Preparing for a Tax Audit, Help from the IRS

Whether you’re a nonprofit, a for-profit, or an individual, no one welcomes the prospect of a tax audit.  In an effort to assist with such a preparation the IRS has provided training tools referred to as Audit Technique Guides (ATGs).  These guides are available for 501(c)(3) public charities as well as other types of nonprofit organizations and are available in Adobe Acrobat PDF format.

According to the IRS, these ATGs are designed to provide guidance for IRS employees but are also useful to the nonprofits, as well as the tax advisors and preparers that work with them.  The guides propose specific analysis methods, explain business practices and terminology, and offer insight into common issues for certain types of organizations. 

The guide for public charities is a 44 page document that explores in detail how to determine if a 501(c)(3) is a public entity or a private foundation based on how its revenues are received and classified.  In the introduction it states that the purpose of the guide is to:

  • Outline the procedures IRS auditors use to correctly determine the proper foundation status for organizations described in IRC Section 501(c)(3);
  • Provide guidance to auditors on determining and addressing the presence of inurement, private benefit, and excess benefit transactions; and
  • Discuss political and legislative activities, how auditors determine if they are present, and their effect on charities.

An organization qualifies as exempt under IRC Section 501(c)(3) if:

  • It meets both the organizational and operational tests,
  • It does not permit earnings to inure the benefit of private individuals,
  • It does not engage substantially in legislative activities, and
  • It does not engage in any political activity.

Also addressed are the regulations that cover conflicts of interest, excessive compensation, and private inurement situations.  There is even a link on the final page of the guide that directs you to a 12 page Exhibit PDF that provides a more graphic illustration of some of the points covered.

Although this Audit Technique Guide was initially intended for the IRS to use, it can be more than insightful; helping to make sure you and your organization are as equipped as you can be to pass with ease.  PDFs of all of the ATGs can be found on the IRS website here.


(Compiled from “IRS Audit Guides Inform Nonprofits about Review Criteria” by Michael Wyland, Nonprofit Quarterly, website, and the Audit Technique Guide for Public Charities)


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