Have you heard that the IRS plans to audit 6000 businesses in the next three years? What are they looking for (besides your money)?

All industries, including non-profits, can be scrutinized with a focus on worker classification, fringe benefits, reimbursed expenses and officer (owner) compensation. Unlike traditional audits, these National Research Project (NPR) audits are meant to gather extensive data that can be used for many purposes, including calculation of the so- called tax gap. The IRS claims that approximately $300 billion goes unreported or underreported in the four federal employment tax areas: Social Security, Medicare, Federal Unemployment Insurance (FUTA) and personal income tax.

These audits are a priority for the IRS, which means they will move quickly. Before the IRS arrives here are some measures you can take to minimize your risk:

• Get your house in order: organize documents, key players, and perform an internal audit. If audited, communication with the IRS should be centralized and with an eye toward supportive documents and facts whenever possible;
• Review and understand the independent contractor role, if any, at your organization;
• Maintain a separate file with invoices, contracts, licenses, etc. for each independent contractor;
• Understand the fringe benefits provided to all employees(e.g., discounts, educational assistance, moving expenses, accident and health benefits, lodging, meals, transportation);
• Review personal and business expenses and which are being reimbursed. Personal expenses are usually taxable as wages—check with your accounting department.
• Define officer/owner job responsibilities: the CEO may also oversee marketing, accounting, HR, trash removal. In order to ascertain reasonable compensation, the IRS needs to know what the job entails.