The goal of the Exempt Organizations Examinations program is to promote voluntary compliance by analyzing operational and financial activities of exempt organizations. As in any IRS examination of taxpayer returns, exempt organizations undergoing examinations have certain rights, as explained in Publication 1.
Issues in an audit may include 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. Procedures for examinations are explained in greater detail in Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues.
If your organization will be represented by a third party, whether in person or by correspondence, you must file a power of attorney specifically authorizing the individual to represent your organization. Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. If you want the third party to be able to receive information about your case, but not to represent you, you may use Form 8821, Tax Information Authorization, instead of Form 2848.
Procedures for auditing exempt organizations depend on the particular audit technique used. Procedures vary depending on whether an audit uses field, office, or correspondence/OCEP (Office Correspondence Examination Program) techniques. Field examinations of large, complex organizations that require a team of specialized revenue agents, as well as coordination between IRS functions and other governmental agencies, are conducted using team audit procedures. The appropriate audit technique for each case is based on the potential issues involved, the scope of the examination, and the most effective way to gather required information. Generally, group managers are responsible for determining the appropriate audit technique.
For a discussion of appeal procedures for unagreed issues in exempt organizations cases, see Publication 892. For more information about special rules that apply when auditing churches, see Church Examination Procedures.
Potential Examination Consequences
An examination can result in the following actions:
- No change to the organization’s exempt status or tax liability,
- No change to the organization’s status or liability, with an advisory and later IRS follow-up to see if advice has been followed,
- Imposition of tax (unrelated business income, employment, or excise) and/or penalties,
- Revocation of the IRS’s determination that the organization is tax-exempt,
- Modification of the IRS’s determination of tax-exempt status (for example, reclassifying an organization recognized as exempt as a social welfare organization under Code § 501(c)(4) as a business league described in § 501(c)(6)), and/or
- Reclassification of foundation status (for § 501(c)(3) organizations and § 4947(a)(1) trusts only).
Examination and Compliance Check Processes for Exempt Organizations, Fact Sheet 2008-14 (February 2008)
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.