The IRS Audit of Amateur Sports Clubs

While it's an unpleasant thought, the IRS is empowered to audit the affairs and records of nonprofit organizations, including amateur sports clubs. Although it's difficult for the IRS to establish a basis for auditing a church, there are no legal barriers preventing the IRS from auditing other nonprofit organizations.

This audit examination activity is designed to assure that nonprofit organizations are in compliance with all pertinent tax requirements. Consequently, the likelihood of an IRS audit has become of increasing concern to nonprofit amateur sports clubs, some of which are ill-prepared to withstand an IRS audit.

Many clubs are also vulnerable with respect to the tax on unrelated business income (the so-called UBI tax, or "UBIT"), referring to the income received by a tax-exempt club which is unrelated (as defined in tax regulations) to the club's tax-exempt purposes. Common items of UBIT include most advertising revenues (including advertising in event programs), sales of T-shirts, and revenues from selling concessions). The IRS is also looking for payroll and employment tax compliance.

Some clubs erroneously believe that all of their income producing activities are automatically exempt from federal and state taxation - but this is not true! Some clubs "reward" their members by crediting their accounts in proportion to money raised for the club, or pay members' travel expenses for competitions and treat such payments as nontaxable. Such activities are danger areas that may be accumulating tax liabilities which could adversely affect the club and its officers and directors.

The club records that must be produced upon audit will likely include all organizational documents (articles of incorporation, bylaws, corporate resolutions, minutes of meetings, etc.), documents relating to tax status (such as the application for recognition of exemption and IRS letters of determination), financial statements (including underlying entry books and records), payroll records, and newsletters and/or other publications.

If your amateur sports club is already tax-exempt and you need legal consultation to deal with an IRS audit, or to get your amateur sports club's affairs in order in case you have an IRS audit, give us a call. We're experienced in such matters and have successfully represented many amateur sports clubs having tax and organizational problems. And, if your club hasn't yet taken the step to obtain favored §501(c)(3) charitable status, or has been operating without being incorporated, don't panic - we know how to handle these matters, but call us immediately.