The Tax Man Cometh: Types of Audits and How to Prepare

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The word “audit” can strike fear in even the bravest of .ORG leader’s hearts, conjuring images of stone-faced heavies in suits, lurking around corners, sifting through binders and boxes. Fortunately the reality is much less dramatic. Yes, there’s always the possibility that an audit by the U.S. Internal Revenue Service (IRS) or equivalent tax authority based in your .ORG’s country of establishment could occur. But there are other types to be aware of such as independent audits and culture audits. 

Should it happen to you, don’t stress! Audits are a public good, and provide an opportunity for your organization to grow. Let’s go through the main types of audits and how to best respond. 

(Remember: PIR does not offer tax or legal advice. Please consult an accountant or an attorney for guidance on managing audits specific to your .ORG.)

Let’s begin with …

The IRS Audit

If your .ORG operates in a financially responsible and ethical manner, any variety of audit—even the IRS-initiated kind—can be a valuable teaching tool, according to this piece by Madeleine Monson-Rosen of Mission Box. “Is your non-profit facing an IRS audit? Don’t panic,” she says. “Make the best of the situation—and be careful to learn from past mistakes to avoid repeating them in the future.”

According to Non-Profit Expert, an IRS audit is “…a review of a taxpayer’s books and records to determine tax liability, and may involve the questioning of third parties. For exempt organizations, an examination also determines an organization’s qualification for tax-exempt status.”

Mission Box explains how IRS audits fall into two main types:

  • Field audit. With a field audit, an IRS agent visits your facility, interviews staff and reviews documents. Your notification letter from the IRS may include details about an appointment with an agent.
  • Office or correspondence audit. With an office or correspondence audit, you’ll be asked to submit key documents to the IRS by mail. You won’t meet with an IRS agent.

Non-governmental audits can be a good way to show your .ORG takes its fiscal and mission responsibilities seriously.  These include:

Independent Audits

An independent audit is an organization-initiated in-depth review that can guide its strategic plan, cultural development, and operational budget. Many states require independent financial audits of non-profits and other charitable organizations in order to engage in fundraising. You can learn about these requirements in this piece by the National Council of Nonprofits. These audits require gathering significant amounts of information. If you’ve been staying organized throughout the year, it shouldn’t be hard to find and compile. The National Council of Non-profits offers an extensive guide to all things audit-related. Even if one isn’t required by law to conduct, .ORGs might consider …

Discretionary Audits

According to this piece by the Council of Nonprofits, there are good reasons to conduct an audit, even if you don’t have to: “Publishing an independent audit report on a non-profit’s website or providing the report to those who request it are examples of transparent practices that donors and the public have come to expect from charitable non-profits. Potential donors may want assurance that the charitable non-profit’s financial practices meet accepted standards.”

Again, audits can be a .ORG’s best friend: “It is a common misconception that audits serve primarily to uncover fraudulent activities, like embezzlement,” Hana Takagi writes for the Nonprofit Law Blog. “Audits rarely detect fraud, but auditors can provide non-profits with information, tools, and strategies to better protect against such occurrences.” 

Voluntarily releasing the results of a discretionary audit may help strengthen donor confidence by being transparent about how the organization is functioning well, and where there may be areas for improvement. Which leads us to another kind of audit…

Culture Audits:

According to this piece by the Association for Talent Development, “The culture audit is the tool to use to get at the substance of an organization’s culture so that the organization understands where and how to drive change toward the preferred culture.” Culture audits have become a more widely-practiced form of assessing workplace dynamics, relationships, strengths and weaknesses, and biases. While culture audits are not required, they can be very useful for cultivating a healthy environment to achieve a mission, especially if your organization is in transition, under new leadership, or working to diversify and empower its employees. 

More than assessing finances, culture audits require significant mental and emotional preparation and care to conduct. As Steve Bruce writes for ICAS, “A high level of tact and discretion is required when undertaking an audit of culture as the issues surrounding culture can be subjective, sensitive and often point to the most senior levels of the organization.”

The Institute of Internal Auditors offers tremendous resources for undertaking a culture audit, including a step-by-step practice guide

So, the next time you hear the word audit, don’t fear! Remember, there are different kinds of audits, and with proper preparation, each one can be important to the growth and success of your .ORG.


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