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  Tax Exemption Home: Non Profit / Exemption Information: Exemption Workshop - Chapter 9 - Audit and Compliance
 

Exemption Workshop - Chapter 9 - Audit and Compliance

IRS Examination, Compliance Check, and Complaint Processes

One objective of IRS Exempt Organizations (EO) is to advance voluntary compliance through its compliance and examination check programs. IRS Exempt Organizations attempts to confirm consistency and fairness in these programs. In its yearly Implementing Guidelines, which are available on the IRS website at www.irs.gov/eo/, IRS Exempt Organizations explains its proposed compliance and examination check activities for the year.

IRS Exempt Organizations gives fast responses to complaints affirming the abuse of the tax-exempt status granted to different organizations. Read Page 9–7 in this chapter for help regarding how IRS Exempt Organizations handles complaints from the public about the actions of organizations that are exempt.

Compliance Checks Versus Examinations

An outline of an organization that is tax-exempt falls into one of two categories: examinations versus and compliance checks.

Examinations, also called audits, are affirmed under Section 7602 of the Code. For organizations that are exempt, an examination establishes an organization's adequacy for tax-exempt status. IRS Exempt Organizations carry on two different kinds of examinations: field examinations and correspondence (explained below).

A compliance check is a review to find out if an organization is adhering to information reporting requirements and recordkeeping. It is not an examination because it is not related to the determination of a tax liability for any particular period.

IRS Exempt Organizations do not assume that an organization is infringing on the tax laws before it starts the compliance check letter or examination.

Field Examination versus Correspondence Examination
The IRS examiners carry on audits of exempt organizations in different ways:
Field examination – The examiner leads the audit at the organization's area of business. In general, these exams are the most widespread exams.

There are two separate types of IRS Exempt Organizations field examinations:
• IRS Exempt Organizations Examination Program (TEP), for examinations which require a team of specialists.
• IRS Exempt Organizations General Program, in which an examination is performed by one revenue agent. As a rule, the IRS uses team exams for the biggest exempt organizations.
Correspondence examination – The examiner leads the audit by written or oral correspondence with the organization's representatives or officers. These audits are often restricted in scope, only centering on one or two items on a return. On occasion, if the issues become too intricate or if the organization does not respond to correspondence efforts, IRS Exempt Organizations may call for representatives from the organization to give their records to an IRS office. IRS Exempt Organizations may also change a correspondence examination into a field examination.

Initial Contact by the IRS

For field audits, the agent that is appointed to examine an organization will communicate with it by letter or telephone to plan the very first appointment. The organization will take Publication 1, Your Rights as a Taxpayer, with the appointment letter.

Records for Field Examination

In the appointment letter, the examiner will identify the records he or she wants to have easily accessible at the beginning of the audit. In general, these records include:

• Governing instruments (articles of charter, incorporation, or constitution, plus all amendments; bylaws, together with amendments)
• Brochures, pamphlets, and other printed literature fully explaining the organization's activities
• Copies of Forms 990 for the years after and before the year under audit
For the year under examination (at a minimum):
• Minutes of the Board of Directors' meetings and standing councils or committees
• Entire records and books of liabilities, assets, disbursements, and receipts
• Auditor's report, if there is any
• Copies of other filed federal tax returns and any other work papers that are related (Forms 990-T, 1120-POL, etc.)
• Copies of employment tax returns and any other work papers that are related (Forms W-2, W-3, 941, 1096, 1099)
A lot of these records might also be necessary for a correspondence examination.

First Interview and Opening Conference for Field Examination

At the time of an opening conference with the representatives or officers of the organization, the examiner will clarify the plan for the audit plan he or she has established, and the cause why the organization has been chosen for an audit.

The examiner will usually lead a widespread interview and tour the facilities of the organization in order to better understand its activities and purposes.

The Length of the Field Examinations

The length of the field examination will rely upon a number of factors such as the intricacy of its activities, the size of the organization, and the matters that might come up at the time of the examination. Some audits are finished inside of a few days, while other audits go on for months or weeks.

The Last Conference for Field Examinations

Every field examination ends with a last conference. The agent will talk over his or her discoveries and, if needed, provide a report describing the examination results and any suggested adjustments to the organization's exempt status or returns.

If the organization does not agree with the discoveries the examiner makes, it may ask for a conference with the examiner's manager in order to talk over the disagreement. If the manager is not able to settle the conflicts, the organization may pursue its case through the IRS appeals process.

To see more information, read Publication 5, "Your Appeal Rights and How to Prepare a Protest If You Don't Agree." Also read Publication 892, "Exempt Organization Appeal Procedures for Unagreed Issues."

Compliance Checks

IRS Exempt Organizations keep up an active compliance check program. IRS Exempt Organizations specialists manage the checks by communicating with representatives in the organization. A specialist may ask about an item on a return, ascertain if specific reporting requirements have been met or whether the activities of an organization are consistent with its stated tax-exempt purpose.

The representative or officer of any organization that is exempt may decline to take part in a compliance check without penalty. However, IRS Exempt Organizations has the choice of opening an examination that is formal, even if the organization does or does not agree to take part in a compliance check.

A compliance check is not an examination. Therefore it is likely to have more than one compliance check for a tax year if circumstances and facts warrant. To read more information, see Publication 4386, Compliance Checks.

Public Complaints Related to Alleged Abuse of Tax-Exempt Status
The Internal Revenue Service gives serious consideration to complaints that are made asserting the abuse of the tax-exempt status granted to different organizations.

A complaint is also known as a referral, and is any communication affirming that an organization that is tax-exempt organization is in possible noncompliance with the tax law. IRS Exempt Organizations takes complaints from members of Congress, the general public, state governmental and federal agencies, as well as from other parts of the IRS. A referral of an exempt organization may be made by filling out and submitting Form 13909, "Tax-Exempt Organization Complaint (Referral) Form."

As soon as a referral is made, then the IRS will send a letter of acknowledgement to the referral source, unless it was made secretly. The Code (Section 6103) excludes the IRS from revealing if it has started an examination or the results of any examination. Therefore, the IRS cannot communicate with the original source of a referral outside of the acknowledgement letter. For more information about the review process, read Fact Sheet 2008-13.

For More Information, read these fact sheets and publications:
• Fact Sheet 2008-13, (IRS Complaint Process for Tax-Exempt Organizations)
• Fact Sheet 2008-14, (Examination and Compliance Check Processes for Exempt Organizations)
• Form 13909 (Tax-Exempt Organization Complaint Referral Form).
• Publication 1 (Your Rights as a Taxpayer)
• Publication 5 (Your Appeal Rights and How to Prepare a Protest If You Don't Agree)
• Publication 892 (Exempt Organization Appeal Procedures for Unagreed Issues)
• Publication 4386 (Compliance Checks)


 

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