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Claiming nonprofit charity status: Are you ready for an audit?

How important is the nonprofit sector to the economy? Pretty important, if you gauge things by data compiled by a variety of organizations. In Minnesota alone, nonprofits are estimated to be responsible for the employment of more than 14 percent of the workforce. Nationally, estimates are the sector contributes close to $890 billion to the overall economy.

When you see figures like that, you appreciate why the IRS might want to consider keeping a close eye on the players in this market. Tax-exempt status isn't something the government grants blindly. If an audit shows that a charitable organization failed to operate in the public interest, it could mean loss of status and trigger tax disputes that require spending scarce resources.

Ounces of prevention

Nonprofits come in all sizes. The largest ones are probably most likely to be targeted for an audit, but experts in the sector note that size doesn't really matter. At the same time, those familiar with the sector know that there are some common mistakes in process that, if addressed now, could alleviate audit concerns later.

Failure to track restricted gifts

Nonprofits don't operate without donations. Grants sought and awarded, however, often come with strings attached. Too often, nonprofits don't set up practices to make sure that the money is spent according to restrictions attached.

Operating in the 20th century

We’re in the 21st century now. The digital age makes it possible to assemble critical documents in a hurry, but only if a system of digital archiving is in place. If an audit begins and documents are demanded, will it mean rifling through scattered files? Wouldn't it be easier to have everything on computer?

Loose approvals management

In an audit, the officials will want to know who signed off on what expenditures. Here again, stepping into computer-assisted document management can help.

Losing sight of cash flow

With volunteers doing most of the work, it can be easy for a nonprofit to ignore cash flow until issues develop into a major whirlpool of trouble. This can be avoided if leaders maintain regular monthly checks on finances as part of business.

The work of nonprofits is important; too important to be derailed by lax oversight. If serious issues involving the IRS do arise, work with skilled legal counsel.

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