Federal Audit Requirements: Do You Need An Audit?

Nonprofit organizations (NPOs) work to help the public through their dedicated mission. While these missions are critical to the community, NPOs also have a financial responsibility to lenders, donors, and the public. One key responsibility is adhering to federal audit requirements. In this article, we’ll discuss the mandates of single audits, also called federal audits, and clarify when your nonprofit organization needs one.

Understanding Federal Audit Requirements

Let’s review some of the background information about federal audit requirements. Section 501(c) (3) of the Internal Revenue Code (IRS) states that charitable organizations are tax-exempt as long as they are organized and operated for exempt purposes, and they must not benefit any private interests.

What makes a charitable organization 501c3 tax-exempt?

A nonprofit organization is eligible for tax exemption status as a 501(c)(3) if its purpose falls into one of three categories: charitable organizations, religious organizations and churches, or private foundations.

Benefits of 501c3 tax-exemption

Nonprofits under the 501c3 section are eligible for federal tax exemption and can receive tax-deductible donations. Some states also allow these nonprofits to be exempt from sales and property taxes.

Tax-exemption Scrutiny

Due to their tax-exempt status, these organizations are highly regulated by the US Department of Treasury and the IRS through different single audit requirements.

Will You Need to Meet Federal Audit Requirements?

Single audit regulations dictate specific conditions under which nonprofits need to have their financial statements examined by an auditor. These requirements ensure that organizations are transparent in their financial dealings, mainly when they receive federal funds.

If your nonprofit has received a certain threshold of federal grants or funds within a fiscal year, you may be obligated to undergo this type of audit. Here’s a breakdown of the key aspects of the federal audit requirements:

Federal Funding: If an organization is a non-federal entity and received $750,000 or more in federal awards during its fiscal year, it’s mandated to undergo a single audit. Be aware that federal funding is often distributed through states, local governments, and other entities before being received by an organization.
Independent Auditor Required: The audit cannot be done internally. It must be conducted by a qualified, independent auditor with experience in nonprofit and single audits. They’ll thoroughly assess the organization’s financial practices and adherence to federal guidelines.
Uniform Guidance: This refers to the set of rules and regulations that nonprofits must follow when using federal funds. It encompasses everything from cost principles to audit requirements. Ensuring compliance with Uniform Guidance is essential for any nonprofit operating with federal support.

Also, keep in mind that staying well-informed about federal audit requirements isn’t only about compliance but also about demonstrating financial integrity and building trust among your stakeholders and donors.

Choose Assurance Dimensions for Your Nonprofit Audit

Assurance Dimensions has a team of audit professionals providing nonprofit and single audit services. We help nonprofit organizations and their boards understand federal compliance, and we have the knowledge and experience to prepare both single and nonprofit audits.