Link to Letter Here: IRS - Exempt Organization 2018 Accomplishment Letter
Question: Why are audit fees so expensive for Nonprofits?
Question: Why are audit fees so expensive for Nonprofits?
Generally, audit fees are expensive for any entity. Complicating this is the fact that many small organizations don’t have a full understanding of the audit process and how it differs from a preparation engagement. On the surface, the output is seemingly the same. There is not much extra “paper” you receive from an audit compared to less expensive services. All the extra work for the CPA firm goes into their documentation and remains in the audit files of the firm. Those files will be “audited” during that firm’s Peer Review. The extra piece of paper you do get, the audit opinion report, which proceeds the financial statements, has to be backed up by serious amounts of documentation . That is why it is the gold standard in the world of accounting and also why the Audit Report is relied on by your organization (i.e. your board), your donors, your grantors, your service recipients and state charity regulators. If you have not worked as an auditor for a peer reviewed CPA firm, it would be hard to understand the full audit process. For edification, I will point you to the popular blog of Charles Hall. You can read the blog here, Each entry is an education of what goes into the audit process “behind the scenes”. If you want to know more about the differences between Audit, Review and Compilation services, I will point you to this AICPA publication .
So, why are audit fees so expensive for Nonprofits?
Audits (and reviews) are subject to peer review. This means the CPA’s files and workpapers are reviewed by an AICPA approved peer reviewer. Peer review requirements have been becoming increasingly stringent for a variety of reasons. Remember, there is only one audit standard. The same rules and documentation requirements apply to auditing a small nonprofit organization as to a public entity (e.g. Microsoft). Specialized personnel are needed to work on audit documentation and are in demand. Additionally, NY has now joined every other state in the nation in requiring peer reviews for every CPA doing Audits or Reviews. Many smaller firms and sole practitioners dropped audits/reviews instead of being subject to peer review. Price is also affected by supply and demand. This is very specialized service (audits) and few people are doing it. Also, Nonprofits are a specialized industry which many accountants don't serve.
Outside of the Nonprofit world, few small entities (i.e. small businesses) ever have a CPA financial statement audit. Because of the public nature of 501(c)(3) charitable organizations, there are immense benefits for these organizations to have an audit. There are good reasons why states require audits as a tool to protect the public’s interest as they regulate charities and charitable assets in their state. Unfortunately, lack of funds , lack of experience in staff and governance and the limited amounts of CPAs actually doing Nonprofit audits, makes this a dilemma for many small organizations.
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IRS Excess Benefit Transactions & Intermediate Sanctions
The world of nonprofit organizations is made up of diverse organizations. Many times, nonprofit organizations have some inter-connectivity or relationship with a for-profit company. Any individual or for-profit entity could be a disqualified person and subject to IRS sanctions and monetary penalties if involved in an excess benefit transaction.
Excess Benefit Transaction
An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of a disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration received by the organization.
Disqualified Person
A disqualified person is any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during the look-back period. It is not necessary that the person actually exercise substantial influence, only that the person be in a position to do so.
Imposition of Excise Tax on Disqualified Persons
An excise tax equal to 25 percent of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. The disqualified person who benefited from the transaction is liable for the tax. If the 25 percent tax is imposed and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200 percent of the excess benefit is imposed.
If a disqualified person makes a payment of less than the full correction amount, the 200 percent tax is imposed only on the unpaid portion of the correction amount. If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes.
To avoid the imposition of the 200 percent tax, a disqualified person must correct the excess benefit transaction during the taxable period. The taxable period begins on the date the transaction occurs and ends on the earlier of the date the statutory notice of deficiency is issued or the section 4958 taxes are assessed. This 200 percent tax may be abated if the excess benefit transaction subsequently is corrected during a 90-day correction period.
Imposition of Excise Tax on Organization Managers
An excise tax equal to 10 percent of the excess benefit may be imposed on the participation of an organization manager in an excess benefit transaction between an applicable tax-exempt organization and a disqualified person. This tax, which may not exceed $20,000 with respect to any single transaction, is only imposed if the 25 percent tax is imposed on the disqualified person, the organization manager knowingly participated in the transaction, and the manager’s participation was willful and not due to reasonable cause. There is also joint and several liability for this tax. A person may be liable for both the tax paid by the disqualified person and this organization manager tax in appropriate circumstances.
An organization manager is not considered to have participated in an excess benefit transaction where the manager has opposed the transaction in a manner consistent with the fulfillment of the manager’s responsibilities to the organization.
A person participates in a transaction knowingly if the person has actual knowledge of sufficient facts so that, based solely upon such facts, the transaction would be an excess benefit transaction. Knowing does not mean having reason to know. The organization manager will not be considered knowing, if after full disclosure of the factual situation to an appropriate professional, the organization manager relied on a professional’s reasoned written opinion on matters within the professional’s expertise or if the manager relied on the fact that the requirements for the rebuttable presumption have been satisfied.
Participation by an organization manager is willful if it is voluntary, conscious, and intentional. An organization manager’s participation is due to reasonable cause if the manager has exercised responsibility on behalf of the organization with ordinary business care and prudence.