Annually, charitable nonprofits must file with a number of regulatory and enforcement agencies through the state of Minnesota in order to maintain their status and comply with the law.
These annual filings are required in order to ensure charitable nonprofits account to the public, maintain incorporated and/or charitable status, comply with the law, and protect organizational assets. Failure to maintain good standing with the State of Minnesota could result in the loss of the ability to fundraise, have tax consequences, or could even lead to the involuntary dissolution of the organization.
IRS Form 990
Even though a nonprofit organization may be tax exempt, it must file an annual information return with the Internal Revenue Service. This is done through the filing of IRS Form 990 — Federal Return of Organizations Exempt from Income Tax.
Depending on the status or size of receipts and assets, a nonprofit must file a Form 990, Form 990EZ, or Form 990-N (e-postcard).
- Form 990-N: Organizations with revenues less than or equal to $50,000/year can file an Electronic Notice (“e-Postcard”), found here.
- Form 990-EZ: Organizations with annual revenues between $50,000-$200,000 and total assets under $500,000
- Form 990: Organizations with annual revenues over $200,000 or total assets over $500,000
Failure to file your annual Form 990 may result in penalties, and failure to file it for three consecutive years will result in the loss of your tax-exempt status. Having an organization’s 501(c)(3) status revoked is disruptive and puts the organization at risk.
The Form 990 is the most detailed and most misunderstood filing for nonprofits. It is the most complete documentation of an organization’s financial history and is often used to hold the organization accountable for its past actions and future decisions. Nonprofit organizations are required make their Form 990 and applications for tax-exempt status widely accessible and available to anyone who requests. File Form 990 by the 15th day of the 5th month after the organization’s accounting period ends (May 15th for a calendar-year filer).
There are no fees for filing a 990, but severe penalties apply for filing late or failing to file. Mail to: Internal Revenue Service, Ogden, UT 84201-0027.
Other Considerations
Tax-exempt organizations are required to make their past 3 years’ Form 990 and Application for Tax Exemption (Form 1023) widely available and must present it when asked. Organizations may make their forms available in their offices or on their websites.
Charitable organizations in Minnesota with annual revenues exceeding $750,000 must also conduct an annual audit by an independent certified accountant.
How to access nonprofits’ 990s
The Form 990 is also posted on Candid/Guidestar, a charitable website providing financial information and promoting accountability of nonprofits. GuideStar receives its information directly from the IRS and shares data for more than 1.8 million nonprofits nationwide. Nonprofits are encouraged to submit additional information to enhance their listings. Visit Candid/GuideStar at www.guidestar.org.
Other places to access nonprofits’ 990s
- Nonprofit Explorer (ProPublica)
- Search for Charities and Fundraisers (Office of the Minnesota Attorney General)
- Tax Exempt Organization Search (IRS)
IRS Audits
As the Internal Revenue Service (IRS) ramps up its audit staff and broader public scrutiny is being cast upon public charities, the number of IRS audits of public charities is increasing.
With this in mind, it is important for nonprofits to understand the IRS audit types and processes, common audit triggers, and recommended steps for best preparing your organization for the initiation of such actions.
Types of IRS Audits
According to the IRS, there are two primary types of audits that nonprofits may encounter:
- Field audit (or examination): If the initial contact letter sets up an appointment for an IRS agent to visit the organization’s premises, the IRS is conducting a field audit.
- Office/correspondence audit (or examination): If the letter asks you to deliver documents to an IRS office by mail, the IRS is conducting a correspondence audit.
An audit starts with the initial contact and continues until a closing letter is issued. A compliance check or compliance check questionnaire starts with the initial contact. The IRS may contact the organization again if the IRS needs further information, or if the organization does not respond to the compliance check or questionnaire. The IRS typically issues a closing letter at the end of a compliance check, but not at the end of a compliance check questionnaire.
Non-audits. If the letter indicates the IRS is conducting a compliance check, then you’re not being audited. Additionally, the IRS also sometimes asks organizations to complete questionnaires to help us better understand how organizations satisfy federal tax law requirements. Neither compliance checks nor compliance check questionnaires are audits.
Important Notes on Taxpayer Rights
- Taxpayer rights and Publication 1, Your Rights as a Taxpayer
- Right to representation and Form 2848
- Appeal rights and procedures
- Taxpayer Bill of Rights
Common Audit Triggers
IRS audits can occur on a random basis, but there are also several common trigger points that the IRS looks for when determining organizations for further review. Understanding the following common nonprofit IRS audit triggers is paramount to helping you prepare procedures that address these triggers and minimize the likelihood of selection.
- Form 990 Data (Missing or Misleading): The IRS looks at the overall data from Form 990 to find areas where organizations might not be following the rules, assuming that the forms are filled out correctly. If an organization submits Form 990 with missing or wrong information, it can make them look non-compliant, which could lead to an audit. Additionally, the IRS uses Form 990 to spot governance problems that could result in non-compliance. Questions about the board and management in Form 990 give the IRS clues about organizations that might have issues worth checking out. With the requirement that Form 990 be completed and submitted once per year, it is critical that nonprofits take the time to fill it out extensively and accurately.
- External Referrals: The IRS has a program for reporting organizations that are tax-exempt, allowing anyone — whether it’s individuals, groups, or other government agencies — to send in relevant information about these organizations. When the IRS receives a referral report, they review the details to decide if an audit is necessary. Considered “whistleblowing” by some, many of these referral reports come from state agencies working together with the IRS. These state reports can stem from issues like not filing taxes in a state, red flags related to payroll, or other tax issues related to the nonprofits in that area.
- Compensation Red Flags: The IRS, along with others in government and the general public, tend to frownon unusually high executive compensation. With that said, the IRS’s attention may also be drawn to unusually low compensation amounts reported, particularly in relation to the size and budget of the organization. In either case, the IRS may be concerned regarding a lack of reporting transparency and may decide to open an audit.
- Fundraising Income/Expense Discrepancies: When a charity raises a lot of money, the IRS usually expects to see matching expenses for fundraising efforts. If the IRS thinks that the expenses aren’t reasonable compared to the money raised, they may choose to initiate an audit.
- Unrelated Business Income (UBI): The IRS may choose to closely examine organizations that have a significant amount of UBI (income unrelated to explicit function or purpose for which the organization received its exempt status) and haven’t paid taxes on it. This scrutiny happens because these organizations might be assigning too many expenses to their UBI.
- Foreign Activities: The IRS is currently paying close attention to how large foreign grants are being handled, concerned that funds sent abroad might not be used for charitable purposes as intended. In the past, they’ve identified problems like not properly controlling overseas expenses, failing to report foreign bank accounts, and keeping poor records.
While this list does not capture every reason a nonprofit could undergo an audit, it sheds light on some common pitfalls of which to be mindful. By recognizing these issues early on, organizations can take proactive steps to enhance their reporting and resolve potential problems prior to an official audit, ultimately saving themselves a lot of hassle down the line.
Other Resources
- Charity and Nonprofit Audits (Internal Revenue Service)
Independent Internal Audit
An independent internal audit is an examination of a nonprofit’s financial records, accounts, business transactions, accounting practices, and internal controls by an “independent” auditor. The term “independent” refers to the fact that the auditor or CPA is retained through a contract for services, as opposed to being an employee of or having a formal connection to the nonprofit.
Some independent financial audits are required by state or federal regulations. However, even when not required a nonprofit may choose to have an independent audit, as it can be a useful way to catch any mistakes that could lead to an IRS audit later on.
A few important reasons your nonprofit may want to conduct an independent internal audit, as outlined by in the National Council of Nonprofits’ information-packed Nonprofit Audit Guide:
- Independent audits are important for inspiring and maintaining donor trust because they demonstrate that the nonprofit is committed to financial transparency and accountability.
- Audited financial statements help the board of directors have more confidence in the organization’s finances because they are based on an analysis by an objective third party.
- Some private foundations require that grant applicants and grantees submit audited financial statements, or similarly certified financial statements, in order to be eligible for funding.
Does your nonprofit need to conduct an independent internal audit?
In Minnesota, a charitable nonprofit with total annual revenue exceeding $750,000 must file an audited financial statement prepared by an independent CPA.
Other circumstances that may trigger the requirement for an independent audit include (Nonprofit Audit Guide, National Council of Nonprofits):
- Federal, state, and local governments may request a copy of a nonprofit’s audited financial statements.
- Charitable nonprofits that expend $750,000 or more in federal funds in a year are subject to special audit requirements.
- Some contracts with state and local governments to provide services in the community may require a nonprofit to conduct an independent audit.
- Many state laws require that charitable nonprofits submit a copy of their audited financial statements when they register with the state for charitable solicitation/fundraising purposes.
- Private foundations may request that a nonprofit submit a copy of the nonprofit’s most recent audited financial statements in conjunction with submitting a grant proposal.
- Some banks may require a nonprofit to have an audit as a condition of receiving a loan.
If a charitable nonprofit is small and has not conducted an audit due to the cost, the nonprofit should not be shy about asking the funder if a more affordable method of evaluating the nonprofit’s financial positions would be acceptable, such as a review of certified financial statements.
Other Resources
- Nonprofit Audit Guide (National Council of Nonprofits)
- Understanding Nonprofit Audits: A Beginner’s Guide (Wild Apricot)
- What Is a Nonprofit Audit? Ultimate Guide + Checklist (Jitasa)
Disclaimer: Information on this website is provided for informational purposes only and is neither intended to be nor should be construed as legal, accounting, tax, investment, or financial advice. Please consult a professional (attorney, accountant, tax advisor) for the latest and most accurate information. The Minnesota Council of Nonprofits makes no representations or warranties as to the accuracy or timeliness of the information contained herein.