How Your Form 990 May Trigger an Audit

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AAFCPAs would like to make our clients aware that the IRS is now taking a data-driven approach to reviewing the Form 990, Return of Organization Exempt From Income Tax, to scrutinize governance, accountability and oversight of exempt organizations.   The IRS’s Exempt Organizations (EO) compliance specialists are now using data queries to better focus their examination plans on areas or issues where there may be greater risks of non-compliance.

IRS Exempt Organization Focus Areas

Sunita Lough, the IRS tax-exempt/governmental entities (TE/GE) commissioner, recently released a list of priorities.  The TE/GE has identified the following five significant compliance issue areas related to exempt organizations:

  1. Exemption: Issues include non-exempt purpose activity and private inurement;
  2. Protection of Assets: Issues include self-dealing, excess benefit transactions, and loans to disqualified persons;
  3. Tax Gap: Issues include employment tax and Unrelated Business Income Tax liability;
  4. International: Issues include oversight on funds spent outside the U.S., including funds spent on potential terrorist activities, exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR/FinCen Form 114) requirements; and
  5. Emerging issues: Issues include non-exempt charitable trusts and IRC 501(r).

The most common IRS Form 990 issues that may trigger an audit include:

  • The Form 990 is incomplete, such as missing schedules or parts of schedules, name/FEIN mismatch, or lack of signatures;
  • The Form 990 information is inconsistent;
  • Unrelated business income (UBI) issues – The Form 990 reports UBI, or a mortgage and rental income, but the entity does not file a Form 990-T for Unrelated Business Income (UBI);
  • The Form 990 reports a significant diversion of assets (indicating embezzlement or theft), indicated by answering Yes on 990 Part VI, line 5;
  • The Form 990 reports political campaign activity (Schedule C);
  • The Form 990 reports excess benefit transactions with disqualified persons (such as unreasonable officer compensation);
  • The Form 990 reports fees for non-employee services (Part IX, lines 11a through 11g), but does not report that any 1099’s were issued (part V, line 1a); or
  • The Form 990 reports that outstanding amount of loans to, and other receivables from, disqualified persons do not decrease from the prior year/prior 990 (part X, lines 5-6).

In addition, the following are common Form 990 errors found by the IRS:

  • Entities not reporting required information regarding related organizations;
  • Entities not properly reporting joint venture activity; or
  • Entities not properly reporting foreign activity; this includes investments, fundraising, travel, programs, and grants (The IRS looks at Schedule B for donors that donate from foreign countries.).

AAFCPAs reminds our nonprofit clients to make certain the Form 990 is complete and accurately reflects all the required information.  As a best practice, nonprofits should make the 990 available to the entire Board of Directors for review before filing (also a question on Part VI, Sec. B, line 11).  Management and the Finance Committee should closely review the draft Forms 990 and PC, paying special attention to the common issues and errors, and changes from prior years.

Consult with AAFCPAs before undertaking significant new programs, or entering into transactions with Board members to find out how these may affect your Form 990 reporting and tax-exempt status. If you have any questions, please contact your AAFCPAs Partner or Robin Kelley at 774.512.4011, rkelley@nullaafcpa.com.