How to Plan for an Audit and Tax Filing as a Business Officer

As a nonprofit business officer, you have a lot of responsibility, ranging from financial oversight to strategy, compliance and more. While each responsibility is important to the success of your nonprofit, overseeing your organization’s audits and tax filings should be close to the top of the list. 

If you don’t plan ahead for your audit process and tax filings, you risk critical mistakes with steep consequences. You might make errors in your filings or even fall into non-compliance, exposing your nonprofit to penalties and legal issues—both of which could make it difficult to secure future funding. 

Luckily, these activities go hand-in-hand and occur every year, meaning that with the right approach, business officers can proactively prepare their organizations for these tasks. This article outlines a step-by-step process to help you effectively plan for audits and tax filings, ensuring a smoother audit and more efficient tax filing process.

Step 1: Establish a Proactive Partnership with Your CPA

An experienced nonprofit CPA is a vital ally for your organization. Building a proactive relationship can significantly ease the audit and tax processes because it allows for open communication. This ensures that you can address concerns and seek guidance throughout the year, rather than just during the busy filing season. 

Plus, if you keep your CPA in the loop, they can help you identify and anticipate challenges—occurring either on your end or due to industry updates, such as new accounting or tax legislation—before they arise. To build a proactive partnership with your CPA:

• Engage Year-Round: Regular communication with your CPA helps address potential issues before they escalate. For example, if you’re considering launching a new program or applying for a new grant, discuss its financial implications with your CPA early on. It’s crucial for officers to feel comfortable reaching out to their CPA throughout the year, not just during filing periods.
• Empower Your Team: Encourage your staff to engage with the CPA as well, ensuring everyone is aligned and informed about financial practices and expectations.

Start by scheduling routine check-in meetings with your CPA on a regular cadence—for example, once a quarter—to discuss any changes or new initiatives. This will help you avoid surprises during the audit season and provide your CPA with the necessary context to help you prep more effectively.

Step 2: Plan Ahead for the Audit

Effective pre-planning sets the foundation for a smooth audit and tax season. Pre-planning involves understanding the timeline and requirements for both the audit and tax filings and coordinating these efforts with your organization’s year-end close.

Here’s how:

• Begin with the end in mind. For example, if you have a board meeting in October, plan to have a draft report ready in September, which means audit preparations would start by July. Review records from the prior year and discuss with your CPA how long the process took to better project timelines for the current year.
• To further optimize your prep, analyze the previous year, focusing on both your audit timeline and tax preparation. This will help you set realistic timelines for the current year.
• For tax filings, particularly Form 990, start planning well in advance. The Form 990 tax filing has an extended due date, resulting in the filing being due one and a half months before the fiscal year end of the school. In order to avoid last minute stress coinciding with the school winding down operations, start planning well in advance. If you aim to file before the deadline, work backwards from your desired filing date to determine when you need to start compiling information.
• Coordinate your audit and tax preparation timelines. Since the audit typically precedes tax filing, ensure your timeline accounts for both, allowing enough time between the audit completion and tax preparation.

By setting clear expectations early and understanding the time required for both audit and tax processes, you can create a comprehensive timeline that aligns with your organization’s schedule and ensures timely completion of both requirements.

Step 3: Schedule Strategically

Understanding your organization’s busy periods is essential for effective scheduling. By mapping out your annual calendar, you can identify peak times and strategically plan your audit and tax activities around them. This foresight helps to minimize stress and ensures that you have the necessary resources available when needed. 

For example, let’s say you work for an independent school. School starts in early September, which is one of your busiest times. You also have a major fundraising gala scheduled for March. Knowing these peak periods, you might decide to schedule your audit for late October, a time when activities have settled down after the start of the school year and before the holiday season begins. This timing allows you to leverage the slower period to prepare necessary documentation and handle audit requests without the added pressure of managing other major projects. 

During this time, you can ensure that all audit-related tasks are completed, providing auditors with everything they need well in advance. This strategic scheduling not only reduces stress but also ensures that you have ample time to address any unexpected issues that may arise, allowing you to focus on your primary responsibilities during peak periods.

Step 4: Streamline Documentation and Delegation

As the audit approaches, it’s crucial to organize how information will be delivered to auditors and delegate responsibilities effectively among your team. This ensures that all necessary documentation is prepared in a timely manner without overwhelming any single individual.

• Organize Information Delivery: Your auditor will advise you how the information should be delivered to them. This typically occurs through an online file sharing system. Make sure that all of your documentation is well-organized to ensure you can easily find the documentation your auditors require. 
• Delegate Wisely: Assign tasks to team members responsible for specific areas. For example, if you need to provide enrollment data, reach out to your enrollment head. For payroll ledgers, connect with your payroll person, and so on.

When it comes to information delivery, work with your auditors to determine the most efficient method. This could be through an online system, email, or a live documentation checklist. Having a clear system in place will help streamline the process and ensure nothing falls through the cracks.

Step 5: Prepare Internally with Precision

Certain tasks require detailed organizational knowledge and should be prepared well in advance. Identifying these tasks early allows you to allocate focused time for their completion, ensuring they are ready when auditors begin their fieldwork.

• Identify Key Tasks: Certain tasks require in-depth knowledge and cannot be delegated to members of your team, such as preparing investment roll-forwards or fixed asset schedules. Identify these tasks and handle them ahead of time. These tasks often take significant time to complete and require a thorough understanding of your organization’s financials.
• Allocate Focused Time: Schedule dedicated time to handle these tasks, ensuring they are ready for auditors when fieldwork begins. For instance, block out specific days on your calendar well before the audit begins to complete complex tasks.

In addition to audit preparations, it’s essential to plan for tax filings, particularly Form 990. If you want to avoid a last-minute scramble or having to file for an extension, start compiling the necessary documentation well in advance. 

For example, if you know that your tax return is due in May, set a goal to have the draft of Form 990 ready for internal review by March. This gives you ample time to review everything and make any necessary adjustments before filing.

Optimize Your Nonprofit’s Tax & Audit Processes with Smith + Howard

Streamlining audit and tax processes for nonprofits is about proactive planning, strategic scheduling, and effective communication. Planning ahead and communicating proactively with your CPA or financial advisor not only ensures compliance but also prepares you for a successful audit season.

To maximize the impact of your preparation, work with a nonprofit advisor with in-depth nonprofit accounting expertise. Smith + Howard has served the nonprofit sector for more than fifty years. We can evaluate your current tax and audit process and help you prepare more effectively, setting your organization up for financial success. 

Contact your advisor today to start preparing for tax and audit season.