Not-for-Profit Archives - CironeFriedberg, LLP

Financial Transparency and Nonprofit Audits

June 10, 2022 by Sandra Callanan CPA

You want to demonstrate your commitment to financial transparency. By publishing an independent audit report on your website and providing the report to anyone who requests it, you’ll be assuring your donors and the public that your financial practices meet accepted standards — for handling contributions, for instance.

Many public and private foundations — and funders — require charitable nonprofits to submit audited financial statements to be eligible for funding. Budgets and cash-flow statements predict your nonprofit organization’s financial future, but you need a review of each year’s annual income and expenses in your financial statement, which tells the story of your organization’s past.

Preparing and interpreting your financial statements is a special area of expertise. An audit involves a formal study of your policies and systems for managing your finances, a review of financial statements and commentary about the accuracy of those statements.

Such charity watchdogs as CharityWatch, Charities Review Council and Charity Navigator take into consideration whether a charitable organization has an annual independent audit when they do their ratings. To exercise their due diligence, your top management committee or board of directors may want the assurance offered by an independent audit that the financial statements are free of material misstatements.

In an audit, the CPA expresses an opinion as to the accuracy and completeness of financial statements, based upon test procedures and an evaluation of your internal controls. Analytical procedures coupled with inquiries of management allow the CPA to attest that no material modifications are needed for the financial statements to be in accordance with generally accepted accounting principles (GAAP) — the common set of accounting principles, standards and procedures used to present financial statements.

Getting Started

A first step, then, is to decide who in the organization will oversee the audit process. Typically, the audit is overseen by an audit committee or the Executive Committee. That committee should oversee the selection of the audit firm.

In selecting the audit firm, it makes sense to choose one that has expertise and knowledge in performing an audit for charitable organizations. Before meeting with the candidates, develop goals and objectives to help narrow your search.

Auditors should present the results of their audit to management and the audit committee/executive committee. This presentation should include any recommendations to improve internal controls, which should be followed by a corrective action plan by management to correct any weaknesses in the systems of internal control.

For more information on this topic, read our article, Does Your Nonprofit Need an Independent Audit?

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Tax Rules Nonprofits Need to Know

March 29, 2022 by Patrick Dunleavey CPA

Since navigating the complexities of tax laws is not easy, working with an accountant can be a good first step. There are common pitfalls that carry serious consequences if not addressed. A review of the basics can help your nonprofit organization avoid them.

Not everyone at your nonprofit needs to become an expert on charitable contribution tax rules. However, it is helpful if key people on your staff — particularly those involved in fundraising efforts — understand the basic charitable deduction rules.

IRS rules make certain types of donations easier or more advantageous than others. Your fundraising strategies should always take the tax effect of a donation into consideration. Use fundraising letters and other communications to educate potential donors on the tax benefits of particular types of donations.

To make sure that your donors understand current IRS requirements for donations, it can be beneficial to post basic information on your website.

If your nonprofit provided any goods or services in exchange for a donation —a tote bag, a meal, or a fruit basket for winning a silent auction–you may want to remind them that their tax deduction is limited to the excess of the contribution over the fair market value (FMV) of the item received in exchange for the donation. In “thank you letters, it’s a good idea to include the following reminder for donors: Please keep this written acknowledgment of your donation for your tax records.

All tax-exempt organizations must file certain reports with federal, state and local authorities. In the State of Connecticut, charitable organizations are required to file with the Department of Consumer Protection Public Charities Unit. To comply with this filing, organizations with gross revenue (not including government grants) in excess of $500,000 must include audited financial statements. Organizations that receive Federal or State awards may also be subject to additional single audit requirements.

Many Organizations receive contributions that are restricted by donors. Restricted contribution amounts are reported on a nonprofit’s tax return. Organizations are responsible for using the funds in accordance with the donor’s restricted intent.

Nonprofits are required to itemize expenses across general, administrative, fundraising, and program areas. These are called functional expenses, and the IRS requires you to report them.

Direct costs are expenses that can be identified specifically with an organization’s activity or project. They can be assigned to an activity or project with a high degree of accuracy. Indirect costs are costs that cannot be identified specifically with an activity or project. Organizations are responsible for reasonably allocating these indirect costs to report amounts accurately and document the method of allocation in their records.

Failure to file the right forms, depending on the type and size of the organization, can lead to severe penalties.

It’s important to retain tax-exempt status so that contributions made by donors continue to be tax deductible. To keep tax-exempt status, various reporting documents must be filed on an annual basis. The IRS is vigilant in observing these rules. Indeed, in 2011, about 500,000 organizations had their tax-exempt status automatically revoked for failing to file required reporting documents for three years in a row.

While nonprofits are exempt from income taxes, they are still required to pay certain taxes such as payroll taxes. Typically, payroll taxes are withheld from employee paychecks and deposited by the organization with the proper federal, state, or local taxing authority.

Also, the organization may need to collect and remit sales tax if taxable goods and services are sold. Sales tax filing responsibilities differ by state and can be complex.

Working with an accountant is important to ensure that your nonprofit organization is fling the proper and necessary paperwork.

Does Your Nonprofit Need an Independent Audit?

March 5, 2022 by Sandra Callanan CPA

The Internal Revenue Service (IRS) doesn’t require nonprofits to have independent audits, but that doesn’t mean your nonprofit never needs an audit. Some federal, state and local government agencies require audits, as do some banks and foundations. For example, Connecticut requires an audit if gross revenues exceed $500,000. Generally, the requirements relate to the nonprofit’s size or spending.

When an Audit Is Required

An independent audit might be required in the following circumstance:

To respond to a request. A federal, state or local government requests a copy of your nonprofit’s audited financial statements.
To verify assistance. A nonprofit spends more than a certain about in federal or state financial assistance. Keep in mind that this amount includes funds received directly from the agency as well as funds that come through another entity (e.g., a donor-advised fund).
To solicit funds. A nonprofit is in a state that requires audits if you solicit funds by mail, phone or other means in their states, even if the organization isn’t located there. In states that require it, the audit must be submitted as part of the registration process.
To contract services. A nonprofit has a contract for services with federal, state or local government that requires an annual financial statement audit.
To apply for funds. A nonprofit receives or wants to apply for funding from a foundation or other entity that requires audited financial statements.

These requirements are straightforward. If your nonprofit falls into any of these categories, an independent audit is required.

When an Audit Is Beneficial

Sometimes, however, it is a good idea to have an audit even if one is not required. Better community relations and greater transparency can be compelling reasons to have an audit. Here are three ways an audit can be beneficial:

Demonstrates transparency. By eliminating the deduction for charitable deductions for taxpayers who don’t itemize their deductions, the Tax Cut and Jobs Act of 2017 (TCJA) has made obtaining funding more competitive. It has been estimated that nonprofit contributions may drop by $20 billion per year. This makes it even more important for your nonprofit to convince donors that their donations will be used to further the organization’s mission. Having an independent audit supports this argument by demonstrating your organization’s commitment to financial transparency to the public, the media and watchdog groups. An independent audit can support this argument.
Enhances internal controls. An independent audit can monitor your nonprofit’s internal controls and help prevent theft and embezzlement. Although these audits aren’t foolproof, they can spot vulnerabilities and risks that aren’t apparent on a day-to-day basis.
Increases accountability. As part of its fiduciary responsibilities, your nonprofit’s board of directors is responsible for overseeing its financials. Having an independent audit helps the board and the nonprofit’s executives be more accountable.

For some smaller nonprofits considering an independent audit that is not required, the cost of an audit may outweigh its benefits, however. These organizations should consider more cost-effective alternatives, such as a review, compilation or agreed-upon procedures. A review, in contrast, is a lower level of assurance on the reliability of the financial statements. It may be appropriate for some smaller nonprofits.

Another service is a compilation, where a certified public accountant takes information supplied by management of the organization and prepares financial statements, without offering any assurance. The differences between an audit, review and compilation are significant and warrant in depth discussion before deciding which route is right for your nonprofit.

New York State Changes Filing Requirements for Nonprofit Organizations

June 26, 2021 by David Moseman CPA

Author: Patrick Dunleavey, Principal, CironeFriedberg, LLP

Back in December 2013, Governor Cuomo signed into law the Nonprofit Revitalization Act of 2013. That Act contained many welcome changes for nonprofit organizations, and elements of the law eased the burdens relating to certain major corporate transactions, such as mergers. One of the welcome changes was the increase over time of the audit threshold required with the NYS Annual Filing for Charitable Organizations Form CHAR500 (CHAR500) to $1 million.

Beginning on July 1, 2021, the current audit threshold of $750,000 of revenue and support will increase to $1 million. Organizations whose CHAR500 have an original or extended due date that falls after July 1, 2021 will be able to take advantage of the new audit threshold. An independent accountant’s review report is required if the organization has revenue between $250,000 and $1 million.

In addition to this change, charitable and social welfare organizations that are registered to solicit funds in New York under Article 7-A of the New York Executive Law and have gross revenue exceeding $250,000 must now file their annual CHAR500 financial report with the New York Department of Law and the New York Department of State. Previously, the CHAR500 was filed only with the New York Department of Law (more specifically, with the Attorney General’s Charities Bureau). These reports are due the fifteenth day of the fifth month after the organization’s fiscal year end, with extensions available for up to 180 days (mirroring the filing schedule for the IRS Form 990).

Also, as part of the new financial report requirement for the New York Department of State, a mission statement must now also be submitted and the statement must be consistent with what was or would be provided to the IRS with an application for recognition of tax exemption as a 501(c) organization.

Finally, the new financial report requirement clarifies that CHAR500 filers must file a copy of the organization’s “complete IRS Form 990 with schedules.” Under New York state law, the Schedule B and the names and addresses of donors disclosed in reports, including donors listed on Schedule B, are not subject to public disclosure, but must be included with the CHAR-500.

About the Author

Patrick Dunleavey, CPA, specializes in providing audit services for not-for-profit organizations, including arts and cultural organizations and human services agencies and, manufacturing and distribution organizations. Contact Patrick at pdunleavey@cironefriedberg.com and connect with him on LinkedIn.

Financial Transparency and Nonprofit Audits

Tax Rules Nonprofits Need to Know

Does Your Nonprofit Need an Independent Audit?

New York State Changes Filing Requirements for Nonprofit Organizations

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