Audit Requirements for Nonprofits

What do we mean when we talk about an audit?  There are several kinds of audit, each for a different purpose, but the one most likely to be needed by a charity or nonprofit is an independent financial audit.  It is an examination of an organization’s records to determine the accuracy of its financial statements covering a specific time period, and it is conducted by a Certified Public Accountant (CPA) at the organization’s expense.  The IRS does not require this type of audit, but an independent audit may be required by large donors, by state agencies, by lenders, or by the organization’s own Board of Directors—in other words, anyone who has a need to determine the organization’s financial health.

Many states where a charity must register to solicit donations require an independent audit to be performed each year that the organization’s revenue or contributions reach a certain level.  State audit requirements vary, from Pennsylvania’s threshold of $300,000 in revenue to California’s threshold of $2 million.  Organizations with less annual revenue may be required to have an independent review of their financial statements, conducted by a CPA.  A review is similar to an audit but requires less work by the auditor and is less expensive for the organization.

An independent audit must comply with what are known as Generally Accepted Accounting Principles (GAAP), but there can be additional requirements.  For example, an organization which receives federal funds and expends $750,000 or more of those funds in one year must comply with the Single Audit Act of 1984.   Guidelines for this type of audit are issued by the federal Office of Management and Budget.  This requirement applies whether the organization receives the funds from one or from multiple sources, including government contracts, grants, loans, subsidies, and donated property.  Also, federal funding does not only mean the funding that comes directly from the federal government; instead, money that reaches an organization by a pass-through entity, such as a state government or local agency, is also included in this definition.

A ‘Single Audit’ as defined in the law is very similar to an independent audit, but its scope is usually widened to all financial activities and operations of the organization.   It also includes more detailed and in-depth testing of expenses, in order to ensure that all financial data is presented fairly and accurately and that adequate internal controls and checks are in place.  At the same time, this audit also reviews compliance with any federal or state regulations related to the specific program or funding source.   The report of the Single Audit must be made available to the public.

The auditor performing the Single Audit must have a higher level of certification and the increased testing means an increased cost to the organization.  However, the cost is an allowable indirect cost of administering the federal funds.

Starting a NonProfit and Soliciting Donations in Washington D.C.

The District of Columbia does not require charitable registrations, but to solicit contributions in DC, you will need to obtain a Basic Business License.  With our help, the steps below will be as easy as 1-2-3!

Qualify to do business in the District of Columbia

  1. Designate a Registered Agent
  2. Obtain a Certificate of Occupancy number (only if you are located in DC)
  3. Make sure that your IRS Determination Letter is current
  4. Register with the DC Office of Tax and Revenue
  5. Apply for Exemption from Income and Franchise tax
  6. Obtain a Certified Resolution
  7. Make sure you don’t owe the DC Government money
  8. Apply online for your Basic Business License (BBL)

Qualify to do Business in the District of Columbia

If your organization is a corporation created outside the District of Columbia, you will have to register as a foreign nonprofit corporation with the DC Department of Consumer and Regulatory Affairs.  As part of this process, you will report the names of your corporate officers and designate a Registered Agent, either an organization or an individual located in DC who can accept legal documents for your organization.

Designate a Registered Agent

If you do not have someone who can represent you in DC, we can help with that too!  Our Registered Agent service can accept delivery of legal documents for your organization and make sure that they reach you.

Obtain a Certificate of Occupancy number

This is required if you have an office or other facility located in DC.  Most commercial office buildings already have a Certificate of Occupancy allowing use of their space by tenants.  You will need to obtain the number for your building and enter it as part of the application process for the BBL.

Make Sure that your IRS Determination Letter is current

If you applied for tax exemption from the IRS, you received a determination letter spelling out your organization’s status under the IRS code.  You will need that letter to apply for tax exemption in DC.  If the letter is more than four years old, you will need an updated letter, known as an Affirmation Letter.  A representative of your organization must request the Affirmation Letter from the IRS; more information is available at https://www.irs.gov/charities-non-profits/exempt-organizations-affirmation-letters.

Register with the DC Office of Tax and Revenue

This registration is done online and requires your organization’s tax ID number, identification of your organization’s structure, and the names, titles, home addresses, and Social Security numbers of the organization’s principal officers.

Apply for Exemption from Income and Franchise Tax

This isn’t a required step for the BBL, but now that your tax-exempt organization has registered with the DC Office of Tax and Revenue, you will want to make sure that you do not have to pay DC Income and Franchise Tax.  This application is done online at MyTax.DC.gov.  You will have to upload your IRS Determination Letter or Affirmation Letter as part of the process.

Obtain a Certified Resolution

A corporate officer must sign a form to certify that you are authorized to apply for the Basic Business License.  This form will be uploaded as part of the BBL application process.

Make Sure you don’t owe DC money

As part of the online application process for the BBL, you will be asked to file a Clean Hands Certificate, certifying that your organization does not owe the District of Columbia more than $100.  As with any other form, you must be able to answer this question truthfully, so make sure all accounts are up to date!

Apply online for your Basic Business License

The hard parts are done.  (Well, except for the payment.)  This application is done online, but if you have followed the steps above, you will have all the documents you need.  DC charges a fee of $412.50 for the BBL, but it does not have to be renewed for 2 years.

Starting Your Nonprofit

You’ve decided to start a nonprofit!  You see a need in your community, and you plan to do something about it.  So, where do you start?

  • First, do some brainstorming:
  • What do you hope to achieve, and how do you plan to go about it?
  • What will your organization do that existing organizations aren’t doing?
  • Where will the money come from?
  • What other resources will you need?
  • Will you be able to recruit volunteers?
  • Will you have paid employees?
  • Are there existing groups that you can partner with?

Write out a plan and a budget.   Identify your goals, your own skills and resources, and potential sources of assistance.

Next, decide on a legal structure.  Many nonprofits exist as unincorporated associations, but there may be advantages to creating a nonprofit corporation.  You might want to consult an attorney to discuss the pros and cons.  If you decide to incorporate, you will need to recruit a Board of Directors to manage the organization, register your Articles of Incorporation with your state government (in most states, this registration is done through the Secretary of State’s office), and meet any other state requirements.   Whether or not you incorporate the organization, you will need written documents to outline how your organization will operate.

The next step is to obtain a Federal Tax Identification Number, also known as an Employer ID number (EIN), from the IRS.  Even if the organization will have no paid employees, this will be needed to establish a bank account and to file reports with the IRS.   The IRS has streamlined this procedure, and it can be completed on their website at https://www.irs.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein.

Once your organization has obtained an EIN, it needs to apply to the IRS to recognize its tax-exempt status.  Nonprofits are exempt from income tax because they have no owners or shareholders; the money they receive is used to carry out the organization’s purposes, and any money left over is kept for future use or donated to other nonprofits.  However, most nonprofits are still required to file annual reports with the IRS.  If your organization wants to be recognized as a charity (its purpose must be charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals), you should apply to the IRS using Form 1023, Application for Recognition of Exemption from Income Tax Under Section 501(c)(3) of the Internal Revenue Code.  If your nonprofit falls into a different category (for example, a social club or a political organization), you would use IRS Form 1024.  More information is available on the IRS website and in IRS Publication 557.

Once the IRS has approved your application, they will issue a Letter of Determination that specifies your Federal tax-exempt status and whether contributions to your organization are tax-deductible.  But depending on the state where you are located, you may have to apply for exemption from state taxes too.  For example, California and Texas are two of the states that require a separate application to be exempt from state franchise tax.  State laws also vary as to whether a nonprofit organization is exempt from other state taxes such as sales tax.

Your Letter of Determination will also specify whether you must file an IRS Form 990, Return of Organization Exempt from Income Tax, each year.  That form is generally due four months and 15 days after the close of your organization’s fiscal year.

Nonprofit organizations are required to disclose information on their finances to the public.  Your Form 990 is considered public information and you must provide copies upon request.  You may also be required to include information telling how to request those copies on your website and in any solicitation literature.

And will your organization be soliciting donations from the public?  If so, most states will require you to register to solicit donations in their state.  We won’t go into the details here, because registration requirements and fees are different for each state.  If you hire a professional fundraiser or fundraising consultant, they may also be required to register.   Then most charitable solicitation registrations must be renewed each year, and you may be required to obtain an independent audit of the organization’s financial statements.  It can get complicated, but that’s why we’re here–to make the process easier.

Starting a Nonprofit and Soliciting Donations in Connecticut

In Connecticut, charities are regulated by the Department of Consumer Protection (DCP).  Any charity that solicits donations in Connecticut must register or file a claim for exemption from registration with the DCP.

Your organization may also need to apply for tax exempt status from the IRS and/or register with the Connecticut Secretary of State to do business in the state.  However, you do not have to file with the IRS or the Secretary of State in order to apply to register with DCP for charitable solicitation.  You may wish to consult an attorney or an accountant to determine what is best for your organization.

Before beginning to solicit donations in Connecticut, an organization must apply for registration, unless they meet the requirements for exemption.  They can file a claim for exemption if they meet any of the categories below:

  • Organized religious corporations, religious institutions, or religious societies;
  • Parent-teacher associations or educational institutions accredited and recognized by a government body;
  • Non-profit hospitals licensed under the laws of Connecticut or another state;
  • Governmental units in the United States; or
  • An organization that receives less than $50,000 in contributions annually, as long as the organization does not pay anyone to conduct solicitations.

If the claim for exemption is approved, the organization does not have to file again unless their status changes and they no longer qualify for exemption.  Exempt organizations are listed along with registered organizations on the DCP’s website at www.elicense.ct.gov, as organizations legally able to solicit contributions.

If your organization cannot claim an exemption, you must:

  1. Complete the initial registration form;
  2. Provide a copy of your most recent IRS Form 990;
  3. Provide audited financial statements if your revenue on the Form 990 exceeds $500,000; and
  4. Pay a $50 registration fee.

However, you do not have to furnish financial documents if you have not completed your first fiscal year or filed your first IRS form 990.

Any changes to the organization’s name, address, officers, tax exempt status, legal form, or fiscal year end must be reported to DCP within 30 days.

Registered organizations that wish to continue soliciting donations must renew their registration each year.  Renewal notices are send by email about 60 days before registration expires.  One email message will contain the user ID and a second message will contain the password.  Blank renewal forms are also available on the DCP website.

An organization should cross out any incorrect information on their renewal notice and write in the corrected information.  To renew online, they must upload the corrected and signed renewal notice, the IRS Form 990, and their audit report, if an audit is required.  They can pay the $50 registration fee with a credit or debit card.

If the organization’s registration is still due more than 65 days past the expiration date, they must apply for reinstatement by mail.  They will have to mail in a reinstatement form, the required attachments, any required audit report, and the $50 registration fee, plus a late fee of $25 per month.

If the organization will no longer solicit donations in Connecticut, they may withdraw by sending in the Form 990 for the last year in which they solicited donations, their registration number, and either a letter stating the date of withdrawal or a copy of a dissolution document.

Paid solicitors and professional fundraisers must also register in Connecticut.  These rules do not apply to any fundraiser who is either a permanent employee of the charity or a volunteer.

If a person or company plans, manages, or otherwise advises a charity regarding fundraising but does not solicit donations themselves or hire anyone to solicit donations, they must register as a fundraising counsel.  A fundraising counsel must have a contract with the charity and must submit a copy of the contract to the DCP.

If the person or company is hired to directly solicit contributions, they must pay an annual fee of $500 and post a $20,000 surety bond with DCP.  They must also file a notice-to-solicit at the start of each fundraising campaign and a financial report at its conclusion.  These reports are filed jointly with the charitable organization.

Volunteer fundraisers must have an organization’s written permission to use their name and should verify that the organization is registered to solicit donations.  If you wish to hold an auction or raffle to benefit a charity, you should check for local requirements or restrictions.

Multi-state Charity Compliance Webinar – November 28th 2:00 pm

Simple Charity Registration is an affordable form fill software designed to reduce the amount of time and resources it takes your organization to fulfill your state charity compliance requirements.

How can SimpleCharityRegistration.com help you accomplish your mission?

4 Simple Steps:

  1. Identifying up front which states your organization will need to register in and in which states you may be exempt from registration requirements
  2. Collecting all information necessary to file up-to-date state specific forms (registration, renewal, exemption, or extension), with instructions and resources all in one place
  3. Sending email reminders of renewal and annual financial due dates, saving you from missed deadlines and penalties
  4. Storing your data from one year to the next, available to you at any time to add a new state or renew a previous one, keeping you compliant

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4 Simple Steps to Compliance Video

Simple Charity Registration is designed to allow you to do your registration in parts as you have the information available, making now the perfect time to get started on your registrations and renewals while waiting for your financials to be complete.

Simple Charity Registration looks forward to helping you spend more of your valuable resources on your mission while staying compliant.

Join Us for a free, 30-minute webinar on Tuesday, November 28th at 2:00 pm EST.

Register Now

 

Here are some other resources that will be helpful throughout the registration process: GuideStar’s blog on State Registration Requirements for Fundraising, our blogs on what to prepare for registration and how Simple Charity Registration can help.

Please take a minute to visit our website www.SimpleCharityRegistration.com and create a free account or contact us to learn more at 800.780.6027 or email us at support@simplecharityregistration.com with any questions.

Thank you
Your Simple Charity Registration Support Team

What is Religious Exemption?

There is an old joke about an IRS auditor who calls a clergyman to confirm a large donation from a parishioner and asks, “Did Mr. Thompson donate $10,000?” The clergyman thinks a moment and replies with a smile, “He certainly will!”

The interesting thing is that while that donation is tax-deductible for Mr. Thompson, like other nonprofit organizations, the church doesn’t have to pay taxes on it, but unlike other charities, it has even less responsibility for reporting it.

So, what is religious exemption? For charities this is a big question because exemption can mean tax exemption, exemption from financial reporting, and exemption from state charitable solicitation registration in many cases.

Let’s talk about tax exemption and exemption from financial reporting to break it all up. Later we will get into religious exemption from charity registration.

Why is there a special classification for religion?

Churches are protected from government interference by the First Amendment to the Constitution. Therefore, the degree to which an organization is associated with the direct practice of religion determines their level of accountability (reporting) to the IRS and subsequently to the states.

The IRS categorizes religious charities accordingly: churches, their integrated auxiliaries, religious organizations, and other. Each type as defined by the IRS determines what level of reporting they need to do. In general, churches and their integrated auxiliaries (per the IRS) are treated differently from “religious organizations” as follows:

  1. “Church” (used as an overarching term to indicate any similar place of worship, such as a synagogue or mosque) – The IRS gives 14 attributes of a church, primarily among which is being a legally recognized organization and having a congregation and an ordained clergy (see the IRS Tax Guide for Religious Organizations Glossary);
  2. “Integrated auxiliary” is a 501(c)(3) nonprofit and public charity that is associated with a church or denomination and is internally funded, though missionary groups and youth groups do not usually need to meet this last criteria. Churches and Integrated Auxiliaries (including the definition of a missionary group) are further defined in the Code of Federal Regulations, 26 CFR Section 1.6033-2(g) & 2(h);
  3. “Religious organizations” — according to the IRS, these can include nondenominational ministries, interdenominational and ecumenical (encompassing multiple Christian faiths) organizations, and groups whose purpose is for the study or advancement of religion; and
  4. Other — If the activity of the organization is primarily secular in function when performed by other groups, the charity may not fit in the religious exemption. 7.26.2.2.1 (03-30-1999)

The biggest difference is that because of the need for the separation between church and state, churches and their integrated auxiliaries don’t have to file a Form 990, while religious organizations do. The other end of that separation is that religious organizations can do some, not substantial, issue based lobbying while churches cannot. Page 10 of the IRS Webinar on Churches and Religious Organizations: Do’s and Don’ts has a chart to help you see where you might fit by what is required of you.

It is important to know where your organization falls on this spectrum to know what is required of you at the federal level. Next, we will delve into how it affects state compliance.

This information is not intended as legal advice or instruction.

State Charity Registration Exemptions

You have started your nonprofit and you have applied to the IRS for a federal exemption, but wait, that does not mean you are exempt from filing state taxes, paying local sales taxes or registering your charity in each state.  Approximately 40 states require you to file a state charity registration application, several require you to apply for a corporate license and some you will need state tax exemptions.

These application processes are completely different than Federal tax exemption.  The state charity registration is your organization notifying the state that you will be soliciting its residents for donations.  The application that you provide to them is there way of assuring transparency to their citizens.   Looking for an exemption from filing a state charity registration application? Well, good luck!!  Those laws have more loop holes than an amusement park.

One hundred percent of all states offer some type of exemption but qualifying for that exemption and keeping it is a different story. Each state law has its own definitions and requirements for those exemptions. Some states only require an initial letter notifying them that your organization believes it is exempt while others require you to file an application for approval to the state charity office and a few require annual notifications.  In those states the fees are reduced for the exemption not the required paperwork.

Here are some common state exemptions:

Revenue <$25,000 (can vary from $5,000 to $50,000)

Religious Organizations or their affiliated groups

Educational Institutions or their supporting groups

Membership Organizations – Fraternal, Social, alumni, or professional

Veteran’s Organizations including Police, Fire and Rescue Groups

Political Party or Candidates for Office

Donations for a Specified Individual

Hospitals

Some other not so common state exemptions:

Childcare Providers

Adoption Agencies

Clinics

Boys and Girls Clubs

Less than 10, 35 or 100 Donors per Year

As noted before, and will be discussed in our next post on the common exemptions, each of these exemptions have their own requirements designated by the state where you are soliciting donations.  They are not only determined by the state where you are physically located but in each state where you are soliciting donations.  You may be exempt in your home state but not in others; as well as your organization could be exempt in foreign states but not your state of origination.

If you have any comments, questions or concerns, please contact us at 800-780-6027 or support@simplecharityregistration.com for more detailed answers.

 

Trusted Nonprofit Resources

National Association of State Charity Officials (NASCO)

The National Association of State Charity Officials (NASCO) is an association of state offices charged with oversight of charitable organizations and charitable solicitation in the United States.  They have taken a leadership role in promoting uniform state charity registration and filing requirements, amicus briefs, and multistate lawsuits targeting fundraising deception. NASCO members have also participated in drafting the Uniform Law Commission’s Oversight of Charitable Assets Act which is a model for state solicitation law and jurisdictional guidelines for state regulation of charitable solicitation on the Internet.

National Council of Nonprofits (Council of Nonprofits) 

The National Council of Nonprofits (Council of Nonprofits) is a trusted resource and advocate for America’s charitable nonprofits. Through their powerful network of State Associations and the nation’s largest network of nonprofits they serve as a central coordinator and mobilizer to help nonprofits achieve greater collective impact in local communities across the country. They identify emerging trends, share proven practices, and promote solutions that benefit charitable nonprofits and the communities they serve.

Association of Fundraising Professionals (AFP)

The Association of Fundraising Professionals (AFP) represents more than 30,000 members in over 230 chapters throughout the world, working to advance philanthropy through advocacy, research, education and certification programs.  The association fosters development and growth of fundraising professionals and promotes high ethical standards in the fundraising profession.

National Association of Attorney Generals (NAAG)

The National Association of Attorneys General (NAAG) was founded in 1907 to help attorneys general fulfill the responsibilities of their office and to assist in the delivery of high-quality legal services to the states and territorial jurisdictions. The Association’s members are the attorneys general of the 50 states and the District of Columbia and the chief legal officers of the Commonwealths of Puerto Rico (Secretary of Justice) and the Northern Mariana Islands, and the territories of American Samoa, Guam, and the Virgin Islands.

Your Local State Charity Office

We have a blog devoted with a list of the State Charity offices!! Almost all states have an association devoted to nonprofit assistance no matter where your organization is in its life-cycle. Whether you just need a form or something more complex they will most likely have the answer. Most state associations offer online training, research and local events that you can attend to get more familiar with your fellow non-profiteer!

GuideStar 

GuideStar encourages nonprofits to share information about their organizations openly and completely. They combine the information that nonprofits supply them with data from several other sources to provide information that advances transparency, enables users to make better decisions, and encourages charitable giving.

Please contact us with any comments, questions or concerns at (800)780-6027 or support@SimpleCharityRegstration.com.

 

3 Factors Affecting Your Nonprofit Registration Timeline

One of the most frequently asked questions we get in our support email is “How long will it take to get my charity registered”.  That depends on 3 factors: organizational paperwork preparedness, number of states registering, and the state office for which you are registering.

Prior to beginning the process you should have all of the following paperwork/information in hand to facilitate completing the questions that are required to fill in the forms. If you look at the left-hand side on the SimpleCharityRegistration.com website the navigation bar divides the questions by topic.  The sections will give you a sense of the types of required information you will need. You can even click on the sections ahead before entering information to see what you will need next.

Organizational Paperwork

In addition to the 990, 990-EZ, 990-PF or other financial reporting you will need:

  • Info on the origins of the charity, such as formation date and state, 501(c) designation and date or application date, organization type, purpose, mission, etc.
  • if this is an initial registration in states, you will also need to attach the articles of incorporation and by-laws
  • list of sources of government grants
  • personnel — list of board members with addresses (usually a business address other than the charity), key employees and their salaries and positions, and information about whether any of these people have connections to other related organizations or have any interaction with government agencies or courts
  • list of any paid professional fundraisers used by your charity along with their contracts and terms
  • a list of chapters, branches or offices of the organization
  • a list of resident agents for the states required as explained on the right side of the Resident Agent page

Most of these items are for answering the questionnaire, but some, like the articles of incorporation and by-laws, will need to be copied and attached to the registration form upon submission.

For the data entry, depending on the size of your organization, you should allow a few days just in case you need to contact other administrators in your office for missing information. The next step is proofing and putting the packages together. Add some signatures and stamps and you are on your way.

Number of States

The best part about having an account with SimpleCharityRegistration.com is once all the information is in the software printing and preparing each consecutive state application becomes easier and the next year when it is time to renew you only need to review the prior year’s information and add the current financials and you are on your way to knocking this once burdensome process right out of the park!!

States Where Registering

Depending on the time of year and which states you are registering the time for approval can take a couple of business days up to 6 weeks or more.  Take note of the renewal date for each state when registering as you know that will be the time of year the state offices will be the busiest and your initial registration application may take a little longer.

You may also enjoy our new welcome video and our two-part blog on this topic.

Please contact us with any comments, questions or concerns at (800) 780-6027 or support@SimpleCharityRegstration.com.