Are Private Foundations Required to Obtain an External Audit of Their Financial Statements?
Private foundations are generally not required by federal law or the IRS to obtain an external audit of their financial statements. However, in very rare cases, an audit may be necessary at the federal level—such as when a foundation receives substantial government funding in the form of federal grants. While certain activity or situations can trigger a federal audit requirement, such situations are exceptionally uncommon. For the vast majority of private foundations, audited financial statements are not required at the federal level.
State Audit Requirements: When Do Private Foundations Need an Audit?
Audit requirements for private foundations vary significantly by state. While more than half of U.S. states impose some form of audit requirement for charitable organizations, many have no such mandate at all.
In states with audit regulations, the requirement is usually triggered when an organization’s annual revenue exceeds a certain threshold. However, in many cases, this threshold applies only to organizations registered to solicit contributions from the public. Since private foundations rarely engage in public fundraising, these audit requirements often do not apply. Furthermore, many states exclude investment income from a foundation’s endowment when calculating revenue for audit purposes.
It is essential to recognize that state-level audit requirements create a complex and inconsistent regulatory landscape. Each state sets its own rules, including different revenue thresholds, varying definitions of what counts as revenue, and distinct exemptions for certain types of organizations. A good starting point to check the audit requirements specific to your state, is the National Council of Nonprofits webpage on nonprofit audit laws: State Law Nonprofit Audit Requirements
When an Audit Might Be Recommended
Even if not legally required, an external audit can be beneficial in certain circumstances, particularly for foundations with substantial endowments. Donors, board members, and trustees may request an independent audit to ensure financial accountability, as it demonstrates a foundation’s commitment to transparency and responsible financial stewardship. By undergoing an audit, foundations can reinforce donor confidence and build trust among key stakeholders.
Beyond meeting stakeholder expectations, audits can also serve as an important tool for internal governance and risk management. Foundations with significant endowments—especially those managing assets in the hundreds of millions or more—often choose to conduct audits voluntarily as part of their governance policies. A routine audit helps identify potential financial risks, ensures compliance with tax regulations, and strengthens internal controls, ultimately safeguarding the foundation’s long-term stability.
Conclusion
Although federal law generally does not require private foundations to obtain an external audit, state laws and governance best practices may make one necessary or advisable. This is particularly relevant for larger foundations with high annual revenue and extensive operations. To ensure compliance with state regulations and uphold strong governance standards, private foundations should consult with a tax advisor or legal expert to determine whether an audit is required or would be in their best interest.
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