Notice of Proposed Assessment-What Virginia Nonprofits Need to Know.
Receiving a Notice of Proposed Assessment from the Virginia Department of Taxation or the IRS can be alarming for any nonprofit leader. These notices indicate that the tax authority believes additional taxes, penalties, or interest are owed, and they require prompt attention to protect your organization’s tax-exempt status and financial health.
What Is a Notice of Proposed Assessment?
A Notice of Proposed Assessment is a formal communication from a tax authority proposing adjustments to your organization’s tax filings. It typically outlines:
The specific tax period under review
The proposed changes to your return
The additional tax, penalties, and interest calculated
The deadline to respond or appeal
For Virginia nonprofits, these notices can come from either the IRS (federal level) or the Virginia Department of Taxation (state level). Each agency has its own procedures and deadlines, making professional guidance essential.
Common Triggers for Virginia Nonprofit Assessments
Unrelated Business Income Tax (UBIT) Issues
Nonprofits must pay tax on income from activities unrelated to their exempt purpose. Common UBIT triggers include:
Advertising revenue that exceeds de minimis levels
Rental income from debt-financed property
Income from regularly carried on trade or business activities not substantially related to the exempt purpose
Form 990 Filing Errors or Omissions
The IRS scrutinizes Form 990 for accuracy. Common issues include:
Incomplete schedules (Schedule A, B, C, G, etc.)
Inaccurate reporting of compensation
Failure to report required governance information
Miscalculation of the public support test
Sales and Use Tax Issues
Virginia nonprofits that hold sales tax exemption certificates must maintain compliance with the 40% administrative cost rule. If an organization’s administrative costs exceed 40% of gross annual revenue, the Virginia Department of Taxation may propose assessment of unpaid sales tax .
Payroll Tax Issues
Nonprofits with employees must properly withhold and remit payroll taxes. Common issues include:
Misclassification of workers as independent contractors
Late payroll tax deposits
Errors in calculating withholding amounts
Virginia Sales Tax Exemption Requirements
To qualify for Virginia’s sales and use tax exemption, a nonprofit must meet specific requirements :
The organization must be exempt from federal income taxation under §§ 501(c)(3), 501(c)(4), or 501(c)(19)
Annual administrative costs, including salaries and fundraising, must not exceed 40% of annual gross revenue
Organizations with gross annual revenue of at least $750,000 in the previous year must provide a financial review performed by an independent CPA
Virginia Tax may require organizations with gross annual revenue of at least $1.5 million to provide a full financial audit
If an organization fails to meet these requirements, the Department of Taxation may issue a Notice of Proposed Assessment for unpaid sales and use tax.
Responding to a Notice of Proposed Assessment
1. Do Not Ignore the Notice
Ignoring a Notice of Proposed Assessment is the worst possible response. Deadlines are strict, and failure to respond can result in the assessment becoming final, with additional penalties and interest accruing.
2. Review the Notice Carefully
Understand exactly what the tax authority is proposing and why. Identify the tax period, the specific adjustments, and the deadline to respond.
3. Gather Supporting Documentation
Collect all relevant records, including:
Form 990 and supporting schedules
Financial statements and audit reports
Sales tax exemption certificates and purchase records
Payroll records and employment tax filings
Board meeting minutes and governance policies
4. Consider Professional Representation
Tax matters can be complex, especially for nonprofits navigating both federal and state requirements. A CPA with experience in nonprofit tax matters can help you evaluate the proposed assessment and negotiate with the tax authority on your behalf.
At Nova Tax & Accounting Services , our expert tax solutions team provides professional representation and advocacy for nonprofits facing tax assessments.
Appealing a Notice of Proposed Assessment
If you disagree with the proposed assessment, you have the right to appeal. The appeal process varies by agency:
IRS Appeals
Taxpayers have the right to appeal IRS decisions through the IRS Office of Appeals. Appeals are generally available before payment of the tax and are intended to resolve disputes without litigation. The IRS provides information on the appeals process and taxpayer rights on its official website .
Virginia Department of Taxation Appeals
Virginia taxpayers can request reconsideration of a proposed assessment by submitting a written protest with supporting documentation. The Department of Taxation provides procedures for appeals and hearings through its official channels .
Preventing Future Assessments
Maintain Accurate Records
Keep complete, organized records of all financial transactions, tax filings, and correspondence with tax authorities. Virginia Tax may request records to verify compliance .
Stay Current on Compliance
Ensure your nonprofit meets all filing obligations:
File Form 990 annually with the IRS
Renew VDACS charitable solicitation registration annually
Maintain sales tax exemption with Virginia Tax
File Virginia SCC annual report
Monitor the 40% Administrative Cost Rule
Virginia’s sales tax exemption requires that administrative costs (salaries, fundraising, overhead) not exceed 40% of gross annual revenue. Monitor this ratio carefully throughout the year .
Engage Professional Support
Regular professional oversight can help identify potential issues before they become assessments. At Nova Tax & Accounting Services , we provide accounting and bookkeeping and assurance and compliance services to help Virginia nonprofits maintain compliance and avoid tax assessments.