IRS NON-PROFIT AUDIT TARGETS – ARE YOU AT RISK?

By Peter Szostak, CPA, MBA - Manager

With deficits at all-time highs and the search for revenue greater than ever before, the IRS has substantially increased its scrutiny of non-profits. Below are items that are of particular concern to the IRS for non-profits because of the multitude of mistakes that many nonprofits make when handling them:

• Gambling fundraisers: Sometimes the income from a nonprofit's gambling fundraisers (e.g., bingo, pull-tabs, Las Vegas nights, etc.) is taxable as unrelated business income (UBI), but the organization is unaware of this requirement. For example, a court has ruled that income from selling instant bingo tickets is taxable as UBI. Several organizations have lost their tax-exempt status because too much of their operations consisted of running gambling fundraisers and not enough of the money raised went to charitable program services.

• Tax-exempt bonds: IRS agents have been instructed to scrutinize the effect of financing with tax-exempt bonds on an organization's tax-exempt status. While commercial mortgages, taxable bonds, and private financing may be used in acquiring and constructing facilities, the IRS believes that transactions financed by 501(c)(3) organizations with proceeds of tax-exempt bonds merit special scrutiny.

• Joint ventures: Joint ventures between nonprofits and for-profits have always been under close scrutiny by the IRS. The reason is that these ventures can easily stray from serving primarily charitable needs. In addition, the IRS has found cases of improper private gain for owners or beneficiaries of the for-profit entities. In particular, joint ventures between nonprofit and commercial health care organizations are examined very closely.

• Retirement plans: Many nonprofits make mistakes in their employees' retirement plans, particularly tax-sheltered annuities or 403(b) plans. If mistakes are made and are not corrected under the IRS's voluntary compliance program, a plan could lose its tax-favored status. Two of the most common problems with these plans are excessive employee withholdings being contributed on a tax-deferred basis or that inadequate amounts of money are contributed by the employer due to an incorrect compensation base being used during the matching calculation.