiliates
If your tax-exempt organization has chapters or affiliates, then your bylaws should be explicit about the authority to create chapters. There should also be some form of agreement like a charter or license in place that outlines the term of the relationship.

Governance Policies
Because of the IRS’ encouragement of certain policies, tax-exempt organizations and nonprofits are making their policies and procedures more formal. The Form 990 even references a variety of governance policies and requires your organization to reveal if they’re implemented.

It would be in your best interest to review these governance policies regularly. The audit will consider about four things:

• Which policies exist
• Whether policies are reasonable 
• If additional policies make sense for the organization 
• Whether policies are consistent with existing practice

Tax-Exempt Status
An audit for your tax-exempt organization will undoubtedly review your tax-exempt status. The prime consideration is to see if your organization is properly identified in regard to its tax-exemption and public charity status. The review will also consider if your organization’s activities remain within the scope of its ruling.

You’ll need to provide your

• Previous Form 990’s
• IRS Determination Letter
• Application for Recognition of Exemption

Any changes made to your governing documents or sources of support, programs, or purposes must be reported to the IRS when you file your next Form 990.

Other Federal Tax Matters
The review of your federal information and unrelated business income tax returns is important because forms of that nature, such as the Form 990, are publicly available. Legal analysis of your tax forms focuses on the accuracy of your information shown on your return. That information is considered along with other information from the legal audit and the overall presentation of your return.

We’ll take a short break here as to not to overload you with all this tax goodness. Honestly though, it’s a good bit of dense information to grasp an understanding of; however, this blog helps to clarify a few things. In the next blog, we’ll conclude with the rest of the key areas involved in a legal audit.

Remain in compliance with the IRS and your own tax-exempt organization governance by e-filing your tax-exempt returns with Express990. Our service provides a mini-audit with the built-in error check that reviews your return for errors before you transmit to the IRS.

Expert help is available through step-by-step instructions and with live professionals at our office in Rock Hill, South Carolina. Contact us at (704) 839-2321, Monday through Friday from 9am to 6pm Eastern Standard Time; or, email us anytime, 24/7 at support@expresstaxexempt.com.

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IRS Audit of Exempt Organizations

If you are not prepared, just the word - Audit - can create stress and fear. It's an unsettling feeling anytime the IRS wants to look at your financial documents. But when you know what to expect and how everything is done, the entire experience is much less frightening. Let's begin...

Will Your Organization Be Audited?
This one is tricky to answer. The IRS isn't required to audit a certain percentage of exempt organizations every year, so that is good. But then you have to accept the random selection process. It could happen, you just don't know when. The main issues that trigger an audit are described by the IRS as an organization's tax-exempt status and private foundation classification, whether it paid employment taxes and tax on unrelated business income when required, and whether it filed required returns and reports.

If you keep your exempt status in good standing by filing your Form 990 every year, and properly document everything and file your returns on time, you can still be randomly selected for an audit.

Are There Different Types of Audits?
There are different types of audit procedures implemented depending on the size of your organization and the potential issued involved. There are three main audit procedures used by the IRS: field, office, and correspondence/OCEP (Office Correspondence Examination Program). If you are used to seeing audits in movies or on television where a team of auditors rolls in and goes through everything, that is considered a field audit and is typically only used for very large organizations. If you are a smaller organization and receive an audit notification, you will most likely be asked to go to an IRS office for an interview, or be asked to send in specific documents. You can even be asked to an audit interview at your accountant's office. However you are audited, the IRS is kind enough to tell you exactly what records are needed so you don't get too stressed out.

What is Publication 892?
Publication 892, also known as, Exempt Organization Appeal Procedures for Unagreed Issues, is a way for you to appeal an IRS decision based on your audit. Like if the IRS proposes to revoke or modify your organization's exempt status, you can appeal the decision and stop the IRS from taking away your status.

IRS audits in a whole can be a bit overwhelming at first to understand. There is a lot of information out there about the procedures and what to do. Don't let the popularized fear of audits stress you out. The IRS will tell you exactly how it will all go down, what you need and what to do.

To keep your tax exempt status in good standing, be sure to file your Form 990 every year, and by your deadline date. Express990 provides e-filing of Form 990-N, 990-EZ, and soon to come the complete Form 990 and 990-PF.

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