As a result of a National Research project the IRS has concluded that certain abuses may be taking place and has deemed it necessary to audit nonprofit organizations. Therefore, it is now more important than ever that tax-exempt entities ensure tax compliance with IRS regulations.
If your organization is selected for an audit, it would be helpful to designate a specific person to handle all communications. Ideally the staff member selected will be familiar with and/or have previous experience in dealing with the IRS. If you don’t have someone who is capable within your organization, you may want to hire an outside contractor, such as a CPA.
A couple of important things to remember during the audit process:
- When corresponding with the IRS, make sure all information is documented and ask them to provide any requests for information in writing.
- Be sure that all information you provide is consistent and accurate.
- Documentation between your organization and its attorneys may be protected from this process.
Several thousand tax-exempt organizations will be selected for audit. The IRS will be scrutinizing compliance within the area of employment tax reporting and withholding. Items that may fall under this umbrella include: officer compensation; worker classification; employee reimbursements; and fringe benefits. A couple of specific examples of potential errors that may get you into trouble include:
Employee Compensation and Fringe Benefits
The most important thing regarding employee compensation and fringe benefits is that they are valued and taxed appropriately. Ensuring the correct classification and withholding is imperative to avoiding penalties and interest. Furthermore the auditing process will be simplified should your records be maintained accurately. Keep in mind that they may ask you for information in regards to:
- Childcare assistance
- Employer provided vehicles
- Cafeteria plans
- Employee discounts
- And educational expense reimbursements
Employees vs. Independent Contractors
To avoid considerable repercussions, it is of the utmost importance that employees and independent contractors be classified correctly. Many nonprofits fail to categorize these workers appropriately and end up being forced to pay tax penalties. To help you differentiate between the two here are a couple of rules of thumb.
- The worker is an employee if:
- An agreement has been signed establishing employment with your organization
- They conduct business on your behalf at your location
- You reimburse them for out of pocket expenses, provide them with training, and pay them by the hour.
- You maintain direct authority over their work process.
- The worker is an independent contractor if:
- They are paid by the job.
- They maintain their own control of how the service is provided, with little input and/or instruction needed from you.
- They work at an off-site location.
It is crucial in this challenging economy that you are able to keep more of your money and not be forced to pay it in penalties to the IRS. In order to ensure your organization is able to pass an audit, you’ll want to focus on maintaining accurate records, abiding by current tax laws, and properly classifying those you employ. We hope to continuously provide this kind of information for you, and if you ever have any questions please don’t hesitate to give us a call.