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The single audit requirement kicks in when a non-federal entity expends $750,000 or more in federal funds in one year. Pay close attention to the cumulative total received, because that threshold applies whether the funds come from one grant or a combination of several smaller awards. If you’d like to learn more about the auditing process or would Six Common Nonprofit IRS Audit Triggers Carr, Riggs & Ingram CPAs and Advisors like to connect with a CPA, contact us today. Our CPAs are experienced in nonprofit financial audits and have the tools and information you need to prepare you for a smooth auditing process. The IRS has a robust referral program for exempt organizations that allows referrals from individuals, groups, other government agencies, and more.

Six Common Nonprofit IRS Audit Triggers Carr, Riggs & Ingram CPAs and Advisors

A financial audit typically refers to an independent review of a nonprofit organization’s books and accounts. This is usually done annually as a way to ensure that the nonprofit is in compliance with federal regulations and private donor requirements. CRI is a member of PrimeGlobal, a worldwide association of independent accounting firms and business advisors. Each independent member of PrimeGlobal is a separate firm and an independent legal entity. PrimeGlobal is not a partnership and independent member firms are not acting as agents of PrimeGlobal or other independent member firms. Being a subrecipient of funds from another nonprofit or governmental entity can trigger the single audit requirement, but not always.


The contract or grant may state that the organization is a beneficiary rather than a subrecipient of federal funds. This distinction is important, as it exempts the beneficiary organization from the single audit requirement. A single audit includes both an audit of the organization’s financial statements and an audit of the organization’s expenditures of federal award money.

The IRS uses aggregate Form 990 data to target areas of concern or non-compliance, assuming forms are completed accurately. When Form 990 is submitted with incomplete or inaccurate information, it gives the appearance of a non-compliant organization. The IRS also uses Form 990 to identify governance issues that they feel can lead to non-compliance. The numerous questions in the 990 related to board and management governance provide the IRS with insight into organizations that may be more likely to have issues that should be examined. The IRS has very strict rules concerning the way tax returns, and specifically the Form 990, are prepared. Closely following these rules is important as you do not want to subject your Organization to an IRS audit.

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Nonprofit IRS audits have increased in recent years due to the IRS’ intent to ensure tax compliance in all areas of business. The IRS wants to make sure that nonprofits are fully invested in public, charitable interests. With the right amount of information and preparation, you can come out of a nonprofit financial audit successfully.

  • If you’d like to learn more about the auditing process or would like to connect with a CPA, contact us today.
  • Consequently, it may only be a matter of time before your nonprofit becomes subject to an audit.
  • Your chances of being audited depend on a number of factors, such as the nature of your income, and the business you are engaged in (read our blog “What Prompts an IRS Tax Audit?”).

Single audits are usually due nine months after your year-end, but the Office of Management and Budget has delayed certain single audit due dates by six months. These delays are creating bottlenecks for auditors, so reach out to your audit team as soon as possible and schedule the single audit in plenty of time to meet your compliance responsibilities. A recent program that the IRS conducted with universities confirmed the need to expand efforts in this area. For nonprofit organizations, IRS audits are largely based on ensuring that the organization is truly run for public, rather than private interests. Fortunately, even though there is no surefire way to avoid an audit, there are some precautionary measures your organization can take to defend against a dreaded call from the IRS. If your organization is getting ready to undergo a financial audit, you need to be prepared.

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Experienced partner focused on servicing the tax consultation needs of large and mid-size businesses. Though there is no surefire way to avoid an IRS audit, nonprofit organizations can monitor at least six areas to reduce their level of audit risk. Additional items the IRS may have on its radar are casualty losses, foreign bank accounts, cryptocurrency transactions, and many other potential audit triggers, depending on a taxpayer’s particular situation. However, it’s important to remember that some audits are done entirely at random, meaning you could still be subject to an audit—even if you have no common tax return triggers. There’s a lot at stake for entities that are subject to a single audit, so it’s important to have your ducks in a row. In extreme cases, the awarding agency could demand repayment if you can’t show that you used the money correctly.

Six Common Nonprofit IRS Audit Triggers Carr, Riggs & Ingram CPAs and Advisors

However, they also focus on unusually low compensation amounts reported in relation to the size of the organization. In this scenario, the IRS may be concerned regarding a lack of reporting transparency and may decide to open an audit. It is best to be aware of your organization’s presence in the public and to be sure you are complying with IRS regulations and filling out all the required paperwork. Your organization’s tax exempt status depends on compliance with these IRS regulations.

When the IRS receives a referral, the agency reviews the relevant information and then decides as to whether an audit is warranted. While most people may consider a referral “whistleblowing,” many referrals to the IRS come from state agencies coordinating information with the IRS. These state referrals may come from non-filing in a state, payroll issues, or other tax-exempt issues related to the states where the nonprofit operates. If you aren’t sure yet whether you are going to need a single audit, schedule a consultation with your accounting firm immediately.

The IRS may initiate an audit if it feels fundraising expenses are not in proper proportion to fundraising income. Their concern is that money sent overseas could be diverted away from charitable purposes. Previously, areas of non-compliance concerning control of overseas expenditures, reporting of foreign bank accounts, and inadequate record keeping have been found. Understanding these six nonprofit IRS audit triggers is crucial to establish procedures that address these triggers and minimize the likelihood of selection.

In order to ensure a smooth auditing process for all parties involved, we’ve compiled a checklist for a financial audit of a nonprofit organization. The following checklist is designed to help you prepare for your financial audit and know what to expect from your auditor. Emergency funds went out unexpectedly to many entities that have never before been subject to an audit, leaving many organizations unaware that they must report on those expenditures to keep the money. Most nonprofit organizations are aware that the IRS frowns on unusually high executive compensation.