IRS Tax-Exempt Organization Form 990 Examination Response

The situation

Rebecca, 51, is the Executive Director of a $1.8M-revenue 501(c)(3) community health nonprofit in Columbus, Ohio, Health Partners of Central Ohio (HPCO). In March 2026, Rebecca received a letter from the IRS TE/GE division opening an examination of HPCO's Form 990 for fiscal year 2023. The IDR requested:

- All board minutes for fiscal years 2022, 2023, 2024 (including compensation approval minutes) - Documentation of comparability data used in setting executive compensation - Revenue breakdown for HPCO's health education workshops and nutrition counseling services (flagged as potential UBIT) - Documentation of any political activity or lobbying expenditures

Rebecca has 30 days to respond. Her CPA (a general practitioner who prepared the Form 990) has never handled an IRS TE/GE examination and quoted $4,500 to "help pull together documents." She found an exempt organization tax attorney in Columbus who quoted $8,500 to "represent the organization through the examination."

(a) The compensation audit is almost certainly resolvable with existing board minutes. HPCO's board approved Rebecca's $145,000 salary in January 2023 based on a GuideStar compensation survey showing median executive director pay for Ohio nonprofits of similar size at $138,000. If that approval was documented in board minutes AND the board members who voted were conflict-free (no family relationship to Rebecca), HPCO has a complete IRC §4958 rebuttable presumption defense. The problem: the minutes from that meeting are buried in a Google Drive folder and need to be formatted as a formal document production rather than raw emails.

(b) The "UBIT" inquiry is probably a non-issue. HPCO's nutrition counseling services are provided by licensed registered dietitians to low-income community members, the exact purpose for which HPCO received its 501(c)(3) status. These services are "substantially related" to HPCO's exempt purpose under IRC §513 and are not UBIT-taxable. The IDR flag exists because the activity generated $220,000 in fee revenue that appeared as "program service revenue" on Schedule A, which the IRS agent is cross-checking against potential UBIT. A one-paragraph letter explaining the exempt purpose connection resolves this inquiry.

(c) Rebecca can respond to the IDR herself. The document production is a structured checklist, not a legal argument. Most IDR responses require: (1) the documents requested; (2) a brief factual narrative explaining what each document is; (3) an explanation of any items not being produced (privilege, not applicable). The substantive legal arguments only come later if the agent proposes an adjustment, and even then, a written protest to IRS Appeals is a structured document with a known format (IRS Rev. Proc. 2016-22).

Who receives this

Executive directors and board treasurers of small-to-medium 501(c)(3) and 501(c)(4) nonprofits ($100k-$10M revenue) receiving IRS TE/GE examination letters. Primary segments: (1) community health organizations, social service agencies, and education nonprofits, the most common small nonprofit types examined for compensation and UBIT; (2) advocacy organizations (501(c)(4)s) examined for political campaign activity issues; (3) community foundations and donor-advised funds examined for private benefit issues. These organizations typically have a part-time bookkeeper or CPA preparing their 990 but no in-house legal counsel.

Why the agency will not advise you

IRS TE/GE examination agents cannot advise the organization on how to respond to their own IDRs. The IRS "Taxpayer Bill of Rights" gives organizations the right to representation, but provides no guidance on what that representation needs to be, or whether the organization can self-represent. The organization's CPA is typically a general practitioner who is unfamiliar with (a) the IRC §4958 rebuttable presumption procedure, (b) the UBIT exceptions under IRC §513, or (c) how to write a document production narrative that preemptively addresses the agent's concerns. The gap: structured, nonprofit-specific examination response guidance that a non-attorney can execute.

Key facts, with sources

• The IRS Tax Exempt and Government Entities (TE/GE) division examines approximately 7,000-15,000 tax-exempt organizations annually. IRS TE/GE publishes an annual work plan identifying examination priorities; recent priorities include executive compensation (IRC §4958 intermediate sanctions), unrelated business income (UBIT), political campaign activity, and foreign grantmaking. When selected for examination, an organization receives an opening letter and an Information Document Request (IDR) listing required documents. The organization has 30 days to respond, with one extension of 30 days typically granted upon written request. Source: IRS TE/GE Examination Program — IRS.gov · Scope of Audits and Compliance Checks of Exempt Organizations — IRS.gov
• IRC §4958 (Intermediate Sanctions) imposes a 25% excise tax on 'excess benefit transactions', payments to 'disqualified persons' (officers, directors, key employees, or their family members) exceeding fair market value. A second-tier 200% tax applies if not corrected. However, IRC §4958 provides a complete safe harbor through the 'rebuttable presumption of reasonableness' procedure: compensation is presumed reasonable if (1) approved in advance by an authorized body (board/compensation committee) composed entirely of individuals without conflicts of interest; (2) the body relied on appropriate comparability data (compensation surveys, IRS Form 990 data from comparable organizations, written offers from similar organizations); and (3) the decision was documented in board minutes within 60 days and ratified within a reasonable period. This rebuttable presumption is widely unknown by small nonprofit boards, yet IRS TE/GE examination frequently targets compensation as a primary issue. Source: Intermediate Sanctions (IRC §4958) — IRS.gov · Disqualified Person — Intermediate Sanctions — IRS.gov
• Unrelated Business Income Tax (UBIT) is assessed under IRC §511-513 on income from a trade or business regularly carried on by a tax-exempt organization that is NOT substantially related to its exempt purpose. However, IRC §513 provides several exceptions that systematically protect activities small nonprofits mistakenly believe are taxable: (1) the 'convenience exception' (IRC §513(a)(2)) exempts services sold primarily to members, students, patients, or officers in the course of exempt activities); (2) activities conducted by volunteers (IRC §513(a)(1)); (3) sales of donated merchandise (IRC §513(a)(3)); (4) 'substantially related' activities (any revenue-generating activity that directly furthers the organization's exempt purpose is not UBIT). IRS examiners frequently flag revenue-generating activities as potential UBIT without fully analyzing whether the exception applies. The IRS requires the organization to demonstrate, in writing, why each flagged activity falls within an exception. Source: Unrelated Business Income Tax — IRS.gov · Publication 598: Tax on Unrelated Business Income of Exempt Organizations — IRS.gov

When to bring in a professional

Self-serve responses fit routine cases: clear facts, amounts a business can absorb, and a deadline still ahead of you. Bring in a licensed professional when the amount at stake is large relative to their fee, the facts are genuinely disputed, criminal exposure is possible, or the deadline has already passed. A short paid consultation to sanity-check your plan is often worth it even when you handle the filing yourself.

All sources for this guide

1. IRS TE/GE Examination Program — IRS.gov
2. Scope of Audits and Compliance Checks of Exempt Organizations — IRS.gov
3. Intermediate Sanctions (IRC §4958) — IRS.gov
4. Disqualified Person — Intermediate Sanctions — IRS.gov
5. Unrelated Business Income Tax — IRS.gov
6. Publication 598: Tax on Unrelated Business Income of Exempt Organizations — IRS.gov