IRS Focuses on Unrelated Business Income Taxes in Social Enterprise Audits
Two years ago, I read in the Wall Street Journal that the IRS was planning to audit more charities operating business ventures. “Hmm,” I thought to myself, “wouldn’t that be a lot of fun.” A few weeks later, I received a letter from the IRS and the good times started rolling with our own nonprofit audit. I wasn’t worried because we pride ourselves in operating with the highest ethics and transparency. Sure enough, we passed with no deficiencies a few months later. But the audit raised a couple of interesting issues for social enterprises and faith ventures . The IRS was most interested in collecting the Unrelated Business Income Tax which is required if the nonprofit is operating a business that is “not substantially related to furthering the exempt purpose of the organization.” Over and over, they asked us to show that our businesses served our social mission verses just being an unrelated income source. My favorite moment was when the agent asked one of our project direct...