Referrals are reviewed by a group of managers, who decide whether an audit is appropriate. The IRS conducts additional research when it receives a referral before opening an audit and does not take referrals at face value.
Preparing for audit
The association manager and the HOA’s representative are well advised to review the records in advance before the IRS auditor arrives. An experienced HOA representative is often valuable at this point. Hiring an independent HOA representative can provide an independent review before the audit starts. Knowing as much as possible about potential issues the IRS may raise helps to prepare for the arguments.
Additional information is provided by the IRS to explain their process at this web-address on the irs.gov website: http://www.irs.gov/Charities-&;-Non-Profits/Exempt-Organizations-Audit-Process
The most common issues that come up in audits of a tax-exempt HOA include unrelated business income, employment taxes, unfiled returns, and compliance with the permitted activities. The IRS office conducts a lot of employment tax audits, and may request an IRS specialist to come into the case.
An organization’s tax counsel is well advised to periodically peruse its website to check on the accuracy of information provided and claims being made. Particularly for Code Secs. 501(c)(4) tax-exempt organizations, it matters what is on the website, and the organization needs to take responsibility for it.
The revenue agents prepare for an audit by looking at what triggered the audit, looking at the taxpayer’s website, conducting Internet research to look for articles on the taxpayer, and studying the organization’s tax return. The agent will focus on what the organization does and whether its activities have changed since it began and will scrutinize the numbers on the form.
Amended Returns
Taxpayers filing an amended return generally do not increase their chance of being audited. At a 2012 presentation to a continuing education seminar, an IRS manager said it depends on what item is being amended but, in his experience, an amended return does not automatically trigger an audit. Another IRS revenue agent (exempt organizations) at the seminar said the IRS probably does not have the resources to audit every amended return.
If a taxpayer is chosen for an audit it is better not to file an amended return after the audit starts. Chances are that the audit group will not get the amended return, and the filing will create confusion. It is better to discuss any proposed change with the revenue agent conducting the audit.
Conducting the audit
When the auditor arrives for an in-person audit, they want to conduct an initial interview with an officer of the organization. The association is often wise to have an attorney or CPA there as the HOA’s representative.
Auditors want to tour the organization’s office with an individual who is knowledgeable about its operations and readily available to answer questions. The association is often wise to have the auditor prepare a written information document request (IDR) instead of allowing general questions of management staff. The IDR can be submitted to the attorney or CPA that is the HOA’s representative for a written response.
The tour allows the revenue agent to observe the facility, operations and activities of the organization and to refine the scope of the examination. It helps the agent understand how the organization's activities further its exempt purposes.
Often they develop new questions and find more things to examine because they get the casual information a non-professional or inexperienced employee may provide as the auditor tries to chat with them.
Some auditors rely on standardized IDRs. Others that are more knowledgeable make very focused requests, with one issue per IDR.
Some IDRs are clear; others may be overly broad; and responding comprehensively may be burdensome. The HOA’s representative can talk to an IRS manager if the HOA has a problem with the IDR.
During a field audit, the auditing revenue agent will review requested items they receive.
Open communication between the IRS agent and the HOA’s representative is important. When the IRS requests a particular document, there is probably an issue lurking behind the request. So, eventually, the IRS auditor will want to discuss that issue with the HOA.
Audit Results and Dispute Resolution
In a general program audit, attempted resolution may not come until the end, at a closing conference. The issues should not be a surprise. A HOA’s representative who is unclear about the issues should ask the agent, and the agent should identify the issues.
The HOA can expect changes and proposed additional taxes. Generally, the auditor can find something to disagree with. “No change” audits are becoming more rare.
The IRS will generally assess penalties because the association owes additional taxes. The IRS provides a notice of the proposed changes plus penalties, and gives the taxpayer an opportunity to argue good faith and reasonable cause for the additional taxes. Generally, the IRS tries to be reasonable and when a taxpayer makes an error and confesses, the IRS may be more lenient on penalties.
The IRS will try to resolve the audit through the auditing revenue agent’s report, rather than a more time-consuming closing agreement. However, fast-track mediation is available instead of the normal process and may bring an expedited closing agreement.
If the issues are not resolved, the taxpayer can file a protest and ask IRS Appeals to look at the case. The IRS agent will read the protest and may file a rebuttal. The HOA’s representative can request a copy of the rebuttal, but the IRS does not always provide it.
If the IRS has enough information on an issue, it will take an aggressive position in the audit. Issues do not just go away.
