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Blog > Nonprofit Audit Triggers: State Rules on Revenue Size and Funding Sources

Nonprofit Audit Triggers: State Rules on Revenue Size and Funding Sources

Devi Narayanan
January 29, 2024
3 minutes

Nonprofit organizations are vital to meeting various community needs throughout the United States. To retain their tax-exempt status, nonprofits are generally required to adhere to both federal and state regulations regarding financial management and audits. The need for mandatory audits or reviews often depends on factors like the size of the organization’s revenue and sources of funding, with specifics varying by state.

Understanding key audit triggers can help nonprofits stay compliant as they grow. This article explores common nonprofit audit rules on revenue thresholds and government funding. It also covers options like voluntary audits. With insight on state requirements, organizations can better plan for financial oversight.

Revenue Size Triggers Audits in Most States

A significant number of states, possibly around 38, have legislation that mandates financial statement audits for larger nonprofits, which are typically conducted by Certified Public Accountants (CPA). The threshold for revenue size, which commonly triggers audits, varies widely. 

According to the National Council of Nonprofits, audit thresholds can vary significantly, with a common range being reported as $300,000 to $500,000, although exact figures should be confirmed. Higher revenue requirements for audits may apply to specific nonprofit categories, such as religious institutions and private educational entities, in some states.

For example, Oregon’s regulations could include a full audit for nonprofits exceeding a certain revenue threshold, and a different level of financial statement review or compilation for those within a certain lower revenue range.

So if an organization’s income crosses state-defined levels, external audits become obligatory, outside of any government funding received. Yet even under the thresholds, nonprofits should consider non-profitable audit requirements by state for best practices.

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Types of IRS Audits

The IRS classifies audits into categories including Mail Audits, In-person Office Audits, and In-person Field Audits.

Understanding the specific requirements of each audit type is essential for effectively managing the process.

Government Funding Sources Trigger Nonprofit Audits

In addition to income size, public funding sources impose audits for many tax-exempt groups. The federal Single Audit Act stipulates that nonprofits expending a certain amount in federal awards, which might be around $750,000, are required to undergo an independent audit. 

States like Florida might have rules stating that receiving a substantial amount of state financial assistance, possibly around $500,000, necessitates a state single audit. In some states, such as Illinois, there could be specific requirements for an independent audit when Medicaid funding exceeds a particular amount, such as $175,000. 

So if a nonprofit takes state, federal, or other public funding streams, understanding non-profitable audit requirements by state is essential.

Staying Compliant with Audit Rules

Other circumstances can also mandate external audits for nonprofits, like loan covenants with financial institutions. But clearly, growing income and public funding sources are primary audit triggers based on non-profitable audit requirements by state. Staying abreast of specific rules in a nonprofit’s home state area thus enables smart planning.

Many nonprofits willingly get audits even when not obligatory. Choosing to have voluntary audits can enhance financial transparency, which is often appreciated by donors and grantmakers. Undergoing independent audits can add to the validation and credibility of a nonprofit organization.

How GRC Software Assists Nonprofits in Navigating Audit Triggers and State Rules

  • Customization to Specific Needs: GRC software can be tailored to the specific regulatory environment and audit requirements of each state where a nonprofit operates. This customization ensures that nonprofits are always in line with local regulations.
  • Managing Multiple Compliance Standards: Nonprofits often have to comply with various standards at federal, state, and local levels. GRC software can track and manage these diverse requirements in a single platform.
  • Alerts and Notifications: These systems can alert nonprofits about upcoming audit triggers, such as reaching revenue thresholds or changes in state laws, allowing them to prepare in advance.
  • Educational Resources and Guidance: Some GRC platforms offer educational resources and guidance on compliance and audit best practices, which can be particularly beneficial for nonprofits navigating complex regulatory landscapes.
  • Integration with Other Systems: GRC software often integrates with other collaboration and communication tools used by nonprofits, ensuring that all relevant data is factored into compliance and risk assessments.

Frequently Asked Questions

  • What are the consequences if a nonprofit does not get a required audit?

    Not completing mandatory audits can jeopardize a nonprofit’s tax-exempt status and lead to penalties, like fines or losing government contracts. It also undermines financial transparency.

  • When do revenue size audit triggers apply – based on gross or net income?

    In most cases, states use gross revenue and support to determine if a nonprofit meets audit thresholds. This includes total income before expenses, from all sources like donations and government grants.

  • Do nonprofits need an audit if they only received funding from private foundations?

    Likely not, unless required by a specific grant agreement. But some states mandate audits for total revenue over a certain amount regardless of funding source. And many nonprofits choose voluntary audits to validate operations.

  • What is a federal Single Audit and when is it required?

    The federal Single Audit Act applies to nonprofits spending $750,000 or more in total federal assistance. A Single Audit examines organizational compliance and financial statements covering all applicable federal awards received.

Streamlining Audit Processes

In a complex governing climate, understanding nonprofit audit triggers enables smart targeting of finite resources. But unified GRC [governance, risk and compliance] tools also greatly assist in tackling mandatory oversight rules. 

Finally, web-based nonprofit software platforms like VComply’s comprehensive system help groups efficiently handle compliance obligations like financial audits and reporting. Centralizing documents, deadlines, workflows plus built-in expert guidance aids all aspects of regulatory management. This lets organizations focus on community mission goals rather than back-office administration.

Check state agency websites for the latest on non profitable audit requirements by state, and join the ranks of satisfied compliance professionals and internal auditors who rely on VComply to streamline internal audits. Because when nonprofits thrive, so do the communities they serve.

Book your demo and discover how it can benefit your organization.