Nonprofit organizations operate under special regulations that differ from traditional businesses. One key difference is the audit requirements that nonprofits must adhere to in order to maintain their tax-exempt status. While some states require all registered nonprofits to undergo annual audits, other states only mandate audits under certain circumstances. This can make compliance confusing for nonprofits that operate in multiple states.
In this post, we will provide a state-wise comparison of nonprofit audit requirements so you can ensure your organization stays compliant no matter where it operates.
Seven states—California, Hawaii, Illinois, Maine, New York, West Virginia, and Rhode Island—require all registered nonprofits to undergo an annual audit, regardless of their revenue. This stringent policy aims to ensure proper oversight and financial accountability of organizations benefitting from tax exemptions.
In California, nonprofits must submit audited financial statements for gross revenues over $2 million. For revenues below $2 million, a financial review is permitted instead of a full audit. Illinois follows a similar sliding scale policy based on revenues.
The majority of states only require nonprofits to undergo audits if their gross revenues exceed a specified threshold, which differs by state. Common revenue triggers range from $250,000 to $1 million. For example:
Some states have lower thresholds, such as Mississippi ($250,000), Tennessee ($500,000), and Massachusetts ($500,000). Others have higher triggers, like Ohio ($1 million) and Georgia ($1 million). Nonprofits should research their state’s specific revenue audit trigger to ensure compliance.
Rather than a single revenue threshold, some states have tiered audit requirements based on multiple revenue ranges. For instance:
Having clearly defined tiers helps scale oversight appropriately for larger nonprofits while reducing burden for smaller organizations.
A handful of states—Alaska, Idaho, New Hampshire, New Jersey, and Wyoming—have no statutory nonprofit audit requirements. However, some nonprofits may still choose to undergo voluntary audits to reassure donors and grantors. Lenders and insurance providers may also require audited financials.
Additionally, nonprofit organizations with federal contracts exceeding $750,000 are subject to federal audit rules per the Single Audit Act. Any nonprofit receiving substantial federal funding would need to comply regardless of their state’s policies.
Single Audit Act: This is the cornerstone of federal audit requirements for nonprofits. It applies to entities that expend $750,000 or more in federal funds in a year. This audit is more comprehensive than a regular financial audit, as it includes an examination of the nonprofit’s financial records, compliance with federal regulations, and the effectiveness of its internal controls.
Audit Scope and Standards:
Audit Report: The result of the audit is a report that includes the auditor’s findings on the financial statements, compliance, and internal controls. This report is crucial for the continued funding and regulatory compliance of the nonprofit.
Follow-up Actions: If issues or non-compliance are found, the nonprofit must take corrective actions. Continued non-compliance can lead to penalties, including the loss of federal funding.
The primary trigger for a federal audit under the Single Audit Act is when a nonprofit spends $750,000 or more in federal funds in a fiscal year. This includes direct federal funding or pass-through funds received from another entity.
In some cases, if a nonprofit receives funding from only one federal program, it may only need a program-specific audit rather than a full single audit.
Receiving federal funds typically involves adhering to ongoing reporting and compliance requirements, even beyond the audit. This can include regular financial reporting, program performance reporting, and adherence to specific federal regulations applicable to the funding received.
Understanding these federal audit requirements is crucial for nonprofits to ensure compliance, maintain their integrity, and secure ongoing federal funding. These audits not only serve as a financial check but also help in assessing the effectiveness and lawful use of federal funds.
Nonprofits generally must have an independent financial statement audit conducted by a CPA. This evaluates the organization’s financial records, internal controls, compliance, and financial health. Some states permit compilations or reviews for smaller nonprofits. Single audits are required for those receiving substantial federal funds.
Most states require nonprofit audits to be filed along with the Form 990 within 4 to 6 months after the organization’s fiscal year ends. For calendar year filers, this is usually May 15th. Some states have earlier or later due dates. Nonprofits should check with their state regulators.
Consequences vary by state but often include fines, loss of tax exemptions or fundraising privileges, and even potential dissolution of the nonprofit corporation. Criminal penalties may apply in cases of deliberate noncompliance or fraud. It’s crucial for nonprofits to understand and meet their audit obligations.
Generally, only the central parent nonprofit entity needs an audit. Subsidiaries, branches, or chapters that are under the umbrella of the same 501c3 group exemption do not require separate audits. However, some states may require consolidated audits or set rules for subordinate organizations. Check with local counsel.
Proper oversight protects the integrity of the nonprofit sector. Organizations should periodically review their state’s nonprofit audit compliance regulations as they grow and expand. Using a solution like VComply can help automate monitoring of financial metrics and required filings. Don’t leave anything to chance – make sure your nonprofit has its audit obligations covered. With the right compliance software, staying on top of state rules is simple.
Join the ranks of satisfied compliance professionals and internal auditors who rely on VComply to streamline internal audits. Book your demo and discover how it can benefit your organization.
Ready to set up a trial of VComply and automate your compliance process?