IRS Audit Survival Tips

Things to do NOW – “An Ounce of Prevention...”

Review your organization’s activities – seems simple and basic, but the IRS will be certainly asking about them and the audit context is not the time to learn about someone’s pet project for the first time. Do you have documentation to establish the relationship between program activities and your exempt purposes?
Review your records – make sure you know where they are, that they are labeled accurately, and that contain what they are supposed to contain. Create a records retention schedule and stick to it. The IRS will be interested in financial records and operational records, such as grant files.
Review your web site – you can bet that the IRS will. Web site content is often developed by well-intentioned subject matter experts or marketing people without regard to potential tax implications. Make sure that the language is in keeping with the “recommendations” donors are allowed to make, etc.
Review your Form 990 – are there any gaps or incongruities such as significant public contributions and no fund raising expenses?
Compare your filings and public reports – if you have an annual mission-oriented report, a CPA-certified audit, or a federal or state lobbying disclosure report, make sure that the information being reported is consistent.
Adopt (and implement) a conflict of interest policy – it tells agents that you are interested in high-integrity grant making and helps establish a boundary between personal and institutional interests.
Employment Contracts – if your more highly paid employees signed them, make sure you have copies in your files. If anyone’s compensation would make a good headline in the local newspaper, make sure that you have documentation to justify/explain it.
Stay up-to-date on employment tax matters – this includes proper withholding and reporting, as well as reviewing the employee/independent contractor classification of your workers. Make sure that your personnel files contain justification for independent contractor status and copies of Forms 1099.
Take a deep breath and relax – audits are worrisome, time/resource consuming, but ultimately survivable. For help, contact the Legal Services Department at legal@cof.org.

So You Won the Audit Lottery – Now What?

Get organized – identify a team that will be charged with overseeing the audit. Your goals are to maximize your control over the situation and move the agent(s) through the audit process as quickly as possible.
Designate a single “point of contact” – you want to control contact with the IRS so that all requests for documents and/or interviews can be tracked and timely responses made.
Develop a communications strategy – while the IRS won’t issue a press release about your audit, they could contact your bank, your contractors, and your grantees. Be ready with a thoughtful statement for the local media, just in case. Particularly if you already make good copy for local reporters.
Who’s who – find out who’s on your case. Meet and greet the agent(s) and their manager (or, at least, get the manager’s name and contact information). Will IRS counsel be assisting the agent(s)? Will there be any specialists assigned to the case?
Find an office for the agent(s) – the IRS will need workspace. Decent space, a telephone, a place to hook-up a computer, but let’s be blunt – it’s better to have them across the street or down the road than next door to your lunchroom.
On that note – the IRS audit manual for agents specifically suggests engaging employees in casual conversation as a way of collecting information. Enough said.
Don’t hesitate to ask questions up front – is it the audit part of a special study project? Do the agent(s) have any special areas of interest? Is there an audit plan?
Be talkative (carefully) – first impressions are important. Offer (insist) to provide an overview of the organization. Don’t be overly fluffy, but you want the agent(s) to understand, as soon as possible, that you do good works.
Read and reread – you want the IRS to ask, in writing, for documents. They probably will anyway. Don’t read more into their requests than they’ve specifically stated. Remember to note the specific tax year involved in each request.
Stay calm, things take time – the agent(s) won’t have the final say in the outcome unless you agree to let them. You have rights to explanations, conferences and a review of the agent(s) findings. Don’t be afraid to use them; it doesn’t count against you.
Let the Council know – we’d like to track these audits and we may be able to help. Contact legal@cof.org or call any of the attorneys.