Form 990 IRS Audit Trends
By Sarah Knight, CPA, HoganTaylor Tax Manager
Last year, the Internal Revenue Service announced that publicly available data on electronically filed Forms 990 will become available for the first time in machine readable format. Previously, the Form 990 data was only available in image files. Over 60 percent of all Form 990 returns are electronically filed. In addition to this data being provided to the public in a new format, the IRS is also using this data to inform their audit process and assist in making taxpayer selections for audit. Their goal is to identify and address existing and emerging high risk areas of noncompliance by running various queries on the data. Since implementing this new methodology, the IRS is claiming a 90 percent+ change rate on examinees selected through this process.
The Tax Exempt and Government Entities FY 2017 Work Plan, updated on March 8, 2017, estimates a 10 percent increase in exams. Which would mean approximately 7,000 total returns will be examined. However, the number of taxpayers who are examined is expected to increase as well. To read the full 2017 Work Plan, visit irs.gov.
In addition to data query selection methods mentioned above, the other most common factor used by the IRS to select taxpayers for exam is by referral. The top three most common referral sources are from current or former employees, board members or managers, and referrals from the public. The IRS also looks at other various public sources of information such as media reports, the taxpayer’s website and related organization’s websites.
What IRS queries might trigger examination?
- Reporting mortgage on Part X and rental income on Part VIII, but no 990-T filing. This could be evidence of missed unrelated business income on debt-financed property.
- Failure to file a complete return. This might include missing schedules or sections, mismatching name and EIN, or returns lacking a proper signature.
- Answering “Yes” to Part VI, Line 5, that a significant diversion of assets has occurred or been uncovered in the filing year.
- Answering “Yes” to Part IV, Line 3 and/or Schedule C, Part I, that prohibited political campaign activity was undertaken by a 501(c)(3) organization.
- Answering “Yes” to Part V, Line 3a that the organization had unrelated business gross receipts in excess of the filing threshold, but no 990-T was filed.
- Answering “Yes” to Part IV, Lines 25a or 25b for excess benefit transactions with disqualified persons with incomplete detail on Sch. L or no Form 4720 filed.
Some areas of Form 990 deserving extra attention:
- Schedule R – Related Organizations and Unrelated Partnerships
- Schedule L – Transactions with Interested Persons
- Public Support Tests and Unrelated Business Income
- Governance/Management and Compensation Reporting
With the wealth of data now available to the IRS and the general public, substantial focus should be placed on accuracy and completeness of filed tax returns. Taxpayers should work with tax preparers who have significant experience in the Nonprofit industry.