Is a “Desk Audit” Right for Your Organization?

Given the uncertainties in the regulatory landscape, many not-for-profit organizations are taking risk mitigation efforts to ensure there are no surprises if the IRS or another regulatory agency knocks on their doors. You may consider implementing these mitigation measures by performing a “desk audit.”

What Is a “Desk Audit”?

A “desk audit” or “mock audit” is a proactive measure not-for-profit organizations can undertake to help them prepare for potential scrutiny by the IRS, Attorneys General, or other regulatory agencies.  This simulated audit mimics the procedures and rigor of an actual audit, allowing not-for-profit organizations to identify and address compliance issues before they become problematic.

How Does It Differ From a Financial Statement Audit?

A financial statement audit is a retroactive measure that verifies the financial results are materially correct.  A desk audit is a proactive measure that focuses on compliance with the regulatory bodies that oversee your ability to qualify as a tax-exempt organization.  Instead of focusing on the recording of the number, the focus shifts to the activity behind the numbers.  Activities are reviewed to identify potential monetary penalties or risks to an organization’s tax-exempt status.

What Do We Look At?

Our approach is customized to your needs.  We work with you to understand your biggest concerns and focus on those.  Additionally, we look at risk areas you may not have identified and determine any potential areas of concern.  Some examples of what we evaluate include:

• Review public support test calculations (public charity) or required payout calculations (private foundation) for accuracy
• Identify potential unrelated business income revenue as a source of potential tax exposure
• Analyze grant expenditure files for alignment with industry best practices and compliance requirements (OFAC rules, SDN lists, taxable expenditures, etc.)
• Evaluate classification of employees versus independent contractors for proper payroll tax treatment
• Examine tax treatment of employee benefits to verify proper payroll tax withholding
• Verify compliance with state and foreign authorities for payroll registration, tax withholding, and charitable registration requirements
• Confirm donor receipts have all required elements to let a donor properly claim a charitable deduction
• Review reimbursement arrangements with disqualified persons for potential excess benefit transactions (public charity) or self-dealing issues (private foundation)
• Inspect federal grant award records for compliance risks, including cost allocation methodology, sub-recipient monitoring, and compensation allocations

Will This Be a Burden to Our Team?

Hopefully not!  While this will require some extra work by your team to gather information for our review, it won’t be nearly as burdensome as a full regulatory audit with multiple rounds of information requests.  If there are multiple areas you want us to explore, we can spread it out over an agreed upon timeframe. The goal is to be help your team mitigate risk so you can focus on your organization’s charitable mission.

Next Steps

If you are interested in exploring what a desk audit looks like for your organization, Clark Nuber can help you perform a desk audit, so please reach out! The benefits of a desk audit for exempt organizations are significant, especially in the current regulatory environment where things are constantly changing. This proactive approach not only helps avoid penalties and fines but also provides peace of mind knowing your organization is well-prepared to face any regulatory challenges that may arise.

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