The prospect of being audited by the IRS is as unsettling to nonprofit leaders as to individuals and for-profit businesses. To assist nonprofit staffs and boards, as well as the tax preparers and attorneys who advise them, the IRS is sharing the training materials known as Audit Technique Guides (ATGs) it uses to guide its reviewers through looking at 501(c)(3) public charities and other types of nonprofit organizations. (Importantly, the guide specific to 501(c)(3) private foundations is not available but noted as “coming soon.”)
There are almost 30 guides available on everything from charter schools and public interest law firms to apostolic associations and black lung benefit trusts. All the guides are available for download in Adobe Acrobat PDF format. The ATGs were formerly included in the Internal Revenue Manual (IRM), but were removed from the IRM last month and issued as ATGs instead.
The guide on public charities is 44 pages long and begins with a purpose statement:
- outlines the procedures IRS auditors use to correctly determine the proper foundation status for organizations described in IRC Section 501(c)(3);
- provides guidance to auditors on determining and addressing the presence of inurement, private benefit, and excess benefit transactions; and
- discusses political and legislative activities, how auditors determine if they are present, and their effect on charities.
It examines in great detail how to calculate whether a 501(c)(3) is a public charity or a private foundation based on how its revenues are received and classified; situational examples are used and there is even a paragraph on the IRS’s perennial wiggle-room phrase: the “facts and circumstances” test.
If your organization isn’t familiar with Section 4958, also known as “intermediate sanctions,” the guide addresses the conflicts of interest, excessive compensation, and private inurement situations (transactions with a charity where someone other than the charity gets significant benefit to the point where the charity’s exempt purpose can be called into question) that are covered by the regulations.
At the end of the 44-page ATG, there is a hyperlink to a 12-page “Exhibits” PDF that might have as easily been included in the ATG itself, and which appears to be a more graphic illustration of some of the points covered in the guide itself.
While the audit technique guides are intended to benefit IRS staff, they also help tax preparers, advisors, and nonprofits know what the IRS is thinking about and looking at when considering audits of various types of tax-exempt organizations. What the guides cover provide great clues about where nonprofits should focus their compliance efforts.