September 15

Audit, Tax and Advisory Services


audit guide for small nonprofit organizations

If your organization has been selected for a review based on one of the above scenarios, then you will receive either a letter or phone call from the IRS Exempt Organizations (EO) Examinations. Just like with normal tax returns, if there are discrepancies, inconsistencies, or incomplete information, then the IRS is interested in learning more. In this situation, the IRS wants more information about your organization and the business that you do by way of an audit or a compliance check. Your message has been received and we’ll be reviewing your request shortly. In the meantime, schedule a meeting with us and we’ll be in touch soon. One of our Classy experts will reach out to schedule a hands-on walk-through of the platform and demonstrate how our industry-leading solution can help your nonprofit reach its goals.

audit guide for small nonprofit organizations

Except where a special indirect cost rate(s) is required in accordance with section B.5 of this Appendix, the separate groupings of indirect costs allocated to each major function must be aggregated and treated as a common pool for that function. General administration and general expenses must be allocated to benefitting functions based on modified total costs (MTC). The MTC is the modified total direct costs (MTDC), as described in § 200.1, plus the allocated indirect cost proportion.

Compliance Audit

You should meticulously review each proposed reclassification or adjustment to ensure they are reasonable and accurate. A financial statement audit is a thorough review of your financial statements to determine if your financial statements present fairly, in all material respects, in accordance with generally accepted accounting principles. A poorly prepared financial report can lead to incorrect financial information being shared with management or board members and inaccurate reporting to the IRS. This can result in penalties, worse yet material fraud, including misappropriation of funds. Audits are not always necessary, but they may be required by law or contract.

In the United States, nonprofit organizations are formed by filing bylaws or articles of incorporation or both in the state in which they expect to operate. The act of incorporation creates a legal entity enabling the organization to be treated as a distinct body (corporation) by law and to enter into business dealings, form contracts, and own law firm bookkeeping property as individuals or for-profit corporations can. Key aspects of nonprofits are accountability, trustworthiness, honesty, and openness to every person who has invested time, money, and faith into the organization. Nonprofit organizations are accountable to the donors, founders, volunteers, program recipients, and the public community.

Compliance With GAAP

For example, if the program is limited to nonprofit organizations subject to 26 U.S.C. 501(c)(3) of the tax code (26 U.S.C. 501(c)(3)), the announcement should say so. Similarly, it is better to state explicitly that Native American tribal organizations are eligible than to assume that they can unambiguously infer that from a statement that nonprofit organizations may apply. Eligibility also can be expressed by exception, (e.g., open to all types of domestic applicants other than individuals). This section should refer to any portion of Section D specifying documentation that must be submitted to support an eligibility determination (e.g., proof of 501(c)(3) status as determined by the Internal Revenue Service or an authorizing tribal resolution).

(4) Compensation for the use of the property was provided through use allowances in lieu of depreciation. (c) Costs related to the physical custody and control of monies and securities are allowable. (e) Charges for depreciation must be supported by adequate property records, and physical inventories must be taken at least once every two years to ensure that the assets exist and are usable, used, and needed. Statistical sampling techniques may be used in taking these inventories. In addition, adequate depreciation records showing the amount of depreciation must be maintained. (E) A disposition by consent or compromise, if the action could have resulted in any of the dispositions described in paragraphs (b)(1)(ii)(A) through (D) of this section.


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