Article
Expansions to IRS audit teams could mean more audits for not-for-profits
Dec. 13, 2022 · Authored by Qi Wen Liang
The passage the Inflation Reduction Act of 2022 has the IRS set to receive $80 billion of funding over a 10-year period. An estimated $45.6 billion is designated to tax enforcement, which means more agents in an expanded audit department, additional legal and litigation support, and investments in investigative technology.
With more bandwidth, the IRS may set its sights on the not-for-profit sector. Here’s how you can prepare if your not-for-profit organization is subject to an IRS audit.
IRS audit trends for not-for-profits
The IRS Tax Exempt & Government Entities Division (TE/GE) issues a program letter annually that highlights compliance program initiatives and priority exam issues, with the compliance program for fiscal year 2023 set to be like that of prior years, focusing on the following:
Misclassified workers
Reviews will be more likely for worker classifications that reduce Federal Insurance Contributions Act (FICA) and income tax burden by misclassifying workers as independent contractors instead of employees.
A common red flag would be issuing both W-2 and 1099-NEC forms to an individual in the same calendar year.
Form 990-N issues
Form 990-N filers could be scrutinized to ensure they meet the $50,000 gross receipts eligibility threshold based on other filings, such as Forms W-2, 1099-MISC, 1099-K. Payments reported on those forms exceeding $50,000 could imply that the organization’s normal gross receipts could be potentially higher.
An organization’s tax exemption could be automatically revoked when Form 990-N is incorrectly filed for three or more consecutive years. Additionally, the IRS will conduct compliance checks to inform Section 509(a)(3) supporting organizations that improperly file a Form 990-N when they don’t meet eligibility standards.
Employees with over $1 million annual compensation
Organizations that pay over $1 million in compensation to at least one covered employee without reporting Section 4960 excise tax on excess compensation on Form 4720 could be prone to investigation.
The IRS has been sending compliance checks to organizations that reported compensation over $1 million on Form 990, Part VII but haven’t filed Form 4720.
Related sections
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.