You filed Form 1023. You waited. Then the letter arrived: the IRS needs additional information before it can approve your exemption. Or worse—the application was denied. For a new nonprofit, this feels like a dead end. The organization cannot solicit tax-deductible donations, cannot apply for many grants, and cannot assure donors that contributions are tax-deductible. The mission stalls while the paperwork sits unresolved. The situation is fixable in most cases. The IRS denial or request for information is not a final judgment. It is a signal that something in the application was incomplete, inconsistent, or unclear. Understanding what the IRS looks for—and correcting it—is the path forward. Why Applications Get Flagged The IRS reviews Form 1023 for completeness and consistency. Common issues that trigger follow-up or denial include: Incomplete organizing documents. The Articles of Incorporation must include specific language required for 501(c)(3) status, including a proper dissolution clause and a statement of charitable purpose. If the Articles are missing required provisions, the IRS will request an amendment . Inconsistent mission description. What you stated in the Articles of Incorporation must match what you describe in the application. If the organizing document says one thing and the narrative says another, the IRS will ask which is accurate. Missing or outdated financial information. The application requires projected financial data and, for existing organizations, historical financial statements. Incomplete financial sections are a common reason for delay. Failure to include required attachments. The IRS provides a checklist for Form 1023. Missing schedules, signatures, or supporting documents result in a request for additional information or a denial . If You Received a Request for Information The IRS typically sends a letter identifying the specific issue and providing a deadline to respond. This is not a denial. It is an opportunity to correct the record. Read the letter carefully. Identify each item the IRS has flagged. Do not respond only to the first issue; address every item. Respond by the deadline. If you need more time, request an extension in writing before the deadline passes. Extensions are routinely granted when requested in advance. Provide clear, organized documentation. If the IRS asks for an amended Article, provide the amendment and a brief explanation of what changed. If the IRS asks about program activities, provide a narrative that describes what the organization actually does—not what it hopes to do. If Your Application Was Denied A denial letter will state the reason. Common reasons include: Activity not qualifying for 501(c)(3). The IRS determined that the organization’s activities do not meet the requirements for charitable, educational, religious, or scientific purposes. Private benefit or inurement. The application indicated that insiders would benefit from the organization’s activities. Incomplete application after follow-up. The organization did not respond to a request for information, or the response was insufficient. The fix: You can reapply. A new Form 1023 (or 1023-EZ if eligible) can be filed with corrected information. The user fee applies again. In some cases, the organization may need to amend its Articles of Incorporation, revise its bylaws, or restructure its governance before reapplying. After Approval: Staying Compliant Once the IRS issues the determination letter, the organization must maintain compliance. Key obligations: File Form 990 annually. Failure to file for three consecutive years results in automatic revocation of tax-exempt status . The IRS will not send additional notices before revocation. Maintain accurate records. The organization should retain financial records, board minutes, and documentation supporting its tax-exempt activities. Update the IRS if circumstances change. If the organization changes its name, address, or exempt purpose, it must notify the IRS. Virginia and DC: Separate State Requirements Federal 501(c)(3) status does not automatically grant state tax exemption. Virginia: Organizations must apply separately to Virginia Tax for sales and use tax exemption. The application requires the IRS determination letter, a financial review or audit if revenue exceeds $750,000, a copy of Form 990, and proof of VDACS registration if the organization solicits contributions . Organizations that solicit donations in Virginia must register with VDACS before soliciting . Washington DC: Organizations must file Form FR-164 with the Office of Tax and Revenue to obtain DC tax exemption. The application requires the IRS determination letter and DC business registration documentation . Common reasons for denial include failure to attach requested documents, attaching outdated certificates, and submitting the wrong type of business license documentation . How Nova Tax & Accounting Services Can Help Nova Tax & Accounting Services helps organizations navigate the 501(c)(3) application process, respond to IRS requests for information, and establish state tax exemption in Virginia and DC. Our team reviews organizing documents, prepares application responses, and coordinates with the organization’s legal counsel when amendments are needed. For more information, visit https://novataxservices.com/ or schedule a free consultation. Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Tax laws are subject to change, and individual circumstances vary. Consult a qualified tax professional for advice regarding your specific situation.
A lender has requested financial statements. A potential investor wants assurance. A board member has asked whether the organization needs an audit. The question is not always “do we need an audit?” It is often “what level of assurance is appropriate for this situation?” The answer depends on who is asking, what they will do with the statements, and what the organization can afford in time and cost. Definitions That Matter Compilation. The CPA organizes financial data into statement format but performs no verification. No assurance is provided that the statements are free from material misstatement. Compilations are appropriate for internal management, tax filing, and simple loan applications where no assurance is required. Review. The CPA performs analytical procedures and inquiries of management. Limited assurance is provided that the statements are plausible and free from material misstatement. Reviews are appropriate for boards, smaller lenders, and grantors that require more than a compilation but do not require a full audit. Audit. The CPA performs testing, confirms balances with third parties, evaluates internal controls, and issues an opinion on whether the statements are presented fairly. Audits are required for federal grant recipients subject to Single Audit, publicly traded companies, and many lenders and investors. The Decision Framework Ask the requester what they will accept. A lender may say “audited financials” as a default but accept a review if the loan is below a certain amount. An investor may require an audit. A grantor may require a Single Audit because the funding is federal. Do not assume; ask. Consider the cost of being wrong. If you provide a compilation when the lender required a review, the loan may be delayed or denied. If you provide a review when the grantor required an audit, the grant may be at risk. The cost of upgrading the engagement later is often higher than the cost of doing it right the first time. Think about the timeline. A compilation can be completed in days. A review can be completed in weeks. An audit typically requires four to eight weeks of fieldwork, plus planning and reporting. If the deadline is tight, the timeline may determine the level of service. When the Answer Is “None of the Above” Some organizations ask for an audit when the real issue is that the books are a mess. An audit does not fix disorganized records; it identifies the problems and may result in a qualified opinion or a management letter that documents the issues. If the underlying problem is bookkeeping, a cleanup engagement followed by a compilation or review may be more appropriate than an audit. Nova Tax & Accounting Services helps businesses and nonprofits determine the right level of assurance and prepare for the engagement. Our team provides audits, reviews, and compilations, along with bookkeeping and accounting support to ensure the records are ready. For more information, visit https://novataxservices.com/ or schedule a free consultation. Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Tax laws are subject to change, and individual circumstances vary. Consult a qualified tax professional for advice regarding your specific situation.
A foundation or government grantor has notified you that the next award requires audited financial statements. The deadline is in eight weeks. Your organization has never had an audit. The board is asking questions you cannot answer. The finance director is already stretched thin. This is a common scenario for growing nonprofits, and it is manageable with a structured approach. First: Determine What Is Actually Required Not every grantor that says “audit” means a full financial statement audit. Some accept a review. Some accept a compilation. Some require a Single Audit because the funding is federal. Read the grant agreement carefully. If the language specifies “audited financial statements,” confirm whether the grantor will accept a review if a full audit is not feasible in the timeframe. If the funding is federal and the organization expends $1 million or more in federal awards, a Single Audit is required by law. The distinction matters because the cost and timeline differ significantly. A review can often be completed in weeks; a full audit typically requires four to eight weeks of fieldwork plus planning and reporting time. Second: Assess Your Records An auditor cannot audit records that do not exist. Before engaging a firm, review the organization’s books. Are bank reconciliations current? Are grant expenditures tracked separately? Is there a general ledger that reflects all transactions? If the records are incomplete, the audit will take longer and cost more. Some firms offer a pre-audit cleanup engagement to bring the books to an auditable state before fieldwork begins. This is often more efficient than asking the auditor to reconstruct records during the audit. Third: Engage the Auditor Early Do not wait until the grant deadline is two weeks away. Auditors schedule engagements in advance. A firm that is told about an eight-week deadline in week one can plan. A firm that is told in week six may not be able to accommodate the timeline. When you contact a firm, be prepared to provide: The organization’s most recent financial statements The prior year’s Form 990 The grant agreement or the specific audit requirement The fiscal year end and the deadline Fourth: Prepare the Board The board is responsible for overseeing the audit, not performing it. But the board should understand what an audit involves, what it will cost, and what the organization needs to do to support the process. A brief presentation at a board meeting before the engagement begins can prevent confusion later. Fifth: Use the Audit as a Management Tool An audit produces a management letter that identifies internal control weaknesses and recommendations for improvement. Organizations that treat the management letter as a checklist for improvement are better positioned for the next audit and for the next grant application. Nova Tax & Accounting Services provides financial statement audits, reviews, and compilations for nonprofits across Virginia and Washington DC. We help organizations prepare for audits, organize records, and address findings. For more information, visit https://novataxservices.com/audit-attestation-services/ or schedule a free consultation. Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Tax laws are subject to change, and individual circumstances vary. Consult a qualified tax professional for advice regarding your specific situation.