Update to case study of legal and accounting costs during a major multi-year IRS audit

Update: The IRS has closed the audit.

The 2013 990 tax return and audited financial statements for Food for the Hungry (FH) are hot off the press and available at their website.

I previously discussed the costs incurred by Food for the Hungry to address their audit from the IRS. See previous post: Case study of legal and accounting costs during major IRS audit.

I am looking at that situation because this audit is of interest to the wider non-profit community and it is also a case study of the costs involved in a major dispute.

Try to stay out of court

Here are two posts on the whole idea of avoiding litigation:

Update of costs

After my last discussion of the costs incurred by FH, I reached out to FH for comment. I received a brief reply from Mr. Barry Gardner in February with a few comments with indication there would be more comments to follow after additional analysis. I haven’t received any followup comment. One item Mr. Gardner pointed out in his e-mail is that the 990 schedule of functional expenses did not accumulate any costs for the substantial amount of time spent by the FH staff to address the audit issues.

I think the previous analysis approximated the costs well except for staff time. With no additional comment on my post or any other followup from FH, I feel comfortable extending my analysis to 2013.

So let’s update that estimate of costs.  Here are the legal and accounting costs from the 990. Remember the audit kicked off in 2011, which is why you see the increase starting there:

FY legal acctg combined change
2010       15,767        74,125       89,892     13,884
2011       16,865      175,648     192,513   102,621
2012       28,158      168,460     196,618      4,105
2013       47,706      160,334     208,040    11,422


Drilling down further, here are the legal costs as allocated to program, general & administrative, and fundraising for those years:

year prog g&a F/r
2009           –    3,882
2010      1,000    8,987    5,780
2011      1,491  12,824    2,550
2012         500  27,658
2013      6,746  35,414    5,546


Here are the accounting costs by category:

year prog g&a F/r
2009      7,000    65,126
2010           –    74,125
2011    94,115    81,533
2012    90,360    78,100
2013  100,345    59,989


I think the correct way to approximate the costs to address the IRS audit are to accumulate the increase in legal fees charged to program and G&A over the 2010 base year, excluding the amount allocated to fundraising. Then combine that with the accounting costs allocated to program.

Here are the amounts for legal fees paid to outside counsel:

year Prog/GA increase
2010     9,987            –
2011    14,315      4,328
2012    28,158    18,171
2013    42,160    32,173
total    54,672


Here are the amounts for accounting, presumably paid to the auditor, but I’m not sure (cue to Francine, et. al. to discuss independence):

2011    94,115
2012    90,360
2013  100,345
total  284,820


The gives an approximated total cost through 9/30/13 of:

legal    54,672
accounting  284,820
total  339,492


My previous estimate for ’11 and ’12 was $206,974. Additional estimated costs for ’13 are around $132,518.

Here is my aggregation of estimated costs by year:

2011     98,443
2012   108,531
2013   132,518
total   339,492


Again, please try to stay out of court.

Doesn’t seem like the IRS audit has been resolved

The notes to the 2013 financial statements contain a comment that the IRS audit is still open. That comment would apply as of the balance sheet date of September 30, 2013. The audit report on the financial statements is dated January 17, 2014. That means the IRS audit had not been resolved as of January 17th. That there is no comment on the FH website or visible in public sources suggesting the case has been resolved as of today. That means there will be additional costs in fiscal 2014 that are not included above.

The above amounts are approximations. I have listed all the amounts rolling into my calculation so you may review my work and revise it as you wish.

The cost of staff time is not included in the above aggregations.

Will comment later as time allows on the drop in revenue, negative change in net assets, and the deficit in undesignated unrestricted net assets for 2013.

Will also reach out to Food for the Hungry for comment. Will update as needed.

What say you?

Let me know if I made an arithmetic or transposition error.

Any suggestions on how to revise or improve my calculations above?

All comments welcome (subject to maintaining a minimum level of professionalism).

Update:  IRS has closed the audit.

Leave a Reply

Your email address will not be published. Required fields are marked *