Nonprofit Compliance Checklist: Key Areas Funders and Auditors Review

Maintaining strong nonprofit compliance is vital for any organization aiming to operate with integrity and secure funding. Funders and auditors regularly review specific areas to confirm that an organization is adhering to legal requirements, donor intent, and sound financial practices. A well-structured nonprofit compliance checklist can serve as a roadmap, helping leaders prepare for these reviews and demonstrate their commitment to transparency and accountability. This guide outlines the key areas typically examined, providing a framework for organizations to assess their own readiness.

Key Takeaways

• Develop and maintain a detailed nonprofit compliance checklist to guide ongoing operational adherence and audit preparation.

• Invest in robust back-office systems and personnel to support accurate financial record-keeping and timely reporting.

• Regularly review and update organizational policies, including those related to governance, internal controls, and human resources, to reflect current best practices and regulations.

• Prioritize clear documentation and segregation of restricted funds to meet donor intent and funder requirements.

• Seek external expertise when needed, particularly for complex areas like tax filings, legal compliance, and financial audits.

Foundational Governance and Organizational Integrity

The bedrock of any reputable nonprofit lies in its governance structure and its commitment to organizational integrity. Funders and auditors pay close attention to these areas because they signal the organization's ability to operate ethically, manage resources responsibly, and fulfill its mission effectively. A strong foundation here builds trust and confidence among all stakeholders.

Maintenance of Governing Documents

Governing documents, such as articles of incorporation and bylaws, are the foundational legal framework for a nonprofit. It is imperative that these documents are not only current but also accurately reflect the organization's actual practices and structure. Regular review and amendment processes are necessary to keep them aligned with operational realities and legal requirements. Failure to maintain up-to-date governing documents can lead to compliance issues and questions about the organization's legitimacy. Auditors will look for evidence that these documents are accessible and have been followed.

Board Meeting Protocols and Financial Oversight

The board of directors holds ultimate responsibility for the organization's governance and financial stewardship. This includes establishing clear meeting protocols, ensuring proper notice is given, maintaining accurate minutes, and actively participating in financial oversight. Key aspects include:

• Regular review of financial statements.

• Approval of budgets and significant expenditures.

• Monitoring of internal controls.

• Adherence to conflict-of-interest policies.

Auditors will examine board minutes to confirm that financial matters were discussed and decisions were properly documented. This demonstrates a commitment to transparency and accountability in financial management. Understanding the role of the board is key to nonprofit operations.

State Registration and Corporate Standing

Maintaining good standing with the state(s) where the nonprofit is incorporated and operates is a basic yet critical compliance requirement. This involves filing annual reports, paying required fees, and renewing any necessary licenses or registrations. Auditors and funders expect to see that the organization is legally recognized and authorized to conduct its activities. A lapse in state registration can have serious consequences, including the loss of corporate status and tax-exempt status. It is important to track these requirements diligently to avoid any disruptions to the organization's work. Public sector agencies, for instance, require clear evidence of societal benefit, which is tied to an organization's ability to operate legally and effectively, as outlined in discussions about measuring societal benefit.

Financial Record Keeping and Reporting Accuracy

Accurate and well-organized financial records are the bedrock of any nonprofit's credibility and operational integrity. Funders and auditors will meticulously examine these records to confirm that funds are managed responsibly and in accordance with established accounting principles and donor intent. This involves not just maintaining ledgers, but also ensuring that all transactions are properly documented, categorized, and reconciled. A robust system here demonstrates fiscal discipline and supports the organization's ability to achieve its mission effectively. Without this, even the most well-intentioned programs can face scrutiny.

General Ledger and Trial Balance Reconciliation

The general ledger serves as the central repository for all financial transactions. Regular reconciliation of the general ledger to subsidiary ledgers and trial balances is a non-negotiable practice. This process verifies that all debits and credits are accurately recorded and that the accounting equation remains in balance. Auditors will look for evidence of monthly reconciliations, including detailed explanations for any discrepancies and clear indications of management review and approval. This diligence prevents errors from accumulating and provides a reliable basis for financial reporting. Maintaining a clear audit trail is paramount.

Bank and Credit Card Account Reconciliation

Each bank account and credit card used by the organization must be reconciled monthly. This involves comparing the organization's internal records against the statements provided by the financial institutions. Outstanding checks, deposits in transit, and any bank service charges or fees need to be identified and accounted for. For credit cards, all charges should be verified against receipts and properly coded to the appropriate expense accounts. Prompt and thorough reconciliation of these accounts is a primary indicator of strong internal financial controls.

Fixed Asset and Investment Schedule Maintenance

Organizations often possess fixed assets, such as property, equipment, and vehicles, and may hold investments. A detailed schedule of these assets is required, documenting acquisition dates, costs, depreciation (for fixed assets), and current market values (for investments). Regular updates to this schedule, reflecting additions, disposals, and changes in value, are necessary. Auditors will compare these schedules to the general ledger and supporting documentation to verify their accuracy and to assess proper accounting for depreciation and investment gains or losses. This schedule is also important for insurance and inventory purposes, contributing to overall asset management and long-term funding sustainability.

The integrity of financial reporting hinges on the accuracy and completeness of underlying records. This requires consistent application of accounting policies, diligent reconciliation processes, and clear documentation for all financial activities. Any gaps or inconsistencies can raise significant questions about the organization's financial stewardship and operational capacity.

Compliance with Funding Restrictions and Donor Intent

Grant Agreement Documentation and Expenditure Tracking

Funders often provide grants with specific conditions attached. It is important to keep detailed records of these agreements. This includes understanding exactly what the money is intended for and how it should be spent. Auditors will look for clear documentation that shows you have followed these terms. This means keeping track of every dollar spent from a grant to make sure it aligns with the original purpose.

• Maintain copies of all executed grant agreements.

• Develop a system for tracking grant expenditures against the approved budget.

• Document all spending with receipts and invoices that clearly link to the grant's purpose.

Careful tracking prevents commingling of funds and demonstrates responsible stewardship of donor resources. It also helps avoid potential issues if a funder requests a detailed report on how their money was used.

Segregation and Reporting of Restricted Funds

Restricted funds are contributions that donors have specified must be used for a particular purpose. These funds cannot be mixed with the organization's general operating funds. Proper accounting practices require that these funds be tracked separately. This allows for accurate reporting to donors and funders, showing that their intent has been honored. Failure to segregate and report these funds can lead to compliance issues and damage trust.

• Establish separate accounts or clearly designated sub-accounts for restricted funds.

• Implement accounting procedures to ensure restricted funds are only used for their intended purpose.

• Prepare regular reports detailing the activity and balance of restricted funds for board review and donor communication.

In-Kind Contribution Valuation and Documentation

In-kind contributions, such as donated goods or services, are valuable assets for nonprofits. However, they must be properly valued and documented to be recognized accurately in financial statements and for reporting purposes. The valuation should be based on fair market value. Without proper documentation, these contributions may not be accepted by auditors or funders. This includes having written acknowledgments from donors and clear records of how the contributed items or services were used.

• Obtain written acknowledgments from donors detailing the contributed item or service.

• Establish a clear methodology for valuing in-kind contributions at fair market value.

• Document the use of in-kind contributions to support program activities or operational needs.

Internal Controls and Operational Safeguards

Strong internal controls are the bedrock of responsible nonprofit management, safeguarding assets and promoting operational integrity. Auditors and funders pay close attention to these systems because they demonstrate an organization's commitment to transparency and accountability. Without them, nonprofits are more susceptible to errors, fraud, and misuse of funds. A robust control environment is not merely a compliance requirement; it is a strategic imperative for long-term sustainability.

Segregation of Duties and Approval Processes

Effective internal controls rely heavily on dividing financial responsibilities among different individuals to prevent any single person from having complete control over a transaction. This segregation of duties is a primary defense against fraud and error. For instance, the person who authorizes a payment should not be the same person who records it or reconciles the bank account. Similarly, clear approval processes for expenses, payroll, and reimbursements must be documented and consistently followed. This includes establishing thresholds for approvals and ensuring that all transactions are properly authorized before they are processed. Auditors will look for evidence that these policies are not just written down but are actively practiced.

Cash Handling and Transaction Management

Proper handling of cash and other financial transactions is critical. This involves establishing clear procedures for receiving, recording, and depositing donations and other revenue. It also extends to managing disbursements, ensuring that all payments are legitimate and properly documented. Procedures should detail how checks are processed, how electronic payments are authorized, and how petty cash is managed. Maintaining accurate transaction records is also key, allowing for easy reconciliation and verification of financial activity. This meticulous approach helps prevent discrepancies and provides a clear audit trail for all financial movements.

IT and Data Security Policies

In today's digital age, protecting sensitive information is paramount. Nonprofits handle a wealth of data, including donor information, financial records, and employee details. Therefore, comprehensive IT and data security policies are indispensable. These policies should outline measures for protecting against cyber threats, unauthorized access, and data breaches. This might include requirements for strong passwords, regular software updates, data encryption, and secure network configurations. Auditors will assess whether the organization has taken reasonable steps to protect its digital assets and comply with relevant data privacy regulations. Implementing these safeguards is vital for maintaining donor trust and avoiding costly breaches.

Whistleblower Policy Implementation

An essential component of a strong control environment is a whistleblower policy. This policy provides a safe and confidential channel for employees, volunteers, and other stakeholders to report suspected wrongdoing or unethical behavior without fear of retaliation. A well-communicated and accessible whistleblower policy demonstrates a commitment to ethical conduct and provides an early warning system for potential problems. Auditors will verify that such a policy exists, is communicated to staff, and that there are procedures in place for investigating reported concerns. This policy is a key element in fostering a culture of integrity and accountability throughout the organization.

Human Resources and Payroll Compliance

Maintaining robust human resources and payroll compliance is vital for any nonprofit organization. It not only safeguards against legal penalties and financial repercussions but also fosters a fair and transparent work environment for all staff members. Funders and auditors pay close attention to these areas to confirm that the organization operates ethically and adheres to all applicable labor laws and regulations.

Worker Classification Guidelines

Accurate classification of workers as either employees or independent contractors is a primary concern. Misclassification can lead to significant liabilities, including back wages, unpaid payroll taxes, penalties, and legal fines. Organizations must diligently apply IRS and Department of Labor guidelines to determine the correct status for each individual. Key considerations include the degree of control the organization has over the worker and the nature of the working relationship. When in doubt, it is generally safer and more compliant to classify an individual as an employee. For remote employees, awareness of state-specific compliance laws is also necessary.

Payroll Tax Filing and Documentation

Timely and accurate withholding and deposit of payroll taxes at federal, state, and local levels are non-negotiable. This includes filing all required tax returns, such as Form 990-series for the IRS and relevant state withholding forms. Maintaining meticulous records of all payroll transactions, tax filings, and supporting documentation is essential for demonstrating compliance. This documentation should include payroll registers, tax payment records, and proof of timely deposits. Organizations should also ensure they are compliant with minimum wage and overtime requirements for non-exempt staff and maintain accurate timekeeping records.

Employee Contracts and Timekeeping Records

Formalizing employment relationships through clear employee contracts or offer letters is a best practice. These documents should outline terms of employment, compensation, and responsibilities. For hourly employees, maintaining accurate and consistent timekeeping records is critical for calculating wages, overtime, and ensuring compliance with labor laws. These records serve as vital documentation during an HR audit and for payroll processing. Furthermore, organizations must provide new hires with essential information, including any required state pamphlets, and adhere to regulations like the Family and Medical Leave Act (FMLA) and any applicable local paid leave laws.

IRS Filings and Tax-Exempt Status Maintenance

Maintaining tax-exempt status with the Internal Revenue Service (IRS) is a core responsibility for any nonprofit organization. This involves more than just initial application; it requires ongoing adherence to federal regulations and timely submission of required documentation. Failure in these areas can jeopardize an organization's tax-exempt status, impacting its ability to operate and receive tax-deductible contributions. Funders and auditors will scrutinize these filings to confirm the organization is operating in accordance with its stated mission and federal law.

Annual Form 990 Filing Requirements

Every tax-exempt organization must file an annual information return with the IRS. The specific form required depends on the organization's gross receipts and assets. These forms, collectively known as the Form 990 series, provide the IRS and the public with information about the organization's finances, governance, and activities. Timely and accurate filing is paramount to maintaining good standing.

• Form 990-N (e-Postcard): For organizations with annual gross receipts normally $50,000 or less.

• Form 990-EZ: For organizations with annual gross receipts less than $200,000 and total assets less than $500,000.

• Form 990: For organizations with annual gross receipts of $200,000 or more, or total assets of $500,000 or more.

• Form 990-T: Required if the organization has $1,000 or more in gross income from an unrelated business activity.

Organizations should be aware of the filing deadlines, which are typically the 15th day of the fifth month after the close of their accounting year. Extensions can be requested if necessary. Reviewing the IRS Form 990 instructions is advisable for detailed guidance.

IRS Determination Letter Accessibility

An organization's IRS Determination Letter is the official document recognizing its tax-exempt status. This letter is a critical piece of documentation that should be readily accessible. It is often requested by grantors, donors, and financial institutions to verify the organization's status. Keeping this letter, along with any subsequent correspondence from the IRS, in a secure and easily retrievable location is a standard compliance practice. Organizations that have applied for tax-exempt status but have not yet received a determination letter should be aware of the implications and ensure their application is being processed according to IRS guidelines.

Timeliness of Required Filings

Beyond the annual Form 990, other filings may be required depending on the organization's activities. This can include Form 990-T for unrelated business income or specific forms related to employee payroll taxes. Missing deadlines for any required IRS filing can lead to penalties, loss of tax-exempt status, and damage to the organization's reputation. Proactive calendar management and assigning responsibility for these filings are key to avoiding such issues. Staying informed about changes in IRS regulations and filing requirements is also an ongoing necessity for maintaining compliance.

Fundraising Ethics and Solicitation Regulations

Donor Acknowledgment and Disclosure Requirements

Properly acknowledging donations is more than just good manners; it's a legal requirement for many contributions. For gifts of $250 or more, the IRS mandates that nonprofits provide a written acknowledgment that includes specific details about the donation. This acknowledgment should be issued in a timely manner, ideally within weeks of receiving the gift or by January 31st of the following year. It must state the amount of cash contributed or describe any non-cash property donated. If the donor received any goods or services in exchange for their contribution, the acknowledgment must also include a good-faith estimate of the value of those benefits. Failure to provide adequate acknowledgments can result in the disallowance of tax deductions for donors, which can negatively impact future giving.

Truthfulness in Fundraising Materials

All communications used to solicit contributions must be accurate and free from misleading statements. This applies to everything from direct mail appeals and email campaigns to social media posts and public presentations. Organizations must be transparent about how funds will be used and avoid exaggerating the impact of donations. Misrepresenting the organization's mission, programs, or financial needs can lead to significant reputational damage and potential legal repercussions. It is advisable to have a review process for all fundraising materials before they are disseminated to ensure accuracy and compliance with ethical standards.

State Charitable Solicitation Registrations

Many states require nonprofits to register before soliciting donations from residents within their borders. This requirement often extends to online solicitations if the organization can reasonably expect individuals in that state to access its donation portal. The specific registration requirements vary by state, and organizations must track renewal deadlines carefully to maintain compliance. Failing to register in states where it is required can result in penalties, fines, and prohibitions on future fundraising activities in those jurisdictions. Organizations should consult with legal counsel or a compliance professional to identify all applicable state registration obligations.

Navigating the rules for fundraising and asking for donations can be tricky. It's important to know the laws so you can raise money the right way. We can help you understand these important guidelines. Visit our website to learn more about how we can support your fundraising efforts.

Conclusion

Adherence to established compliance protocols is not merely a procedural requirement for nonprofit organizations; it is foundational to maintaining operational integrity and stakeholder trust. Funders and auditors critically examine these areas to ascertain fiscal responsibility, adherence to regulatory mandates, and the effective stewardship of resources. Proactive and consistent attention to governance, financial record-keeping, and reporting mechanisms allows organizations to demonstrate accountability, mitigate risks, and ultimately, strengthen their capacity to fulfill their stated missions. A commitment to ongoing compliance fortifies an organization's reputation and its ability to secure future support.

Frequently Asked Questions

What happens if a nonprofit doesn't file its yearly IRS Form 990?

If a nonprofit skips filing its Form 990 for three years in a row, the IRS will automatically cancel its tax-exempt status. Getting this status back can be difficult and costly, and donors won't be able to deduct their contributions.

How often should the board look at the organization's financial reports?

The board should review financial reports at least every three months. However, checking them every month is considered a best practice. This regular review helps ensure openness and allows for early detection of any problems.

Does every nonprofit need an official audit?

Not all nonprofits are required to have an audit. An audit might be necessary if state law demands it, if the nonprofit receives over $750,000 in federal funding, or if funders or the organization's own rules require it. Smaller nonprofits might opt for a less intensive review or compilation by a Certified Public Accountant (CPA).

How can a nonprofit know which states require it to register for fundraising?

A nonprofit should register in any state where it actively asks for donations. This includes methods like sending mail, emails, holding events, or running targeted online campaigns. Most states, around 40 of them, have registration requirements.

What are the dangers of wrongly classifying a worker?

Misclassifying a worker can lead to serious issues, including back taxes, penalties, and legal fees. It's important to correctly identify whether someone is an employee or an independent contractor based on IRS and Department of Labor rules.

Why is it important to keep track of money given for specific purposes?

When donors give money for a specific purpose, like a particular program, the nonprofit must use it only for that purpose. Keeping clear records of these restricted funds and how they are spent is crucial for maintaining donor trust and complying with grant agreements. Mixing these funds with general money can cause major problems.