Tag Archives: IRS

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.

What Counts as Compensation on my Nonprofit Organizations Form 990 or 990-EZ? Get Help from the IRS

May 15 is quickly approaching and many nonprofit organizations are busily trying to prepare their IRS 990 or 990-EZ forms. If you are having difficulties understanding how to report compensation, you may want to join the IRS Webinar on Reporting Compensation on Form 990 or 990-EZ. This webinar will cover:

  • How to report compensation
  • How to complete Form 990 and Form 990-EZ
  • What has to be reported
  • Other compensation
  • Exceptions
  • Highest compensated employees

What is Complicated About Reporting Compensation?

In 2008, the IRS expanded the reporting requirements for nonprofit compensation and particularly of key personnel. The new rules added a process by which executive compensation is determined, added reporting to include compensation that results from related organizations, and gives a monetary and responsibility threshold for defining “key employees.”

Although this is not new information it is still confusing for new and continuing organizations alike. For instance, what is a “key employee?”

A “key employee” is one who fits all three of the following criteria:
  1. $150,000 Test: Receives reportable compensation from the organization and all related organizations in excess of $150,000 for the calendar year ending with or within the organization’s tax year.
  2. Responsibility Test: At any time during the calendar year ending with or within the organization’s tax year:
    1. Has responsibilities, powers, or influence over the organization as a whole that is similar to those of officers, directors, or trustees;
    2. Manages a discrete segment or activity of the organization that represents 10% or more of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole; or
    3. Has or shares authority to control or determine 10% or more of the organization’s capital expenditures, operating budget, or compensation for employees.
  3. Top 20 Test: Is one of the 20 employees other than officers, directors, and trustees who satisfy the $150,000 Test and Responsibility Test with the highest reportable compensation from the organization and related organizations for the calendar year ending with or within the organization’s tax year.

For further reference, see Part VII of the IRS 990 Instructions. Also, Guidestar publishes many informative blogs on IRS reporting requirements and Simple Charity Registration is also always here to help.