For many organizations, the word audit sparks anxiety. It often brings to mind federal tax issues, penalties, and letters from the IRS. While tax audits do happen – and tax compliance is absolutely critical – audits are not always negative.
In fact, an independent nonprofit audit can be one of the most reassuring and beneficial steps your organization takes. It validates that your books are accurate, your controls are strong, and your mission is supposed to be sound financial stewardship.
Whether your nonprofit needs an audit depends on several factors, including state laws, funding sources, federal grant thresholds, and internal governance goals. Below, we break down what you need to know.
What Types of Audits Can a Nonprofit Face?
1. IRS Audits (Mandatory / Compliance-Driven)
Most organizations are familiar with IRS audits—those triggered when tax filings appear inconsistent, incomplete, or noncompliant.
During an IRS audit, the agency reviews your:
- Tax returns
- Accounting records
- Payroll documentation
- Compliance with IRS nonprofit rules
- Adherence to GAAP (Generally Accepted Accounting Principles)
These audits may be conducted through mail correspondence or an on-site visit from a field agent.
2. Independent Nonprofit Audits (Often Required or Voluntary)
Independent audits, typically performed by a CPA firm like Cg Tax, Audit & Advisory, validate whether your financial statements are accurate and aligned with GAAP.
These audits can be:
- Required by state agencies, lenders, or grantors
- Voluntary, performed to increase organizational transparency
- Strategic, helping leadership strengthen internal controls and donor confidence
Unlike IRS audits, independent audits focus on accuracy, integrity, and operational transparency—not penalties.
When Is an Independent Nonprofit Audit Required?
Your nonprofit may need an independent audit if:
- You receive $750,000 or more in federal funding annually (this triggers a Single Audit under Uniform Guidance)
- Your state requires audits for charitable registration or because you’ve exceeded certain revenue thresholds (many states require an audit once a nonprofit passes $250,000-$500,000 in contributions).
- Your nonprofit has a contract with a state or local government (most government contracts require annual audited financial statements).
- You’re applying for grants or loans that require audited financials.
In these cases, an independent CPA audit becomes essential – not optional – to maintain compliance and funding eligibility.
Should a Nonprofit Get a Voluntary Audit?
Even if not required, many nonprofits choose to undergo voluntary audits because of the significant advantages.
1. Does an Audit Improve Transparency & Donor Confidence?
Absolutely.
Audits demonstrate that you are managing funds responsibly and ethically. This builds trust among:
- Donors
- Board members
- Employees
- Grantmakers
- The communities you serve
Transparency is a key driver of donor retention and institutional support.
2. Can Audits Support Stronger Tax Compliance?
Yes.
Nonprofit taxes—particularly around grants, unrelated business income, and multi-source funding—are complex. Regular audits help:
- Validate accurate reporting
- Ensure compliance with GAAP
- Reduce your risk of IRS issues or penalties
With ever-changing nonprofit tax rules, audits serve as proactive protection.
3. Can an Audit Help Preserve Tax-Exempt Status?
Yes.
To maintain tax-exempt status, nonprofits must prove that:
- No earnings benefit private individuals
- No funds support political campaigns
- Resources are used exclusively for charitable purposes
Independent audits offer third-party verification that your nonprofit is operating within IRS guidelines.
4. Do Audits Make Grant and Loan Applications Easier?
Very much so.
Most major grants—especially federal, state, and foundation grants—require audited financials. Banks frequently do too.
Having a current audit on file ensures you can move quickly when valuable funding opportunities arise.
What Does the Cg Team Provide During a Nonprofit Audit?
A nonprofit audit involves sensitive financial data and impacts your organization’s reputation, governance, and funding opportunities. You want auditors who:
- Understand nonprofit regulations
- Communicate clearly and respectfully
- Appreciate your organization’s mission and values
- Provide recommendations—not just reports
For more than 40 years, the Cg Tax, Audit & Advisory team has helped nonprofits of all sizes strengthen transparency, maintain compliance, and build long-term financial health.
Our nonprofit audit services include:
- Comprehensive financial statement audits
- Internal control evaluations
- Compliance with Uniform Guidance for federal awards
- Board-level reporting and presentations
- Recommendations for strengthening systems and oversight
- Guidance on maintaining tax-exempt status
We also offer full nonprofit accounting support, including bookkeeping, payroll, tax filings, and grant reporting.
A Nonprofit Audit Isn’t Something to Fear – It’s a Strategic Advantage
Whether required or voluntary, an independent audit can reinforce trust, improve compliance, strengthen internal controls, and support long-term funding goals. In today’s environment – where donors, grantors, and regulators expect transparency – an experienced audit partner is invaluable.
Your mission deserves a strong financial foundation. We’re here to help.
Ready to Support Your Organization’s Next Chapter?
Contact the Cg Team at 732-676-4100 or reach out online today to discuss audits, compliance, and nonprofit financial management. Let us help your organization operate confidently and transparently.
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