Nonprofit Grant Funding, Financial Audits, and Compliance
For nonprofit organizations across Virginia and Washington DC, the landscape of grant funding, financial audits, and compliance has shifted dramatically. The Treasury Department’s April 2026 announcement that the IRS plans to revise Form 990 to require clearer reporting on government grants, contracts, and fiscal sponsorship arrangements signals a new era of scrutiny . Treasury Secretary Scott Bessent stated plainly: “Public money and tax-exempt status demand public accountability. We are ending the days of hiding fraud, abuse, and extremist activity behind complicated nonprofit arrangements” .
For mission-driven organizations, this means that the systems and documentation supporting grant funding must be stronger than ever. Auditors, funders, and boards are placing greater emphasis on how nonprofits safeguard their finances. Even small teams must show clear review processes and documented checks and balances .
This guide provides a comprehensive overview of grant management, financial audit requirements, and compliance obligations for Virginia and DC nonprofits in 2026.
Understanding the Grant Life Cycle
Grants management is not a single task—it is a series of decisions, handoffs, and checkpoints that span two broad stages: pre-award and post-award .
Pre-Award: Planning and Decision-Making
The pre-award phase is about identifying opportunities and making informed decisions. Organizations must assess mission alignment, organizational capacity, financial viability, and whether they can produce a competitive proposal . Developing a realistic project budget is critical, and best practice is for program and finance teams to collaborate on the budget with enough time for review before submission. Even when finance only reviews the budget, its involvement helps ensure the numbers are complete, compliant, and manageable once the grant is awarded .
Post-Award: Execution, Monitoring, and Compliance
The post-award phase includes grant execution, delivery, monitoring, and compliance. The first step should be reviewing, documenting, and communicating to stakeholders the award terms and conditions, including the period of performance . From there, it is critical to ensure the grant is set up properly in the accounting system and that roles and responsibilities are clarified up front.
One practical tool worth adopting is a RACI matrix, which maps who is responsible, accountable, consulted, and informed at each stage. Spanning finance, grants management, program, development, legal, and IT, a formal RACI matrix helps operationalize grants management and reduce risk from start to finish .
Who Is Responsible for Grants Management?
A recurring point is that no single team owns grants management. It is a shared discipline that spans finance, programs, and development, and it works best when those functions stay connected throughout the life of a grant .
Finance Owns the Guardrails
The finance team owns internal controls, cash management, the general ledger and chart of accounts, financial reporting, and time and effort reporting. How grants are set up in the accounting system is foundational. Every restricted grant should have its own distinct identifier—a grant code, unique class or fund, or project ID—so spending can be tracked cleanly by award . Without that structure, reporting becomes manual and painful.
Time and effort reporting is one of the most scrutinized areas in grants management. Salary and benefit costs must be allocated using a documented, reasonable, and consistently applied method that accurately reflects the work performed. Timesheets or activity reports offer the clearest, most defensible support. The method used to allocate salaries must be documented, applied consistently, reviewed regularly, and supported by documentation that someone outside the organization could reasonably follow .
Program Teams Manage the Work
Program teams implement grant-funded projects and manage resources, vendor and subrecipient relationships, and the project scope of work. They are responsible for confirming that expenses are allowable in the context of the grant .
Procurement is another area where audit issues often surface. Program staff must understand that procurement rules apply directly to them, and ongoing training is important because funder requirements or organizational policies can change .
Development Keeps the Funder Relationship Strong
Development teams own the funder relationship and need to stay in the loop so they are aware of any grant-related issues and can help communicate with a funder as needed. The handoff from development to program and finance teams is a common place for grant details or funder expectations to fall through the cracks .
Internal Controls: The Foundation of Grant Compliance
Internal controls may not be an exciting topic, but they are foundational to successful grants management. A common refrain is that an organization “has controls, they’re just not written down”—however, auditors generally view undocumented practices as institutional knowledge, not controls. Documented controls help preserve organizational knowledge, promote consistency, and support continuity as teams and responsibilities evolve .
Key Controls for Grant Management
Authorization and approval: Funders and auditors want to know who can approve grant expenses, what limits apply, and where that is documented. Automated accounts payable workflow solutions create a clear audit trail when set up thoughtfully .
Segregation of duties: Ideally, the person requesting a purchase isn’t the one approving and recording it. When staffing is limited, compensating controls such as secondary or board review help, as long as they are documented .
Documentation and record retention: Approvals, cost justifications, allocation methodologies, and exceptions must be documented and retained .
Reconciliation: Bank and credit card accounts should be reconciled monthly. Nonprofits should also reconcile pledge and contribution activity between the development department and accounting to ensure that promised donations are accurately recorded .
Virginia Nonprofit Audit Requirements
Virginia law establishes specific thresholds for nonprofit financial reporting that affect grant compliance and tax exemption.
The $750,000 Threshold: Financial Review Required
To qualify for Virginia’s sales and use tax exemption, a nonprofit organization with gross annual revenue of at least $750,000 in the previous year must provide a financial review performed by an independent Certified Public Accountant . This is a statutory requirement under Virginia Code § 58.1-609.11.
The $1.5 Million Threshold: Audit May Be Required
Virginia Tax may require an organization with gross annual revenue of at least $1.5 million in the previous year to provide a financial audit performed by an independent CPA in lieu of a financial review . A 2021 ruling from the Virginia Tax Commissioner confirmed that the Department is authorized to require a financial audit for organizations with gross revenues exceeding $1 million . In that case, a nonprofit that submitted only a financial review was denied renewal of its exemption because its gross annual revenue exceeded $1 million .
Single Audit for Federal Grant Recipients
For nonprofits expending $1,000,000 or more in federal awards during a fiscal year, a Single Audit (Uniform Guidance audit) is required. This comprehensive audit examines both financial statements and compliance with federal program requirements. The threshold was increased from $750,000 to $1,000,000 effective for fiscal years beginning on or after October 1, 2024.
Charitable Solicitation Registration in Virginia
Virginia law requires that every charitable organization intending to solicit contributions within the Commonwealth, or have funds solicited on its behalf, must register with the Office of Charitable and Regulatory Programs (OCRP) within the Virginia Department of Agriculture and Consumer Services (VDACS) prior to any solicitation .
Fairfax County Additional Requirements
Fairfax County requires charitable and civic organizations that solicit donations in the county to obtain a license from the Regulation and Licensing Branch prior to soliciting, unless they have registered with VDACS . Organizations registered with VDACS should provide a copy of their VDACS registration letter to the county to receive an exemption from the county license requirement .
The New Form 990 Transparency Initiative
The Treasury Department’s April 2026 announcement that the IRS plans to revise Form 990 represents a significant shift in how nonprofit compliance will be evaluated . The proposed changes focus on three areas:
Government Grants and Contracts: Currently, government grants are reported separately from other contributions, but there is no requirement to show how specific governmental funds are spent. The proposed changes would require organizations to report not only the receipt of government grants and contracts, but also how those funds are specifically used .
Fiscal Sponsorship Arrangements: Treasury raised concerns that some organizations may use fiscal sponsorship arrangements to obscure the source of funds and how funds are being used. Proposed reporting changes would require disclosure of who is operating the project, who controls the funds, and how the funds are used .
Increased Scrutiny of 501(c)(3) Organizations: The proposed changes specifically target 501(c)(3) organizations, particularly those that receive government grants, have government contracts, or participate in fiscal sponsorship arrangements .
Preparing for the Changes
While any major changes would need to go through the formal notice-and-comment rule-making procedures under the Administrative Procedures Act, organizations should take proactive steps now :
Review Public Disclosures: Examine publicly available information regarding your organization, including what is reported on your Form 990, regarding funding, spending, programs, and activities to ensure consistency with stated purpose .
Ensure Consistency: Confirm that the exempt purposes stated on your annual return are consistent with your organization’s actual activities .
Document Fiscal Sponsorships: If your organization serves as a fiscal sponsor, ensure that all reporting regarding sponsorships and sponsored entities is consistent and accurate .
Track Government Funds: Review how government grants and contracts are tracked, so your organization can clearly demonstrate the source, purpose, and use of public funds .
Enhance Internal Reporting: Enhance internal reporting processes to support potential new disclosures on how specific government funds are spent and allocated across programs and activities .
Common Audit Triggers and Compliance Pitfalls
Form 990 Red Flags
The IRS can initiate an audit for many reasons, but one of the most common is a red flag sent up by the annual Form 990 filing. Key areas of scrutiny include:
Incomplete or Inconsistent Information: Missing schedules, blank boxes, or unsigned forms can draw IRS attention. The agency considers incomplete returns to be unfiled returns .
Unreasonable Compensation: Excessive compensation paid to officers, directors, and high-ranking employees will be noticed .
Excess Benefit Transactions: Transactions that provide economic benefit to disqualified persons can lead to audits and costly intermediate sanctions .
Foreign Grant Activity: The IRS keeps a close eye on nonprofits operating overseas due to concerns about foreign control and funds being used for noncharitable purposes .
Diverted Assets: Organizations must disclose embezzlement or fraud if the gross value of illegally diverted assets exceeds 5% of gross receipts, 5% of total assets, or $250,000 .
Grants Management Pitfalls
Even well-intentioned organizations can run into trouble. Common pitfalls include:
Unallowable costs: Charging expenses that are not permitted under the grant terms can result in questioned costs and repayment demands .
Inadequate documentation: Missing receipts, timesheets, or approval records can lead to audit findings .
Procurement violations: Federal procurement rules require competition for purchases above certain thresholds .
Failure to monitor subrecipients: Organizations that pass grant funds to subrecipients must monitor how those funds are used .
Late or inaccurate reporting: Financial and programmatic reports must be submitted on time and accurately reflect grant activities .
New GAO Standards for Government Audits
The 2024 GAO Yellow Book introduces new quality standards for government audits that took effect on December 31, 2025 . The new standards address six threats to audit quality:
Organizational complexity and audit organization: When organizations are overly complex, it creates opportunities for things to fall through the cracks—missed reviews, inconsistent training, or unclear accountability .
Strategic and operational decisions: Leadership choices that stretch staff too thin or prioritize volume, politics, or speed over quality can adversely affect audit impact .
Characteristics and style of leadership: A micromanaging, indecisive, or disengaged leader is a threat to audit quality .
Organizational resources: Audit quality suffers when auditors are expected to do their jobs without adequate support—time, staffing, tools, or training .
Law, regulation, professional standards and operational environment: Being out of sync with evolving standards can cost reputation and trigger rework .
For nonprofits receiving federal or state grants, these standards affect how audits are conducted and what auditors will expect from management .
Virginia Property Tax Exemption: A Recent Court Decision
A recent Virginia Court of Appeals decision has significant implications for nonprofit property tax exemptions. In the case of Christian Scholars Network (CSN) v. Montgomery County, the court affirmed that property owned by a 501(c)(3) nonprofit did not satisfy the exclusive-use requirement to qualify for a property tax exemption .
CSN owned a two-unit office condominium used for networking and events, allowing affiliated organizations and local churches to use the property for free. However, CSN also allowed a for-profit organization, Abundant Life Christian Counseling, free use of the property to provide mental health services to clients, for which it charged $100 per partial hour. The court found that the activities of the for-profit counseling service could not be characterized as religious services, and the extensive third-party use was fatal to the exemption claim .
This case reinforces that Virginia property tax exemptions for nonprofits require exclusive use for religious, charitable, or educational purposes. Nonprofits must be meticulous in documenting that their property is used exclusively for qualifying purposes, and any third-party use—particularly by for-profit entities—can jeopardize exempt status.
Preparing for Audit Readiness
Nonprofit organizations should prioritize the following actions to reduce audit risk and ensure audit readiness :
1. Regular Reviews of Form 990
Ensure accuracy and consistency in filings. Review the form for completeness, proper schedule attachment, and alignment with your organization’s actual activities and finances.
2. Test Unrelated Business Income Positions
Verify proper allocation and documentation for any UBI. Ensure that UBI does not account for too much of your overall revenue.
3. Update Compensation Policies
Use independent comparability data for compensation adjustments. Document the board’s review and approval of executive compensation.
4. Clear Gift Acceptance Policies
Maintain transparency and adherence to guidelines for accepting and valuing non-cash donations.
5. Document Lobbying Activities
Keep detailed records and ensure compliance with regulations. For 501(c)(3) organizations, lobbying must not constitute a substantial part of activities.
6. Conduct Mock Audits
Identify and address potential vulnerabilities before an actual audit.
7. Maintain a Master Log of Records
Have a master log of all records: financial statements, bank statements, board minutes, governance policies, grant agreements, and related-party transactions.
How Nova Tax & Accounting Services Can Help
At Nova Tax & Accounting Services, we specialize in helping Virginia and DC nonprofits navigate the complex and evolving compliance landscape. Our team provides:
Form 990 preparation and compliance
Independent financial statement audits, reviews, and compilations
Single Audit (Uniform Guidance) support
Grant compliance reviews and internal controls assessment
Charitable solicitation registration assistance for Virginia and DC
Nonprofit consulting on budgeting, forecasting, and board reporting
Our CPAs understand the unique challenges facing mission-driven organizations. We help you maintain tax-exempt status, satisfy funding requirements, and demonstrate transparency to donors and regulators.
For more information, visit https://novataxservices.com/ or schedule a free consultation.
Additional Resources
For more detailed information on nonprofit compliance requirements, consult these official resources:
