As 2025 unfolds, nonprofits are facing increased scrutiny from the IRS. If you’re responsible for compliance or financial reporting at a nonprofit, understanding the latest nonprofit IRS audit triggers is critical to staying out of trouble.
With updated IRS priorities, stricter enforcement, and a growing focus on financial transparency, the audit risk for nonprofits is higher than it has been in years. This article outlines what to expect in 2025, the most common audit red flags, and how to protect your organization.
Why the IRS Is Increasing Nonprofit Oversight in 2025
Following a multi-year backlog, the IRS has ramped up audits of tax-exempt organizations in 2025. This renewed focus is driven by:
- Concerns about misuse of funds and mission drift
- Rising complaints about improper executive compensation
- Increased political activity by some nonprofits
- More sophisticated data analytics to identify anomalies
According to recent data, over 3,000 nonprofits were selected for audit in 2024—a number expected to grow this year. Many of these audits were triggered by issues found in Form 990 filings.
Top IRS Audit Triggers for Nonprofits in 2025
To reduce audit risk, nonprofit leaders should understand what draws IRS attention. Here are the leading red flags:
1. Inconsistent or Incomplete Form 990 Reporting
Missing schedules, contradictory answers, or unexplained variances in revenue or expenses can raise suspicion. The IRS uses algorithms to flag filings that deviate from sector norms.
2. Excessive Executive Compensation
High salaries without a documented reason, lack of board approval, or comparison to similar-sized organizations can lead to scrutiny.
3. Private Benefit or Inurement
Any arrangement that allows insiders to personally benefit from the nonprofit’s assets or income can disqualify tax-exempt status.
4. Unrelated Business Income (UBI) Misreporting
Nonprofits that earn income outside their charitable mission (e.g., merchandise, services) must report UBI accurately. Improper reporting can lead to penalties or loss of exemption.
5. Political Campaign Activity
501(c)(3) organizations are strictly prohibited from engaging in political campaign activity. Even minor violations can trigger an audit or revocation.
How to Reduce IRS Audit Risk and Stay Compliant
Conduct Internal Reviews Before Filing 990s
Perform a thorough review of your Form 990 before submission, checking for consistency, missing sections, and logic errors.
Benchmark Compensation
Use publicly available databases and salary surveys to justify executive compensation. Document the board approval process.
Segregate UBI and Mission Revenue
Keep unrelated business activities in a separate account. File Form 990-T when necessary and consider forming a taxable subsidiary for high-volume activities.
Establish Strong Governance Policies
Ensure your board is active, independent, and involved in major decisions. Adopt a conflict of interest policy and review it annually.
Maintain Proper Documentation
Keep board minutes, salary studies, grant agreements, and receipts well-organized. Be ready to present documentation during an audit.
Need help? Our nonprofit advisors at GreenGrowth CPAs can help you build a custom financial roadmap.
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Final Thoughts
With IRS scrutiny on the rise, staying compliant isn’t just about avoiding penalties—it’s about preserving your mission. Proactive governance, clean financials, and transparent reporting are your best defense.
Need help reviewing your 990 or preparing for an audit?
Schedule a free consultation with GreenGrowth CPAs today to ensure your nonprofit is audit-ready and mission-aligned.
FAQs About Nonprofit IRS Audits in 2025
How likely is an IRS audit for nonprofits in 2025?
While the average audit rate remains below 1%, nonprofits with irregularities on Form 990—or those flagged by data analytics—face significantly higher odds.
What’s the difference between an IRS audit and a financial review?
An IRS audit is a tax compliance investigation conducted by the government. A financial review, by contrast, is a limited-scope assessment performed by an independent CPA—usually for donor or grant reporting. Only the audit can lead to penalties or loss of exempt status.
Do all nonprofits need to worry about unrelated business income (UBI)?
Only if you’re generating revenue outside your core mission (e.g., selling merchandise, renting space). Misreporting UBI is a common audit trigger and should be discussed with a CPA annually.
Can bad bookkeeping get you audited?
Absolutely. Disorganized records, missing backup for expenses, or inconsistencies across financial statements increase the risk of errors on your Form 990—raising red flags with the IRS.
What’s the difference between an audit and a program evaluation?
An audit assesses financial and regulatory compliance. A program evaluation measures the effectiveness and impact of your services. While both are essential for transparency, they serve different goals.
How do we prepare for an IRS audit—without panicking?
Start with a clean Form 990, document your board’s decisions, maintain compensation benchmarks, and store all receipts, contracts, and minutes securely. An annual check-in with a nonprofit-savvy CPA can go a long way in staying prepared.
