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Jen: This is The PKF Texas – Entrepreneur’s Playbook®. I'm Jen Lemanski, and I'm back once again with Emily Smikal, a tax director and one of the faces of our PKF Texas not-for-profit team. Emily, welcome back to the Playbook.

Emily: Thanks for having me again.

Jen: So, I know for profit organizations can be audited by the IRS. I'm assuming not-for-profit organizations can also be audited for the IRS. Are there any steps that they can take to maybe avoid an audit?

Emily: Yes, not-for-profit entities can be audited, and so, it's important to just understand how the IRS selects which organizations they're going to audit so you can be somewhat prepared for that. So, first of all, you can't fully know; they will randomly select organizations to audit, but there are some common triggers to just be aware of.

Jen: What are those triggers?

Emily: So, first there are referrals. So, that could be someone from inside the organization, maybe a state agency and even the public may refer an organization to the IRS.

Jen: Like a whistleblower?

Emily: Exactly. There's also things on the actual Form 990 that you have to be careful about how you fill out, because that could trigger an audit as well. So, there's some common inconsistencies or mismatches that we see often:

  • And that's one, is an organization may report unrelated business income on their Form 990, yet they don't file a separate Form 990-T. That could raise a red flag.
  • Another thing is if you show that you have compensation on the form, yet you answer that you had zero number of employees on your Form W-3.

Jen: That's a little questionable. So, what can you do to prevent that?

Emily: So, there's no sure way to completely avoid auditing, but you can avoid some common audit pitfalls. First and foremost is take the filing of 990 seriously, so all your board members should be reviewing that before it is filed, making sure they agree with all of the information that's being submitted, making sure they agree with how all the questions are being answered. And then also just keep good records of anything that is supplied on the 990 so that if you do get questioned by the IRS, it's easy to back that up.

Jen: Should be like, “Here you go.”

Emily: Exactly.

Jen: Perfect. Anything else that we need to know or that, you know, a not-for-profit organization should take into consideration?

Emily: Yeah, I just want to point out that if you do get contacted by the IRS, don't jump to worst case scenario right away. Sometimes the IRS actually just sends out things called “soft letters,” and that's like a blanket letter and it could be just notifications of law changes or common compliance issues.

They also do things called compliance checks. And that's just a little more simple and less burdensome than an actual audit. It could lead to an audit, depending on how you answer the questions, but those are a couple of options that if the IRS reaches out, it could just be that rather than they are ready to full on audit you.

Jen: Perfect. Well, so you want to answer that letter?

Emily: Yes, definitely do that.

Jen: Perfect. Well, we'll get you back to talk a little bit more about some tax topics related to not-for-profits. Sound good?

Emily: Sounds great. Thank you.

Jen: For more information about this topic, visit www.PKFTexas.com/NotForProfit. This has been another thought leadership production brought to you by PKF Texas - The Entrepreneurs Playbook®. Tune in next week for another chapter.