When does my Private Foundation require an Audit?
Private Foundation Independent 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, Form 990-PF (and certain other IRS documents) must be made available for public inspection, which can serve a similar purpose in terms of transparency and accountability. (IRS – Public disclosure for private foundations)
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. Exec. Law §172-b).
Review: Review: Organizations with gross revenue and support of more than $250,000 but not more than $1 million must file financial statements accompanied by an independent CPA’s review report; organizations at or below $250,000 generally file financial statements without a CPA audit or review report.
Texas:
Texas does not have a broad statewide charitable audit threshold comparable to states like California or New York; audit requirements are more commonly driven by grant/contract terms, lenders, major donors, or specialized regulatory contexts. (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 set a general state-wide audit threshold for charities; instead, Oregon’s charitable filing rules require organizations to include a copy of the independent auditor’s report if an audit was prepared, and audits may still be required by grant or contract terms. (OAR 137-010-0020).
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 $1,000,000 or more in federal awards in a fiscal year, it must have a Single Audit. (2 CFR §200.501).
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.