There have been many stories in the news lately about certain types of nonprofits (social welfare organizations) being targeted for IRS audits due to their conservative political orientation. If the IRS singled out anyone to audit because of politics, it was wrong--and it may qualify as a "scandal."
However, the real scandal is that hardly any nonprofits of any type ever get audited by the IRS. The odds of any nonprofit being audited by the IRS in any given year are incredibly low. In 2012, for example, it examined only 10,743 of the 798,903 returns filed by tax-exempt organizations in 2011. Thus, only about 1.3% of all nonprofits filing returns were audited. In 2011, the odds of being audited were about the same: 11,699 of 858,865 returns filed in 2010 were audited, for an audit percentage of 1.3%.
The chances of a nonprofit losing its tax exemption due to IRS action are even smaller. In one recent year, for example, a total of nine revocations were made--that’s nine out of over one million nonprofits. There’s probably a better chance that a nonprofit’s office will be hit by a meteor than lose its tax exemption.
Why the low audit rate? Because the IRS lacks the resources to conduct more audits. A few years ago the IRS created an Exempt Organizations Division to supervise nonprofits. It has less than 900 employees. There are over 1.5 million nonprofits in the United States. You do the math.
Because of the lack of staff, the Exempt Organizations Division has increasingly come to rely on computer-generated correspondence audits that are conducted by mail and are much more limited in scope than full-scale audits. It also conducts "compliance checks" in which an IRS employee contacts a nonprofit to ask about specific issues. However, no books or records are examined and there are no question about tax liabilities. These kind of checks are commonly referred to as "soft contacts."
To find out more about taxes and your nonprofit, see Nolo's book, Every Nonprofit's Tax Guide.