If you run a nonprofit organization, you may be selected for an Internal Revenue Service (IRS) audit at some point. An audit may be the result of random selection or of a specific trigger, such as compensation issues or expense discrepancies. Regardless of the reasons, you should be prepared to explain your practices to the IRS. Here are a few policies which a nonprofit should have in place:

• Conflicts of interest – A conflicts of interest policy is important to ensure that a nonprofit is operated solely for charitable purposes and for the public good. A nonprofit cannot operate for the benefit of private interests. A conflict of interest policy helps to ensure that board members disclose any conflicts they may have with the operations of the nonprofit and that any board members refrain from voting on any matters in which they have a conflict of interest. The IRS wants to make sure the people who run your organization have the best interests of the organization in mind and not private interests.
• Whistleblower – Whether your organization has paid staff members or is run solely by volunteers, it is important to have a whistleblower policy in place. Such a policy assures staff and volunteers that they can bring forward any concerns about illegal practices or misuse of assets without fear of retaliation. Not only is a whistleblower policy good for your organization, it also shows you are transparent and hold yourself accountable for meeting the highest standards of conduct.
• Document retention – A nonprofit certainly does not need to keep every document it generates for an indefinite amount of time. But if the wrong document is deleted at the wrong time, that can spell trouble. A document retention policy is a record of the types of documents you will keep and how long you will keep them.

In addition to having these policies, you should also:

Keep accurate board meeting minutes

At the beginning of an audit, the auditor will request a copy of the board meeting minutes for the year being audited. The minutes should reflect any discussions and decisions made by the board on operations, including contracts and expenditures that are subject to board approval. It is very important that all compensation decisions are documented and that there are objective standards, such as national surveys, used to make compensation decisions.

At the end of the day, the IRS wants to make sure your organization is operating for the greater good, and not for the benefit of any one individual or private interest. An audit is not something to fear—but you do want to be prepared.

Review Form 990 on an annual basis

The Form 990 is an annual informational return sent to the IRS documenting a nonprofit’s activities. This is the form that is most likely to trigger an audit. Make sure the information on your Form 990 is completely accurate and representative of your current organization. It is a best practice, even noted by the IRS, that a nonprofit’s board of directors reviews the 990 before filing.

At the end of the day, the IRS wants to make sure your organization is operating for the greater good, and not for the benefit of any one individual or private interest. An audit is not something to fear—but you do want to be prepared.