Avoid an IRS Audit


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“There are some ways to substantially reduce the ‘risk’ of an IRS audit and also the risk of losing your tax-exempt status,” said Melanie Lockwood Herman, executive director of the Nonprofit Risk Management Center in Leesburg, Va. “The best preparation for an annual financial statement audit is staying on top of financial statement preparation year-round.”

National Council of Nonprofits Vice President Jennifer Chandler offers these tips:

  1. Make sure throughout the year to carefully record all revenue in, and all expenses out. Note dates, names of donors/payees, and amounts.
  2. Maintain copies of paid bills, deposit records and bank statements. File them in chronological order.
  3. Jennifer Chandler


    The more specific your nonprofit’s records are, the easier it will be for the audit team to compare financial statements to your records of the actual flow of funds.

  4. Pay particular attention to careful record keeping for donations: Keep records of charitable gifts received, and copies of thank-you letters sent to donors.
  5. Withhold income taxes from employees’ paychecks.
  6. Review the IRS form 990 prior to filing annually with the IRS.
  7. Nonprofits must use a donor’s gift for the purpose intended.
  8. Finally, regularly back up your computer! You don’t want to start preparing for the audit only to discover key data was lost in a power failure.

Back to main story "Nonprofits Must Have Books Examined"