For nonprofit boards and fundraising leaders, the risk of an IRS audit of your organization can feel like a back-office concern — important, technical and mostly confined to finance or outside counsel. That view is increasingly risky. The IRS’s FY25 Databook shows roughly a one‑third year-over-year increase in audits of tax-exempt organizations and a 160% year-over-year increase in the total amount of penalties assessed for excise taxes, tax-exempt organizations and trusts. In other words, the compliance environment is not simply noisy. It is measurably more active.
That matters because an IRS audit does not stay neatly inside the finance department (opens as a pdf). Although an IRS audit can end with no change, the data suggest that tax-exempt audits increasingly result in changes in tax liability, penalties and potentially revocation of exempt status. Even when exempt status is not revoked, the process can consume leadership attention and divert critical financial resources at a time when nonprofits face stiff fundraising headwinds. For nonprofits that depend on donor confidence, foundation grants, government contracts or public trust, that is not just a compliance problem. It is a leadership and revenue problem.
Connecting Fundraising and Tax Compliance
The first mindset shift is to stop thinking of Form 990 as a form and start treating it as a public credibility document. Because Form 990 is publicly available through the IRS’s Tax Exempt Organization Search Tool, nonprofit leaders should treat it as part of the organization’s public accountability record, not merely as an annual tax filing. Potential donors and board candidates may compare the return against the organization’s financial statements, governance disclosures and public-facing mission materials. Unexplained inconsistencies across those sources can undermine confidence before any IRS contact occurs.
Nonprofits should not wait for an IRS audit notice to get their affairs in order. According to IRS guidance, an audit may review whether the organization timely filed required returns, whether those returns were complete and accurate, whether activities were consistent with the organization’s stated exempt purpose, whether employment tax and Form 1099 obligations were met, whether unrelated business income tax was properly paid and whether disclosure requirements were satisfied. This means nonprofit leaders should assume the IRS audit lens will be organizational, not merely mathematical.
This has a direct connection to fundraising strategy. A donor’s first question may be emotional — “Do I believe in this mission?” — but the second is often practical: — “Can I trust this organization with my money?” Form 990, audited financial statements, grant reports, board minutes and program metrics all help answer that question. When those records are aligned, compliance supports fundraising. When they are inconsistent, fundraising staff may be left explaining gaps they did not create.
This is particularly important for organizations with government funding, restricted grants or fiscal sponsorship arrangements. The Treasury Department recently announced plans to revise Form 990 with a focus on government contracts and grants. Nonprofits that receive public funding should maintain records that show how funds were used and whether spending complied with any applicable restrictions.
IRS Audit Readiness: What Leaders Should Do Now
While it is impossible to prepare for every conceivable question or IRS document request, there are a few ways in which nonprofit leaders can prepare in advance for potential IRS scrutiny.
Build a Cross-Functional Form 990 Review Process
The accountant and finance team cannot be the only people reviewing the form. The CEO, chief financial officer, program leadership and board or audit committee should confirm that the form’s program descriptions, revenue classifications, governance disclosures and expenses are consistent and supportable. The review is not about polishing language for marketing purposes. It is about making sure the organization can substantiate what it projects publicly. After all, compliance reviews, contemporaneous documents and common sense help keep the IRS at bay.
Create an Audit-Ready File Before There Is an Audit
The IRS’s tax-exempt audit procedures provide nonprofit leaders with a helpful tool to assess which documents should be included in the file. For example, the IRS may request:
- Governing documents (articles of incorporation, trust indenture, bylaws, code of regulations, etc.), including any amendments.
- Exemption applications and IRS determination letters.
- List of names and addresses of all officers, directors and trustees, including compensation, if paid.
- Board and committee minutes.
- Copies of newspapers, newsletters, brochures, magazines, pamphlets and other printed literature.
- Financial statements, including general ledger, cash receipts and cash disbursement journal, accounts payable and accounts receivable journals, subsidiary ledgers, and a chart of accounts.
- Copies of reports made to other federal agencies.
At a minimum, a practical audit file should include those documents. The goal is not to predict every IRS question. It is to reduce the scramble — and time and expense — when the IRS walks in the door.
Review Revenue Streams Through Both a Mission and Tax Lens
Organizations should test whether they properly identified unrelated business income and whether a Form 990-T was or is required. New or expanded revenue streams — sponsorships, advertising, rental arrangements or fee-for-service programs — should be reviewed before they scale. A fundraising idea that sounds mission-related in conversation may still need tax analysis if it operates like a regular business that is not substantially related to the organization’s exempt purpose.
Document Governance Decisions While They Are Happening
Executive compensation should be supported by comparable compensation data, approval by disinterested decision-makers, and written records. Policies addressing conflicts of interest, whistleblowers, and document retention are evidence that leadership is exercising oversight of the organization.
Do Not Wait for an IRS Audit Letter to Align Your Story
Once the IRS sends an audit letter or information document request, there is little room to reconstruct missing records, which is why nonprofits should prepare well before any audit begins. Yes, preparing in advance saves time and money, but it reduces well-documented stress (opens as a pdf) that accompanies an IRS audit.
Increased IRS audit activity and penalties should not cause nonprofit leaders to retreat from bold missions or important public work. Instead, they should push leadership to make compliance part of organizational strategy. The strongest defense in an IRS audit is the same foundation that supports donor trust: clear records, consistent reporting, disciplined governance, and a year-round habit of asking whether the organization’s documents tell the same truthful story as its mission.
The preceding content was provided by a contributor unaffiliated with NonProfit PRO. The views expressed within may not directly reflect the thoughts or opinions of the staff of NonProfit PRO.
