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Audit Selection for Nonprofit Organizations

Prior to 2016, the IRS would subjectively select nonprofit organizations for audit based on specific types of organizations they felt were most risky (e.g. hospitals and colleges).  Beginning in 2016, that all changed.  The new audit selection method means you may be more likely to undergo IRS scrutiny.

The IRS now uses data driven analytics to select nonprofits for audit.  Under this method, each Form 990 is electronically scanned for approximately 200 different analytics.  The more analytics resulting in red flags, the higher the likelihood of an audit.  In addition, the IRS also pays attention to public requests (e.g. complaints by an unhappy donor over the use of their funds or a disgruntled employee).

Although the analytics used have not been publicly released, here are a few examples of items experts believe are triggering red flags:

  • Inconsistent reporting of information – e.g. program expenses reported in Part III do not agree to amounts shown in Part IX
  • Questions marked “yes” in Part IV have no corresponding supporting schedule
  • Schedule L related party transactions exist, but the organization does not have a conflict of interest policy
  • Contribution revenue is reported; however, no fundraising expenses are included in the return

What does this mean for you?  The IRS is focused on compliance and accountability, and the data analytics performed are fail/no fail tests – the significance of the item is not necessarily considered.  As such, completeness and accuracy of your Form 990 is increasingly important.  If your Form 990 is being manually prepared and/or being prepared by someone not intimately familiar with the over 100 pages of IRS instructions, it may be time to consider hiring an expert to reduce your chance of an IRS audit. Call the Ketel Thorstenson Nonprofit Team today with any audit services or accounting questions whether you are in Rapid City or anywhere in the Black Hills region.

Jean Smith

Jean Smith

CPA, Partner at Ketel Thorstenson, LLP
Jean joined Ketel Thorstenson, LLP in August of 1994 with the motivation to make the audit experience a positive one for clients. In November of 2005, she was named a Partner in the firm. She specializes in audits of non-profits, financial institutions, tribal organizations, and closely held commercial entities.
Jean Smith

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