IRS Audit Survival: Is Your NGO Ready for the Public Support Test?

Running a nonprofit is hard enough without the looming fear of an IRS audit, right? You’re already focused on making the world a better place, managing donors, and juggling the endless stream of tasks that come with nonprofit work. But here’s the reality—failing the Public Support Test can land your organization in hot water, and the IRS isn’t shy about checking in. So, how do you make sure your charity is ready if the taxman comes knocking?

Let’s break it down.

What’s the Deal with the Public Support Test?

Think of the Public Support Test as a way for the IRS to make sure that your nonprofit is truly supported by the public, not just a few deep-pocketed donors. In simple terms, at least one-third of your nonprofit’s funding needs to come from the public (under Code Sec. 509(a)(1)).

If your nonprofit is mainly funded by programs or sales (like a museum or performing arts center), there’s another test—509(a)(2)—that balances both donations and program revenue. If you pass either test, you’re in the clear as a public charity. Fail it, though, and you could be reclassified as a private foundation—a whole different ball game with a lot more rules and taxes.

What Triggers an IRS Audit?

Nonprofits generally aren’t singled out for no reason, but certain red flags can attract attention:

• Inaccurate Reporting: If your Form 990 looks fishy, or the numbers don’t add up, it could trigger an audit.
• Big Donor Dependency: Relying heavily on one or two donors may tip the balance, causing you to fail the Public Support Test.
• Shifts in Funding: Sudden changes in where your money is coming from can also raise questions.
• Messy Calculations: The IRS will look at whether you’re properly accounting for things like unusual grants and “excess contributors” (more on that later).

What the IRS Will Focus On During an Audit

If your nonprofit does get flagged for an audit, the IRS will dive into a few key areas:

• Public Support Percentage: Did you do the math right? Are you over the one-third threshold for public funding?
• Income Source Classification: Did you accurately report where your funds came from—donations, grants, sales, etc.?
• Unusual Grants: Some one-time large grants are excluded from your public support total, but only if handled correctly.

Bottom line: If you don’t have your numbers in order, the IRS will find out.

How to Prepare for an IRS Audit

Now that we’ve covered what triggers an audit and what the IRS will focus on, let’s talk about how to get your nonprofit prepared:

• Keep Detailed Records: This might sound boring, but it’s crucial. You need to have clear, accurate records of all donations, grants, and income sources over the past five years. That way, if the IRS comes calling, you can show them exactly where your funding comes from.
• Check Your Math: If your public support percentage is hovering close to the 33.3% threshold, double-check everything. One small mistake could cause a big problem.
• Review Schedule A: Schedule A of Form 990 is where the magic happens. This is where you detail your public support percentage. Make sure it’s filled out accurately every year.
• Call in the Experts: If all this sounds like a headache, don’t worry—this is where G&S Accountancy comes in. We specialize in nonprofit tax compliance and can help you avoid costly mistakes. Whether it’s reviewing your books or helping you understand how to meet the Public Support Test, we’ve got your back.

What Happens if You Fail an IRS Audit?

Let’s say worst-case scenario, your nonprofit fails the Public Support Test during an audit. What happens next?

• Reclassification as a Private Foundation: This is a big deal. Private foundations have stricter rules, more reporting requirements, and, unfortunately, more taxes.
• Excise Taxes: If you’re reclassified, you could be hit with excise taxes on your investment income.
• Administrative Headaches: Foundations are required to distribute a certain percentage of their income each year, and the rules for managing conflicts of interest (self-dealing) are far stricter.

In other words, failing the Public Support Test can complicate things quickly. Avoid the headache by staying compliant from the get-go.

How G&S Can Help You Stay Audit-Ready

At G&S Accountancy, we know nonprofit tax rules inside and out. We help charities just like yours navigate the tricky waters of IRS regulations, so you can focus on what matters—your mission. Here’s how we can help:

• Audit-Ready Recordkeeping: We’ll make sure your records are clear, organized, and compliant.
• Public Support Calculations: We’ll handle the calculations for you, making sure you meet the IRS’s criteria year after year.
• Form 990 Preparation: Let us take the headache out of preparing your annual tax forms. We’ll ensure your Schedule A is spot-on.
• IRS Audit Representation: In the unlikely event that you do face an audit, we’ll be right there by your side, guiding you every step of the way.

Frequently Asked Questions

 1: What is the Public Support Test, and why is it important?

The Public Support Test is what keeps your nonprofit classified as a public charity. Essentially, it ensures that at least one-third of your funding comes from the public, not just a few large donors. Passing this test means you avoid being reclassified as a private foundation, which has more taxes and stricter rules. It’s a big deal!

2: What triggers an IRS audit for nonprofits?

Audits can feel scary, but they’re usually triggered by a few red flags. Things like inaccurate Form 990 filings, relying too much on one or two major donors, or errors in your public support percentage can all raise the IRS’s eyebrows. Keeping your numbers clean is key.

3: How can we avoid making mistakes in our public support calculations?

The simplest way? Let us handle it! At G&S, we double-check everything, from donations and grants to unusual contributions, to make sure you meet the IRS’s criteria. No guessing games here—just solid math that keeps you compliant.

4: What should we do if we get audited?

First, don’t panic! With G&S by your side, you’ve got nothing to worry about. We’ll walk you through every step, from gathering the right records to representing you in front of the IRS. It’s always better to have a pro in your corner, and we’ll make sure you’re fully prepared.

5: How can G&S Accountancy help keep our nonprofit compliant year-round?

We’re more than just tax preparers. At G&S, we help you with Form 990, maintain detailed records, and regularly review your financials to ensure you’re on track with the Public Support Test. Plus, we’re always here year-round—not just during tax season!

Don’t let fear of the IRS keep you up at night. With G&S Accountancy in your corner, you can rest easy knowing your nonprofit is in good hands. Contact us today to get started!