What to Expect from an Audit

A Chapter in Mastering Foundation Law:
The Council on Foundations Compendium of Legal Resources

What to Expect from an Audit CoverThis chapter address what foundations should expect from an audit. Nonprofits, including private foundations, are bracing for an uptick in audit activity from the Internal Revenue Service (IRS) as it puts new systems online to select returns for audit based on computer algorithms. The chapter describes the IRS audit process for exempt organizations, including private foundations; highlights current areas of enforcement focus; and discusses the value of formal legal opinions for private foundations and their managers.

This chapter is divided into six different parts:

IRS Enforcement in the EO Sector in General

Part One gives a general overview of how the IRS handles exempt organization examinations.

The Pre-Examination Stage

Part Two outlines various elements of the pre-examination stage including the IRS’s selection of organizations to audit and the types of IRS audits (the office/correspondence examination program, field audits, and compliance checks).

Examination Stage

Part Three reviews the examination stage including: the commencement of the audit, the auditor’s objectives, the foundation’s objectives, completion of the examination, closing agreements, and penalties and interest.

Options for Appeal of an Adverse Determination

Part Four describes the options for appeal of an adverse determination by addressing protests to the IRS appeals office, petition the tax court, suing for a refund, declaratory judgment, fast-track mediation, and retroactivity of an adverse determination.

Technical Advice

Part Five highlights the process for obtaining "technical advice" which can be requested by the foundation or the IRS during the appeal stage.

Value of Formal Written Opinions

Part Six concludes with the value of formal written opinions for private foundations by looking at IRC §4941, §4942, §4944, and §4945.