Receiving a Notice of Proposed Assessment from the Virginia Department of Taxation or the IRS can be alarming for any nonprofit leader. These notices indicate that the tax authority believes additional taxes, penalties, or interest are owed, and they require prompt attention to protect your organization’s tax-exempt status and financial health. What Is a Notice of Proposed Assessment? A Notice of Proposed Assessment is a formal communication from a tax authority proposing adjustments to your organization’s tax filings. It typically outlines: The specific tax period under review The proposed changes to your return The additional tax, penalties, and interest calculated The deadline to respond or appeal For Virginia nonprofits, these notices can come from either the IRS (federal level) or the Virginia Department of Taxation (state level). Each agency has its own procedures and deadlines, making professional guidance essential. Common Triggers for Virginia Nonprofit Assessments Unrelated Business Income Tax (UBIT) Issues Nonprofits must pay tax on income from activities unrelated to their exempt purpose. Common UBIT triggers include: Advertising revenue that exceeds de minimis levels Rental income from debt-financed property Income from regularly carried on trade or business activities not substantially related to the exempt purpose Form 990 Filing Errors or Omissions The IRS scrutinizes Form 990 for accuracy. Common issues include: Incomplete schedules (Schedule A, B, C, G, etc.) Inaccurate reporting of compensation Failure to report required governance information Miscalculation of the public support test Sales and Use Tax Issues Virginia nonprofits that hold sales tax exemption certificates must maintain compliance with the 40% administrative cost rule. If an organization’s administrative costs exceed 40% of gross annual revenue, the Virginia Department of Taxation may propose assessment of unpaid sales tax . Payroll Tax Issues Nonprofits with employees must properly withhold and remit payroll taxes. Common issues include: Misclassification of workers as independent contractors Late payroll tax deposits Errors in calculating withholding amounts Virginia Sales Tax Exemption Requirements To qualify for Virginia’s sales and use tax exemption, a nonprofit must meet specific requirements : The organization must be exempt from federal income taxation under §§ 501(c)(3), 501(c)(4), or 501(c)(19) Annual administrative costs, including salaries and fundraising, must not exceed 40% of annual gross revenue Organizations with gross annual revenue of at least $750,000 in the previous year must provide a financial review performed by an independent CPA Virginia Tax may require organizations with gross annual revenue of at least $1.5 million to provide a full financial audit If an organization fails to meet these requirements, the Department of Taxation may issue a Notice of Proposed Assessment for unpaid sales and use tax. Responding to a Notice of Proposed Assessment 1. Do Not Ignore the Notice Ignoring a Notice of Proposed Assessment is the worst possible response. Deadlines are strict, and failure to respond can result in the assessment becoming final, with additional penalties and interest accruing. 2. Review the Notice Carefully Understand exactly what the tax authority is proposing and why. Identify the tax period, the specific adjustments, and the deadline to respond. 3. Gather Supporting Documentation Collect all relevant records, including: Form 990 and supporting schedules Financial statements and audit reports Sales tax exemption certificates and purchase records Payroll records and employment tax filings Board meeting minutes and governance policies 4. Consider Professional Representation Tax matters can be complex, especially for nonprofits navigating both federal and state requirements. A CPA with experience in nonprofit tax matters can help you evaluate the proposed assessment and negotiate with the tax authority on your behalf. At Nova Tax & Accounting Services , our expert tax solutions team provides professional representation and advocacy for nonprofits facing tax assessments. Appealing a Notice of Proposed Assessment If you disagree with the proposed assessment, you have the right to appeal. The appeal process varies by agency: IRS Appeals Taxpayers have the right to appeal IRS decisions through the IRS Office of Appeals. Appeals are generally available before payment of the tax and are intended to resolve disputes without litigation. The IRS provides information on the appeals process and taxpayer rights on its official website . Virginia Department of Taxation Appeals Virginia taxpayers can request reconsideration of a proposed assessment by submitting a written protest with supporting documentation. The Department of Taxation provides procedures for appeals and hearings through its official channels . Preventing Future Assessments Maintain Accurate Records Keep complete, organized records of all financial transactions, tax filings, and correspondence with tax authorities. Virginia Tax may request records to verify compliance . Stay Current on Compliance Ensure your nonprofit meets all filing obligations: File Form 990 annually with the IRS Renew VDACS charitable solicitation registration annually Maintain sales tax exemption with Virginia Tax File Virginia SCC annual report Monitor the 40% Administrative Cost Rule Virginia’s sales tax exemption requires that administrative costs (salaries, fundraising, overhead) not exceed 40% of gross annual revenue. Monitor this ratio carefully throughout the year . Engage Professional Support Regular professional oversight can help identify potential issues before they become assessments. At Nova Tax & Accounting Services , we provide accounting and bookkeeping and assurance and compliance services to help Virginia nonprofits maintain compliance and avoid tax assessments.
One of the most common questions nonprofit leaders ask is: “Does my organization need an audit?” The answer in Virginia depends primarily on revenue thresholds, but also on grant requirements, funder expectations, and multi-state operations. When Virginia Law Requires a Financial Review or Audit Virginia law does not require every nonprofit to obtain audited or reviewed financial statements. However, revenue thresholds matter, particularly when applying for or maintaining certain state tax exemptions . The Virginia thresholds are: Under $750,000 in annual gross revenue: No state-mandated review or audit is required (though funders or grantors may still require one) $750,000 or more in annual gross revenue: A financial review performed by an independent CPA is required $1,500,000 or more in annual gross revenue: Virginia may require a full independent audit in lieu of a review These revenue thresholds are based on gross annual revenue and apply to fiscal years beginning on or after October 1, 2024. What Is a Financial Review vs. an Audit? The difference between a review and an audit is significant in terms of both cost and the level of assurance provided . Financial Review (also called a “review engagement”): An independent CPA performs analytical procedures (reviewing trends and ratios) and makes inquiries of management. The conclusion states that nothing came to the accountant’s attention suggesting the financial statements are materially misstated. A review provides limited assurance and is less expensive than an audit. Financial Audit: An independent CPA performs detailed testing, confirms information with third parties (banks, customers, vendors), and assesses internal controls. The CPA issues an opinion stating whether the financial statements are presented fairly, in all material respects, in conformity with GAAP. An audit provides reasonable assurance and is the highest level of financial scrutiny . Why Nonprofits Must Care About These Thresholds Failing to meet applicable financial reporting requirements can jeopardize a nonprofit’s compliance with Virginia tax exemption and charitable registration rules. Additionally, the Virginia sales tax exemption requires organizations to maintain administrative costs (salaries, fundraising, overhead) at no more than 40% of gross annual revenue. When gross annual revenue exceeds $750,000, the organization must undergo a financial statement review by an independent CPA to verify administrative costs remain under 40%. For VDACS charitable solicitation registration, organizations have the option to submit either Form 990 or audited financial statements with their annual Form 102 registration materials. If the organization files Form 990-N, it must submit a Certified Treasurer’s Report (signed internal statements) from the previous tax year . What an Audit Program Looks Like The audit program will vary with the type of nonprofit, its volume of income, and the complexity of its operations. The audit team should develop a written plan for each account balance or class of transaction selected for examination . Below are three areas of emphasis to include in the audit program. 1. The Proper Authorization of Activities and Expenditures The budget and the board of directors’ minutes are the usual source of verification of a nonprofit’s activities. Committee chairs are generally required to authorize any expenses from their budget funds. Employees often document their own timesheets and expense records, with a second party reviewing these documents each month . Additionally, the corporate charter and bylaws should be reviewed to determine that all activities comply, that the designated individuals are performing their proper functions, and that these functions are properly assigned to programs, management and fundraising . 2. Determination of the Physical Existence of Assets Verification of bank balances and current bank signatures, an actual count of securities owned, and a count of merchandise are procedures that help the audit team determine the physical existence of assets. An examination of deeds and tax assessments is another procedure applicable when real property is owned by a nonprofit. Securing appraisals of donated property might be appropriate in the case of unusual donations. All of these records — such as monthly bank statements, brokerage statements, deeds and donation forms — should be available to the audit team . 3. Ascertaining That Returns and Reports Are Filed in a Timely Fashion A nonprofit has the same obligation to file tax returns and corporate reports as a for-profit organization. Failure to comply with these requirements will expose the nonprofit to possible fines or penalties. The IRS has become especially harsh with any non-compliance with Form 990 filing dates . At its planning meeting, the audit team should prepare a list of these taxes and reports, including: Payroll taxes, if wages are paid Sales taxes and licenses Annual corporate report, to be filed with the state Form 990, Return of Organization Exempt From Income Tax Internal Controls for Nonprofit Cash Receipts Proper internal controls are essential for maintaining audit readiness. The Virginia Society of CPAs recommends several controls for cash receipts : Incoming mail should be opened and listed by persons other than those with access to cash receipts journals and accounts receivable records Pre-numbered receipts should be given for contributions, gifts, etc. Checks should be stamped “For Deposit Only” by the person opening the mail The nonprofit board should authorize bank accounts and the signers of checks annually Cash receipts should be entered in journals by persons other than those opening mail and listing receipts Receipts of checks and cash should be deposited each day intact Individuals handling cash should not make entries to the general ledger or subsidiary ledgers A gift acceptance policy should be present, monitored for needed updates regularly, and reviewed to ensure it is being followed by those taking or receiving gifts on behalf of the organization How Nova Tax & Accounting Can Help At Nova Tax & Accounting Services , we provide independent audit and review services tailored specifically for nonprofit organizations and their unique reporting needs. Our team conducts financial statement audits, reviews, and compilations designed to meet the unique reporting requirements of nonprofit organizations. Schedule your free consultation today to discuss your organization’s audit needs.
For organizations seeking tax-exempt status in Virginia, the 501(c)(3) application process is the critical gateway to federal recognition. While forming a Virginia nonstock corporation is the first legal step, securing IRS recognition under Section 501(c)(3) is what unlocks the full benefits of tax-exempt status: eligibility for grants, tax-deductible donations, sales tax exemptions, and donor confidence. The full timeline from filing Articles through obtaining all required registrations typically runs four to twelve months. The range is that wide for one reason: IRS processing time. Every other step is measured in days or weeks . Step 1: Define a Mission That Serves a Real Community Need Before filing any documents with the IRS or the Virginia State Corporation Commission (SCC), organizations should clearly define the problem they aim to solve and why the organization should exist. A strong nonprofit mission should be specific, actionable, and publicly accessible. Founders should ask: What community need is being addressed? Who will benefit from the organization’s work? What services or programs will be provided? Are other organizations already doing similar work? How will success be measured? A clearly written mission statement will help guide your decisions, fundraising efforts, and legal filings . It also helps prevent the organization from drifting into activities unrelated to its exempt purpose. Step 2: Choose the Right Virginia Entity Type Most Virginia charitable organizations first form as a Virginia nonstock corporation. This structure provides a clear governance model, offers legal protection for directors and officers, and establishes a strong foundation for tax exemption . While it’s possible to operate as an informal association, doing so limits your liability protection and can complicate donations and contracts. Incorporating as a nonstock corporation through the Virginia State Corporation Commission is typically the safest and most recognized option . A Virginia nonstock corporation operates under rules that generally prevent the distribution of income or dividends to directors, officers, or members, except as reasonable compensation for services or as asset distributions upon dissolution. This aligns well with the nonprofit model. Not all nonstock corporations automatically qualify for 501(c)(3) status. They must meet IRS criteria for charitable, educational, scientific, or similar purposes and apply for recognition using Form 1023 or 1023-EZ . The process of applying for tax-exempt status requires specific language in the Articles of Incorporation and a clear demonstration of charitable purpose. Step 3: Draft Your Articles of Incorporation The Articles of Incorporation are filed with the Virginia SCC and legally establish the nonprofit in the Commonwealth. For organizations planning to apply for 501(c)(3) status, the Articles must meet specific IRS requirements. According to the Virginia Administrative Code, property used by qualifying organizations for a religious, charitable, patriotic, historical, benevolent, cultural, or public park and playground purpose shall be exempt from taxation, so long as such organization is operated not for profit and the property so exempt is used in accordance with the purpose for which the organization is classified . The document should generally include: The organization’s name A statement that the corporation is a nonstock corporation The registered agent and registered office information The principal office address A statement of the organization’s charitable purpose An appropriate dissolution clause stating that remaining assets upon dissolution will be distributed for another charitable or public purpose Other statements required for exemption purposes Defective or vague Articles can slow down the IRS application or require later amendments. It is easier to get the language correct at the formation stage than to correct it after the board is operational. The filing fee for Articles of Incorporation with the Virginia SCC is $75 . Step 4: Name the Organization Carefully The organization’s name should be memorable, aligned with the mission, and available under Virginia naming rules. A good nonprofit name should: Be distinguishable from other registered entities in Virginia Avoid misleading terms when not authorized Be easy to spell and remember Reflect the organization’s purpose Before submitting, check the Virginia SCC records to confirm name availability. If the organization is expected to grow, consider whether the name remains suitable if services expand to other cities or service lines. Step 5: Recruit Incorporators, Directors, and Officers Every nonprofit needs individuals responsible for launching and governing the organization. Incorporators sign and file the Articles of Incorporation. At least one incorporator is required. The Board of Directors governs the organization, approves major decisions, and helps maintain accountability. Directors should understand the mission, exercise independent judgment, and support compliance and oversight. A strong board typically includes individuals with diverse skills: finance, operations, fundraising, community relations, legal, and program experience . Officers handle day-to-day governance tasks. Common roles include president, secretary, and treasurer. For 501(c)(3) organizations, having a thorough and independent board also helps build credibility and long-term compliance . Step 6: Obtain an Employer Identification Number (EIN) Every nonprofit needs an Employer Identification Number (EIN) from the IRS, even if it has no employees. The EIN is used to open a bank account, file tax forms, apply for exemption, and manage payroll if the organization hires staff. Apply for the EIN as soon as the legal entity is formed. Do not wait until the organization is ready to accept donations. Banks and the IRS will require this number . Step 7: Adopt Bylaws and a Conflict of Interest Policy The Articles of Incorporation establish the legal entity, but the bylaws define how the organization will operate. Bylaws typically address: Board structure and terms Officer roles and elections Meeting frequency and notice rules Voting procedures Quorum requirements Committees Resignation, removal, and vacancy procedures Recordkeeping and governance authority A conflict of interest policy is equally important. This policy helps prevent directors and officers from using the organization for personal gain and demonstrates that the organization takes governance seriously. The IRS will scrutinize the bylaws as part of the tax-exempt application, making professional assistance valuable . Step 8: Hold the Organizational Meeting The first board meeting is when the nonprofit effectively begins operations. At this meeting, the board typically: Approves the bylaws Adopts a conflict of interest policy Elects or confirms officers Authorizes opening a bank account Approves accounting and