Anyone who has undergone an audit by the Internal Revenue Service (IRS) knows the tension of trying to answer questions while staying aware of everything that is going on. Simple mistakes can look like huge discrepancies under the scrutinizing of an IRS accountant, and organizational reputation could even be at stake.
Further, the time taken to prepare for and undergo the audit is time that could be better spent in other ways.
Speaking during the AICPA Not-For-Profit Financial Executive Forum, Rebekuh Eley and Cathy Stopyra of BDO discussed various aspects of IRS audits, especially the one asked by nonprofit managers who have been scrupulous about keeping records straight: “Why are WE being audited?!”
Eley and Stopyra said the IRS usually engages the following methods in determining a choice for an audit:
- IRS examination initiatives and projects;
- Complaints (referrals) about potential noncompliance with tax law;
- Risk modeling from the revised Form 990;
- Related examinations — returns might be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit;
- Documents matching — returns might be selected for audit when pay or records, such as forms W-2 or Form 1099, don’t match the information reported; and,
- Certain claims for refund or request for abatement that require further review.