January 9, 2025 - As not-for-profit organizations continue to serve vital roles in their communities, they face an increasingly complex landscape of financial and regulatory challenges. In 2025, not-for-profit leaders must remain vigilant in addressing audit and tax considerations that can significantly impact their operations and sustainability. Here are some focus areas and considerations surrounding audit and tax matters for the upcoming year.

1. Evolving regulatory landscape

   The regulatory environment for not-for-profits is dynamic, with ongoing changes in laws and guidelines at both the federal and state levels. In 2025, not-for-profits must consider how tax policy could evolve under a second Trump administration.
   
   Several bills have already been introduced in Congress that would directly impact not-for-profits – especially those involved with foreign activities. Members of Congress and others continue to focus on whether hospital organizations and donor-advised funds are sufficiently engaged in charitable activities.
   
   Lastly, additional funding previously awarded to the Internal Revenue Service (IRS), intended to assist the agency with modernizing its technology and expanding its workforce, may be rescinded, impacting its ability to enforce existing tax laws, approve exemption applications in a timely manner, and efficiently serve taxpayers.
   
   Not-for-profits should also be aware of changes in accounting standards set by the Financial Accounting Standards Board (FASB). These changes may impact how organizations recognize revenue, report expenses, and manage financial disclosures. By staying abreast of these developments, not-for-profits can ensure compliance and transparency, which are crucial for maintaining stakeholder trust.

2. Strengthening internal controls

   Robust internal controls are fundamental to the financial health of not-for-profit organizations. In 2025, not-for-profits should prioritize evaluating and enhancing their internal control systems. Strong internal controls help mitigate fraud-related risks, financial reporting inaccuracies, and non-compliance with regulations.
   
   Audit committees and management should work collaboratively to assess existing internal control measures, focusing on cash management, grant oversight, and fundraising activities. Regular internal audits can help identify weaknesses and provide insights into areas that require improvement.
   
   By fostering a culture of accountability and transparency, not-for-profits can enhance their operational efficiency and protect their resources.

3. Tax compliance and reporting

   Tax compliance is a paramount concern for not-for-profits, particularly considering potential changes in tax laws and regulations. In 2025, not-for-profit organizations should focus on ensuring compliance with all applicable federal and state tax requirements. While not-for-profits are generally exempt from income tax, they are taxpayers in many other respects, such as the obligation to remit sales and payroll taxes.
   
   Not-for-profits must also pay careful attention to their Form 990 reporting. This extensive and publicly available form provides insights into the not-for-profit organization’s financial health, governance practices, and operational activities. A thorough review of Form 990 before submission is essential to ensure accuracy and completeness, as errors can lead to penalties and damage to the organization’s reputation.
   
   Additionally, not-for-profits should be aware of state-specific tax regulations that may affect their operations. Filing requirements can stem from unrelated business taxable income, charitable contribution solicitations, fundraising events, and sales of goods and services. NFPs conducting raffles or similar gaming-type activities should ensure they comply with the laws in their applicable jurisdiction and remain aware of any additional tax reporting or withholding requirements that may apply.

4. Financial statement preparation

   Financial statement preparation is a critical function for not-for-profit organizations that extends far beyond mere compliance with regulatory requirements. Properly prepared financial statements are a cornerstone of transparency and accountability, enabling not-for-profits to build trust with donors, grantmakers, and the communities they serve. These documents provide crucial insights into the organization's financial health, program effectiveness, and resource allocation, helping board members and leadership make informed, strategic decisions.
   
   Accurate financial statements are also essential for maintaining tax-exempt status, securing grants, and demonstrating responsible stewardship of donated funds. They enable stakeholders to evaluate the not-for-profit's efficiency in delivering on its mission, track year-over-year performance, and assess long-term sustainability.
   
   Moreover, well-prepared financial statements help not-for-profits identify potential areas of concern before they become serious issues, ensure compliance with accounting standards specific to the not-for-profit sector, and provide the documentation needed to secure future funding opportunities.

5. Governance and transparency

   The audit committee plays a pivotal role in shaping and monitoring organizational transparency and ethical conduct by establishing a strong "tone at the top" through comprehensive policies and oversight. By focusing on senior leadership's commitment to integrity, transparency, and accountability, the committee helps create a culture where ethical behavior is encouraged and expected at every level of the organization.
   
   This involves continuously reviewing and strengthening internal control policies, establishing clear whistleblower mechanisms, and ensuring open communication channels between management, staff, and the board. The committee should focus on the organization’s transparency by scrutinizing financial reporting practices, conflict of interest policies, and executive compensation decisions while also fostering an environment where questions and concerns can be raised without fear of retaliation.

6. Leveraging technology for efficiency

   Technology continues to advance rapidly, offering not-for-profits opportunities to enhance their operational efficiency and financial management. In 2025, not-for-profit organizations should explore adopting technology solutions that streamline financial reporting, improve data security, and facilitate compliance.
   
   Cloud-based accounting software can provide real-time access to financial data, allowing for more accurate reporting and analysis. Additionally, leveraging data analytics can help not-for-profits gain insights into fundraising trends, donor behavior, and program effectiveness. By embracing technology, not-for-profits can improve their financial oversight and strategic decision-making.

How we can help Citrin Cooperman’s Not-for-Profit Practice professionals can assist you in staying informed about regulatory changes, strengthening internal controls, overseeing financial statement matters, ensuring tax compliance, promoting ethical governance, and leveraging technology to help your organization navigate the complexities within the industry. Reach out today for additional guidance.