As mentioned before, an IRS audit of a nonprofit organization is fairly rare. However, they do still happen, so it is good to be aware of the possibility and everything the process entails. Knowing the reasons that organizations do end up getting audited by the IRS is important and can help instruct your organization on ways to operate properly in order to avoid ever being in that situation. Just like with normal tax returns, if there are discrepancies, inconsistencies, or incomplete information, then the IRS is interested in learning more.
Kristin Bakewell, CPA, CFE
- An operational audit assesses your organization’s operation systems, productivity, staffing, IT, HR, and other functions to provide insight into why your organization is hitting or missing its goals.
- If a nonprofit receives a qualified opinion, it should understand the issues uncovered by the initial audit, address them, and then seek a second audit that demonstrates that the issues were fixed.
- Few are well-versed in the ways of accounting so don’t feel like you’re not understanding something you should.
- Start by setting up a dedicated workspace for the auditors with easy access to your documents.
- Running a nonprofit requires familiarity with specific rules and regulations regarding compliance, which can vary greatly compared to profit-based companies.
- From choosing the right independent auditor to preparing for an audit to understanding the results, we can help you make the right decisions for your nonprofit.
Your auditing committee should include at least one or more financial experts with knowledge of GAAP principles and financial reporting requirements. Finally, nonprofits that understand the benefits of audits will include this requirement in their organization’s bylaws, making this mandatory each year. The federal government is not the only one that requires regular audits by nonprofits.
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Donors need to trust an organization before they contribute a one-off gift or recurring funding, and an independent audit provides them with that much-needed reassurance. Nonprofit audits might sound intimidating, but they are far less scary than you think. For starters, the Internal Revenue Service (IRS) rarely has a reason to audit your organization—since you’re a nonprofit and don’t pay taxes.
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During this step, you may also want to review your compliance with labor laws and regulations. If you find issues with employee or contractor documentation, you can remedy them now. An organization’s revenue and donations are perhaps the most important aspects of running a nonprofit.
- The obligation to file an independent audit report with the state government is generally just one requirement among many in connection with charitable solicitation registration.
- An organization that has regular audits conducted may also be able to attract new donors or be eligible for new grants or federal funds.
- Even if it’s not required, a nonprofit audit can be a smart move to build trust, strengthen operations, and ensure financial integrity.
- The steps involved in gathering the required paperwork are fairly straightforward.
The scope refers to the extent and accounting services for nonprofit organizations type of review conducted by the auditor. At the conclusion of your nonprofit audit, your organization will receive a letter to management, which can be used as a guideline to improve processes going forward. The management letter will contain material internal control issues and operating inefficiencies. The report will list adjustments that need to be made for future, and sometimes past, years. Many nonprofit organizations both large and small need to undergo a financial statement audit every year. Preparing for a nonprofit audit can be overwhelming and anxiety-filled, especially if it’s your first audit or you don’t have a strong and experienced financial team.
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Finally, being prepared for your audit shows a level of professionalism that helps protect your nonprofit’s reputation with the public. However, preparing for an audit can be overwhelming if you don’t have the right guidance. This comprehensive checklist can help you streamline the audit preparation process so every detail is ready for a thorough financial review. If your auditor requests access to your accounting system, make sure to grant them the correct level of user permissions (often view- or read-only) before the audit. Also, add all of the documents they’ll need to a centralized digital folder you can share with them. Use Google to find at least three options (based on reviews and portfolios) for CPAs or auditing firms that work with nonprofits.
The statement of cash flows illustrates how cash is generated and expended. Cash flow management is critical for nonprofits, which often face fluctuating donation patterns and grant disbursements. This statement helps stakeholders assess the organization’s ability to sustain operations and fund initiatives. The statement of functional expenses further breaks down expenses by program, management, and fundraising categories, highlighting the efficiency of resource allocation.
- It provides the most assurance on the accuracy and presentation of the financial data and systems, based on the application of generally accepted accounting principles (GAAP).
- When conducting this type of evaluation, auditors check that the organization is complying with nonprofit accounting standards, regulations specific to the nonprofit sector, and broader legal requirements.
- This results in an audit opinion that can enhance credibility with donors, grantors and other stakeholders, bringing trustworthiness to your donation appeals.
- These types of audits also provide assurance to donors and other stakeholders that their funds are being used appropriately and in accordance with the organization’s mission.
- Finally, being prepared for your audit shows a level of professionalism that helps protect your nonprofit’s reputation with the public.
- If a nonprofit thinks it might get an adverse or disclaimer opinion, management should resolve any potential financial issues before seeking an audit.
In fact, the IRS doesn’t issue requirements for nonprofits to be audited, but other federal and state agencies do in some circumstances. If your independent audit is mandated by a government agency and due by a certain date, you will want to keep this timeline in mind as you plan your audit. Make sure to give your organization enough time to complete the audit so you don’t miss the due date or have to file an extension. This article provides practical tips for updating your mission, including reasons for change, a step-by-step guide, and how to stay focused throughout the process. By taking the necessary steps to implement any improvements suggested by the audit report, nonprofits can further the success of their organization and mission.
