On Feb. 5, the IRS issued Fact Sheet 2008-14, which explains the methods used to make sure that tax-exempt organizations comply with tax laws, with the main emphasis on audit examinations and compliance checks. The fact sheet also outlines the types of documents a revenue agent might request in the course of an on-site field examination and discusses some of the criteria for selecting organizations for examination or compliance checks. The IRS’s Exempt Organizations (EO) division is responsible for administering these procedures. A review of a tax exempt organization falls into two broad categories: (1) compliance checks; and (2) examinations.
A compliance check is a review to determine adherence to recordkeeping and information reporting requirements and does not directly relate to determining a tax liability for any particular period. EO specialists conduct the checks by corresponding with exempt organization representatives, inquiring about an item on a return or determining whether specific reporting requirements have been met or whether an organization’s activities are consistent with its stated tax-exempt purpose. The IRS will not examine books or records or ask questions regarding tax liabilities under a compliance check, but has the option of opening a formal examination. For more information, see Publication 4386, Compliance Checks.
An examination (“audit”) is a review of a taxpayer’s books and records to determine tax liability. It may involve the questioning of third parties and, for exempt organizations, determines qualification for tax-exempt status. EO conducts two different types of examinations: correspondence and field examinations.
Correspondence Examinations: limited in scope and focusing on only one or two items on a return, the examination is conducted through letters and phone calls with the organization’s representatives. If the issues become complex, or if the organization does not respond to a letter or call, EO may require the submission of records. EO may convert a correspondence examination into a field examination.
Field Examinations: more comprehensive and conducted at the organization’s place of business, there are two types – the Team Examination Program (TEP) and the General Program. TEP examinations are field examinations of large, complex organizations that may require a team of specialized revenue agents, and General Program examinations typically are performed by individual agents. The following documents typically will be requested:
(1) Governing instruments (articles of incorporation, bylaws, charter and amendments)
(2) Pamphlets and other printed literature describing the organization’s activities
(3) Forms 990 for the years before and after the year under examination
(4) Minutes of meetings of the board of directors and standing committees or councils, all books and records of assets, liabilities, receipts and disbursements, auditor’s reports, other federal tax returns filed, including employment tax returns and any related workpapers.
The revenue agent usually conducts a comprehensive interview and tours the organization’s facilities to gain a basic understanding of the organization’s purposes and activities. If disagreements between the revenue agent and the organization’s representatives cannot be resolved, the organization may pursue its case through the IRS appeals process. For additional information on the appeals process, see Publication 892, EO Appeal Procedures for Unagreed Issues.
Selecting Organizations for Examination or Compliance Checks
In its annual Implementing Guidelines, EO describes its proposed examination and compliance check activities for the year. To determine which organizations should be targeted, experienced specialists analyze information from Forms 990 and other sources (including media, Congress and general public complaints), resulting in the selection of a group of returns for examination or compliance check.
Complaint Process For Tax Exempt Organizations (FS 2008-13)
Fact Sheet 2008-13 discusses the review by EO of complaints alleging the abuse of tax exempt status. A complaint (“referral”) is any communication alleging that a tax-exempt organization is in potential noncompliance with the tax law. Complaints are received from the general public, members of Congress, federal and state government agencies, and other parts of the IRS. Referrals voluntarily may be made by submitting Form 13909, Tax-Exempt Organization Complaint (Referral) Form. EO revenue agents use a “reasonable belief” standard to determine whether EO should take further action, such as whether to examine an organization.