On Monday, we posted an article from the December issue of Blue Avocado about asking prospective board members the right questions. This month’s issue also features an account of a nonprofit board member who was notified by the Internal Revenue Service that his nonprofit was selected for an audit.
While only a small percentage of nonprofits are annually selected by the IRS for audit, it’s not unheard of for a youth soccer organization to be selected for audit by the IRS or even a State of Washington agency (such as the Department of Revenue, Department of Labor & Industries, or the Employment Security Department). The best offense is a good defense and keeping accurate records is a major step towards protecting your organization’s tax-exempt status should you be audited.
This is especially important because board members can be found responsible for outstanding balances in some cases. Earlier this year, Nonprofit Quarterly published an article outlining some of the risks for individual volunteer board members should their nonprofit fail to pay withholding taxes to the IRS. It’s common for Clubs and Associations to work with employees and independent contractors (coaching staff and referees may fall into either group), which may mean that your board members could be personally contacted by the IRS for repayment of delinquent tax payments.
Protecting yourself as a board member during an audit is just one example of why it is so important to follow financial best practices. In addition to the guidelines laid out in the Blue Avocado article, the IRS also publishes a Compliance Guide for 501(c)(3) Public Charities, which gives an overview of the types of records that tax-exempt organizations should keep and other best practices for accounting, governance, and tax filings.
Read the Blue Avocado article and take a look at the IRS compliance guide to see how prepared your board is for an audit. If you aren’t sure who has the key organizational documents (articles of incorporation, bylaws, IRS exempt status letter, etc) or where the board meeting minutes are kept, your next board meeting might be a good time to talk about it.