Nothing can strike fear in the heart of a not-for-profit like receiving the news that it has been selected for an IRS audit. An audit can be intimidating, not to mention costly and time-consuming. Keep in mind the IRS has recently released internal guidance for requesting audit information from tax-exempt organizations.
The guidance explains how auditors in the Tax Exempt and Government Entities Division should issue an Information Documentation Request (“IDR”) to gather information. The guidance, which took effect April 1, 2017, sets a timeline and certain requirements for its auditors to follow to ensure that all taxpayers are treated in a fair and consistent manner.
The IRS auditor will mail your not-for-profit initial contact letters when your tax return is selected for audit. The auditor will then wait at least ten business days before making phone contact.
The phone call will include discussion of the issue being examined and the items that will be requested on the IDR. The discussion may lead the IRS auditor to modify the IDR before sending it to you. If the request seeks more than one item, the auditor will group the items on a single IDR.
Before the auditor sends the IDR, you and the auditor should agree on the deadline for your response. If you can’t agree on a date, the auditor will assign one. The IDR will also identify the date that the auditor plans to review your responses for completeness.
If your response is deemed complete, the auditor must inform you by phone. If the auditor decides your response wasn’t complete you might be granted an extension. This decision must be made within five business days.
The auditor will grant the first extension if, after talking to you about the missing or incomplete items, he or she determines an extension is warranted. Such an extension may run as long as fifteen business days.
If you don’t respond to the extension approval letter or your response is still incomplete, you might get a second extension of up to fifteen business days. The auditor must first consult with his or her manager and obtain approval. If you don’t provide the missing information after this second extension, the auditor will start the enforcement process.
In the past, the IRS has been willing to grant extensions when it believed a not-for-profit was acting in good faith. Some extensions had been for several months. That discretion is no longer available — at most, you’ll get two 15-day extensions before the IRS begins enforcement.
The auditor will prepare a delinquency notice, call you to determine an appropriate due date for your response and mail the notice with the due date noted. The auditor must obtain a manager’s approval if providing you more than ten business days to respond.
The auditor will review your response within ten business days. If it’s complete, the auditor will notify you, and the enforcement process ends. If you didn’t respond or your response was incomplete, you’ll receive a proposal of tax adjustment, summons, or proposal of revocation of tax-exempt status.
The new guidance firms up the IDR timelines for contact between the IRS and not-for-profits. We suggest our clients have corresponding processes in place to ensure prompt and complete responses.
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