When does my Private Foundation require an Audit?
Private Foundation Audits: Is one required and if not, should I still consider undergoing one?
Not all private foundations are required to undergo audits, however understanding when an audit is necessary and why it can be good practice even when not mandated is essential. In this blog post, we'll explore these aspects in detail.
When does the Internal Revenue Services (IRS) mandate that a Private Foundation is required to have an Audit?
Generally speaking, the IRS does not mandate that private foundations to have an audit, regardless of their size or other criteria. Instead, the IRS requires all private foundations to file a Form 990-PF (Return of Private Foundation) annually. This form includes financial information, details of grants made, and compliance with payout requirements.
While an audit is not required by the IRS, the financial statements and Form 990-PF must be made available for public inspection, which can serve a similar purpose in terms of transparency and accountability.
Are there uniform Audit requirements across all States in which a foundation operates?
At the State level, requirements for audits vary significantly. Here’s an overview of the requirements in a few States, beginning with California (in which Ally is located):
California:
Annual Gross Revenue Threshold: In California, non-profit organizations, including private foundations, with annual gross revenues of $2 million or more must have their financial statements audited by an independent certified public accountant (Cal. Gov. Code §12586(e)(1)).
New York:
Annual Gross Revenue Threshold: Non-profits with annual gross revenue exceeding $1 million must have an audit (N.Y. EXC. Law 7A § 172-b).
Review: Organizations with revenue between $250,000 and $1 million must have a review by an independent CPA.
Texas:
No statewide audit requirement specifically for private foundations, but some local jurisdictions may have requirements (Tex. Bus. & Org. Code § 22.352).
Michigan:
Annual Gross Revenue Threshold: Non-profits with annual contributions of $500,000 or more in the preceding tax year must have an audit (Mich. Comp. Laws § 400.273 Sec 3(2)(j)).
Review: Organizations with annual contributions of at least $250,000 and less than $500,000 in the preceding tax year must have a review or an audit by an independent CPA.
Oregon:
Audit Requirements: Oregon does not have a specific statewide audit requirement for private foundations. However, non-profits with gross receipts over $500,000 may need to have an audit if they receive significant government funding or have specific grant agreements that require it (Or. Rev. Stat. § 65.787).
As you can see, the rules vary wildly depending upon the State. It is therefore important for private foundations to understand the specific requirements of the State(s) in which they operate and ensure compliance with both National and State-level regulations. Consulting with a tax advisor or legal expert is recommended to help navigate these requirements effectively.
Are there any other instances in which an Audit may be mandated?
There are other scenarios in which a private foundation may be obliged to undergo an audit. The below is not an exhaustive list.
Although the IRS does not mandate an Audit, they may request an audit or detailed financial review if there are concerns about compliance, accuracy of reporting, or if the foundation is part of an IRS investigation or examination.
If a private foundation expends $750,000 or more in federal awards in a fiscal year then it may be required to have a Single Audit under the Office of Management and Budget (OMB) Uniform Guidance, also known as 2 CFR Part 200 or the "Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards".
Private foundations may also be obliged to undergo an audit as part of grant conditions imposed by funders.
Consulting with a tax advisor or legal expert is recommended to help navigate these requirements effectively.
Should a Private Foundation consider an Audit even when not mandated?
While audits may not be legally required for all private foundations, there are compelling reasons to consider whether an audit should be obtained regardless:
Enhanced Transparency: Audited financial statements provide transparency to donors, beneficiaries, and the public. It shows that the foundation is committed to financial accountability and responsible stewardship.
Credibility: Audited financial statements carry more weight than unaudited ones. Potential donors, partners, and grant applicants are more likely to trust an organization with audited financials, which can lead to increased support.
Compliance Assurance: Adhering to audit best practices ensures compliance with tax laws and private foundation regulations. This can help prevent costly penalties and legal troubles down the line.
Risk Mitigation: In an increasingly complex regulatory environment, an audit can help identify and mitigate financial risks proactively.
Conclusion
It is important for private foundations to be aware of and comply with the specific audit requirements of the States in which they operate, especially if they receive significant government funding or grants that might stipulate such requirements. Consulting with a tax advisor or legal expert is recommended to help ensure compliance with all relevant regulations.
In addition, opting for an audit voluntarily can be a wise decision. Audits not only ensure compliance but also foster transparency, credibility, and responsible financial management. They are an investment in the foundation's long-term success, enabling it to fulfill its charitable mission more effectively and garner support from stakeholders who value financial integrity.
The content of this website has been prepared by Ally Foundation Services for informational purposes only and does not constitute legal, financial or tax advice.