It takes a special kind of person to run a nonprofit business, but here you are! The fundraising and cultivating of resources hasn’t been easy, but at least you don’t need to worry about federal income tax and several state income taxes. Still, there are things to consider. While you may not owe federal income tax, compliance and transparency are key to maintaining your nonprofit’s credibility and legal status. You might discover that a nonprofit audit is required. But there’s no reason to panic! Audits don’t have to be daunting or stressful—in fact, they can be a major asset to your organization.
What is a Nonprofit Audit?
A nonprofit audit refers to the comprehensive review of a nonprofit organization’s records, transactions, policies, and internal procedures. It’s often done by an independent auditor who assesses the overall health of the nonprofit and ensures you’re still in accordance with all state and federal regulations.
Nonprofit Audit vs. Review: What’s the Difference?
Not every financial review is the same. An audit offers the highest level of assurance, providing a deep dive into your financials. A review, on the other hand, is more limited in scope. It includes analytical procedures and inquiries, but doesn’t dig quite as deep. While audits are often required for compliance or grants, reviews may satisfy less formal financial transparency needs.
How Far Back Can a Nonprofit Be Audited?
Generally, the IRS can audit returns filed within the past three years. However, if there are substantial errors or signs of fraud, they may go back six years or more. State requirements may vary, so always keep financial records for at least seven years.
What Triggers an Audit for a Nonprofit?
Certain events can trigger a nonprofit audit, and more often than not, an independent financial audit may occur for compliance reasons. These include:
- Federal funding over $1M in a fiscal year
- State laws that require audits based on annual contributions (thresholds typically range from $250K to $2 million)
- Grant proposals from institutional funders or large foundations
- Your own bylaws that require an audit for accountability
Be sure to review your state’s audit requirements. Check your state’s specific requirements here.
Does My Nonprofit Need an Audit?
To answer simply, it depends. If a trigger like federal grant funding over $750K applies in a given fiscal year, a financial audit is required for that year. However, if your nonprofit falls below the threshold the following year, the audit may no longer be mandatory. It’s important to assess your nonprofit’s needs accordingly and talk with a financial professional if there’s ever any confusion.
Even if it’s not required, a nonprofit audit can be a smart move to build trust, strengthen operations, and ensure financial integrity.
When Is a Nonprofit Audit Required by Law?
If your nonprofit receives over $750K in federal funding, a Single Audit is required for that year under federal law. Some states also require nonprofit audits based on revenue thresholds. Check your state’s rules to stay compliant.
Other Common Reasons Nonprofits Get Audited
Not every audit is triggered by funding. Some other common reasons include:
- Preparing for a merger or acquisition
- Changes in executive leadership or board members
- Internal financial concerns or discrepancies
- Strategic growth planning or new grant applications
What If My Nonprofit Is Below the Threshold?
If you’re under the audit threshold, you might still benefit from one. Audits help identify inefficiencies, protect against fraud, and demonstrate credibility. Independent audits show donors and investors that your organization takes financial integrity seriously.
Why Independent Audits Matter
Nonprofit audits aren’t just about checking boxes. They promote financial transparency, accountability, and can even highlight areas for improvement. Plus, they often shine a positive light on your nonprofit, helping you earn more support and draw in new funders.
How to Prepare for a Nonprofit Audit
You don’t have to go it alone. To prepare:
- Organize financial records, including bank statements and ledgers
- Review your internal controls and document procedures
- Make sure your board understands the audit process
- Partner with a trusted audit firm, like DeMar Consulting Group
Final Thoughts: Know What’s Required And What Builds Trust
An audit doesn’t have to be scary. It’s a tool for growth, credibility, and compliance. Whether it’s required by law or simply a smart strategic move, a nonprofit audit can strengthen your organization from the inside out. Not sure if you need one? Schedule a free consultation with DeMar Consulting Group and get clear on what’s required—and what builds trust. Learn more here.
