At the IRS, does anyone really read Form 990s, 990-EZs, and 990-PFs? Interestingly, the first level reader is apparently not a human . . . but an IRS computer. Those who prepare 990 filings should take notice because their mistakes could trigger an IRS audit.
The IRS warns of this in its March 19th report, which references improvements to its “case selection modeling technique” for reviewing Form 990 filings. Quantitatively, the IRS explains that its filters singled out 1,505 returns in the past fiscal year, with 83% being found to require changes.
Overlooked and inconsistent responses seem the most likely to create problems for tax exempt organizations. Consider, for instance, the executive compensation disclosures that Form 990s require under Line 15 of Part VI, as well as under Schedule J (if applicable). Both relate to whether compensation decisions have been made in a manner that qualifies for a rebuttable presumption of reasonableness based on satisfying the requirements set forth in Treasury Regulation §53.4958-6. Inconsistent responses have been known – or suspected – to trigger audits.
The following checklists provides comprehensive tips, as well as suggestions for avoiding audit triggers:
- Common Errors on Form 990 That Can Result In IRS Penalties (McRee CPA)
- Common Mistakes in 990 Preparation (Wegner CPAs, 2016)
- Common Errors on Form 990 Filings (BKD CPAs 2014)
Here are two final suggestions. First, avoid guesswork or ambiguities in your 990 filings. Full, careful disclosure usually provides the best response to a filing question, and serves as the best defense if IRS questions later arise. Second, don’t be afraid to seek professional input in cases of doubt (or, occasionally, for peace of mind). It is better to have your CPA or attorney find your stumbles, than to have a programming filter trip you into an IRS audit.