Legal Audits pt.1

Legal audits usually serve as an overview of your organization’s non-financial compliance, governance, and risk management issues. Tax-exempt organizations generally consider having a legal audit when new management is in place and they want to start with a clean state, avoiding any costly mistakes. Typically, a standard legal audit will review the following key areas…

Corporate Status
By incorporating a nonprofit or tax-exempt organization, you protect your directors, officers, and members from personal liability. But, to enjoy the benefits of incorporating, your corporation must be in good standing. To review corporate status, you most likely need to provide

  • Bylaws
  • Corporate filings
  • Articles of incorporation

These items are to support that your tax-exempt organization operates in a manner consistent with the law and governance.

Chapters and Affiliates
If your tax-exempt organization has chapters or affiliates, then your bylaws should be explicit about the authority to create chapters. There should also be some form of agreement like a charter or license in place that outlines the term of the relationship.

Governance Policies
Because of the IRS’ encouragement of certain policies, tax-exempt organizations and nonprofits are making their policies and procedures more formal. The Form 990 even references a variety of governance policies and requires your organization to reveal if they’re implemented.

It would be in your best interest to review these governance policies regularly. The audit will consider about four things:

  • Which policies exist
  • Whether policies are reasonable 
  • If additional policies make sense for the organization 
  • Whether policies are consistent with existing practice

Tax-Exempt Status
An audit for your tax-exempt organization will undoubtedly review your tax-exempt status. The prime consideration is to see if your organization is properly identified in regard to its tax-exemption and public charity status. The review will also consider if your organization’s activities remain within the scope of its ruling.

You’ll need to provide your

  • Previous Form 990’s
  • IRS Determination Letter
  • Application for Recognition of Exemption

Any changes made to your governing documents or sources of support, programs, or purposes must be reported to the IRS when you file your next Form 990.

Other Federal Tax Matters
The review of your federal information and unrelated business income tax returns is important because forms of that nature, such as the Form 990, are publicly available. Legal analysis of your tax forms focuses on the accuracy of your information shown on your return. That information is considered along with other information from the legal audit and the overall presentation of your return.

We’ll take a short break here as to not to overload you with all this tax goodness. Honestly though, it’s a good bit of dense information to grasp an understanding of; however, this blog helps to clarify a few things. In the next blog, we’ll conclude with the rest of the key areas involved in a legal audit.

Remain in compliance with the IRS and your own tax-exempt organization governance by e-filing your tax-exempt returns with Express990. Our service provides a mini-audit with the built-in error check that reviews your return for errors before you transmit to the IRS.

Expert help is available through step-by-step instructions and with live professionals at our office in Rock Hill, South Carolina. Contact us at (704) 839-2321, Monday through Friday from 9am to 6pm Eastern Standard Time; or, email us anytime, 24/7 at [email protected].

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