Best Practices: Helping Your Nonprofit Clients Succeed

Part 1 of 2

As of 2022, 1.97 million registered nonprofits were operating in the United States, 1.48 million of which were 501(c)(3) tax-exempt organizations. 501(c)(3)s are organizations that are tax-exempt, donation-supported, publicly accountable, and legally required to operate exclusively for the public good.

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These organizations operate with a variety of missions and outcomes. Despite these differences, they have one thing in common: an obligation to use funds to pursue their objectives in a way that is beneficial to society. 501(c)(3)s generate billions of dollars in revenue each year from fees, program services, contributions, and grants. These revenues can be used in many ways depending on the nature of the nonprofit organization. Typically, funds raised are used, functionally, for program services expenses, management and general expenses, and fundraising expenses as defined by the FASB’s ASC 958, Not-for-Profit Entities.

Best Practice #1: Use the Mission Statement as a Compliance and Planning Anchor

A nonprofit’s mission statement is more than a fundraising message—it defines the operational and regulatory boundaries within which the organization must function to maintain its tax-exempt status. CPAs should periodically review the mission statement with nonprofit clients to ensure that current programs, revenue streams, and expenditures remain aligned with the organization’s stated exempt purpose.

This review also reinforces the CPA’s role as a trusted advisor by linking financial decisions to mission consistency, particularly when evaluating new initiatives, funding opportunities, or changes in organizational direction.

Why it matters?
Mission alignment underpins compliance with IRS requirements for tax-exempt organizations. Activities that fall outside the stated mission can create exposure during Form 990 review, examinations, or grant audits. Using the mission statement as a reference point provides a foundation for sound governance, defensible financial reporting, and the effective application of the best practices that follow.

Best Practice #2: Evaluate Board Governance and Fiduciary Oversight

Strong governance is foundational to a nonprofit’s ability to operate in furtherance of its exempt purpose, comply with federal and state requirements, and sustain long-term financial health. At the center of this governance framework is an effective, informed, and independent board of directors. From a CPA’s perspective, the board’s actions—or lack thereof—often signal the strength of the organization’s overall control environment and compliance posture.

CPAs should assess whether the board is actively fulfilling its fiduciary responsibilities, including:

• Holding regular, well-documented board and committee meetings that demonstrate active oversight
• Maintaining, enforcing, and annually reviewing conflict-of-interest and whistleblower policies
• Ensuring compliance with applicable federal, state, and local laws and regulations governing nonprofit operations
• Understanding and monitoring risks related to finances, operations, and reputation
• Maintaining appropriate board composition, independence, and financial literacy consistent with the organization’s mission and complexity

CPAs should also discuss with clients whether appropriate Directors and Officers (D&O) liability insurance is in place to mitigate fiduciary risk exposure and whether board members understand the personal responsibilities and potential liabilities associated with their roles. Reviewing how board expertise, independence, and governance structure align with the organization’s mission can further strengthen governance effectiveness and regulatory compliance.

Why it matters?
To maintain 501(c)(3) status, a nonprofit must demonstrate active and independent governance, typically through a minimum of three board members and documented oversight activities. Many states impose additional fiduciary and governance requirements, and failure to comply can result in penalties, loss of good standing, or regulatory scrutiny. Weak board governance undermines accountability and increases the risk of compliance failures, financial mismanagement, and reputational harm.

Best Practice #3: Establish Strong Governance Through Effective Internal Controls

Strong governance begins with well-designed and well-monitored internal controls. These controls safeguard assets, support accurate financial reporting, and ensure compliance with tax-exempt requirements. From a CPA’s perspective, internal controls are not merely operational tools—they are foundational to transparency, accountability, and organizational credibility.

CPAs should evaluate whether management and the board have established and maintained effective internal controls over key risk areas, including:

• Financial reporting and period-end closing processes
• Cash handling, disbursements, and segregation of duties
• Contributions, grants, and donor restrictions
• Payroll, benefits, and regulatory reporting
• Ongoing monitoring and remediation of control deficiencies
  (See Side Bar A)

Why it matters?

Board oversight is critical. Effective governance requires that the board understands its fiduciary responsibilities, actively oversees financial processes, and responds promptly to identified weaknesses. Weak or undocumented controls expose nonprofits to errors, fraud, and operational breakdowns that can undermine mission delivery and public trust.

Best Practice #4: Ensure Accurate and Transparent Form 990 Compliance

Form 990 is both a regulatory filing and a highly visible public disclosure document. As such, it serves as a direct reflection of an organization’s governance practices and internal controls. CPAs should work closely with nonprofit clients to ensure that governance structures, policies, and control activities are accurately and consistently reported on the return.

Part VI of Form 990 (Governance, Management, and Disclosure) is especially important, as it addresses board independence, conflict-of-interest policies, related-party transactions, and Form 990 review procedures. CPAs should confirm that the board actively reviews and approves the Form 990 prior to filing.

Inconsistent practices, weak oversight, or inaccurate disclosures can result in reputational damage, loss of donor and grantor confidence, increased IRS scrutiny, and—in severe cases—jeopardy to tax-exempt status.

Why it matters?
Internal control weaknesses often surface through Form 990 disclosures rather than through financial statements alone. Strong governance, combined with careful Form 990 preparation and board review, reinforces compliance, protects tax-exempt status, and enhances transparency with regulators, donors, and the public.

Best Practice #5: Monitor Compliance with IRS Public Support Requirements

To maintain classification as a public charity under Section 501(c)(3), a nonprofit must satisfy the IRS public support test, which is intended to ensure broad-based public funding rather than reliance on a small number of donors. Compliance is measured on a rolling five-year cumulative basis, making ongoing monitoring essential.

Under the public support rules, annual contributions from any single donor are generally limited to 2% of total annual support for purposes of calculating public support. To pass the test, qualifying public support must equal at least 33⅓% of total support over the measurement period. Certain revenue sources—such as government grants and qualifying contributions from other public charities—may receive favorable treatment or be excluded from the calculation, making accurate classification and documentation critical.

CPAs can help their clients analyze the above public support rule to stay in compliance with IRS regulations. What follows is an illustration (A) of how the rule did not work and an illustration (B) of how the rule did work.

Illustration A How the 501(c)(3) nonprofit has NOT satisfied the rule. 

XYZ ANNUAL DONATIONS:                                             $300,000

2% Rule Applied to ANNUAL DONATIONS:                     $300,000 x .02 = $6,000 [Allowance

by IRS]

Donations came from the following:                                      Allowable Donations

Donor A                      $150,000                                                                     $6,000

Donor B                      $40,000                                                                       $6,000

Donor C                      $30,000                                                                       $6,000

Donor D                      $20,000                                                                       $6,000

ALL OTHER DONATIONS ($60,000) WERE SMALL (UNDER $6,000) =          $60,000

Total Annual Donations = $300,000               Total Allowable Donations = $84,000)

NOW APPLY 1/3 RULE: 1/3 x $300,000 (or $100,000) must come from small donations, but

only $84,000 came from small donors. THIS VIOLATES THE IRS 2% – 1/3 RULE.

Illustration B How the 501(c) nonprofit has satisfied the rule. 

XYZ Annual DONATIONS:                                      $300,000

2% Rule Applied to Annual Donations:                      $300,000 x .02 = $6,000

Donations came from the following:                                                  Allowable Donations

Donor A                      $50,000                                                                                   $6,000

Donor B                      $40,000                                                                                   $6,000

Donor C                      $30,000                                                                                   $6,000

Donor D                      $20,000                                                                                   $6,000

ALL OTHER DONATIONS WERE SMALL($160,000) (UNDER $6,000) =                     $160,000

Total Annual Donations = $300,000                           Total Allowable Donations = $184,000

NOW APPLY 1/3 RULE; 1/3 x $300,000 (or $100,000) must come from small donations—and

they do. $184,000 came from small donors. THIS SATISFIES THE IRS 2%-1/3 RULE.

Why it matters?
Failure to meet the public support test over the applicable five-year period can result in reclassification as a private foundation, triggering excise taxes, additional reporting obligations, and heightened regulatory scrutiny. Continuous monitoring enables CPAs to identify risks early and advise on corrective actions before tax-exempt status is threatened.

References

Better Explained. n.d. “Understanding the Pareto Principle (The 80/20 Rule).” https://betterexplained.com/articles/understanding-the-pareto-principle-the-8020-rule/#:~:text=Originally%2C%20the%20Pareto%20Principle%20referred,rough%20guide%20about%20typical%20distributions.

Byrne, Dan. 2025. “Board Diversity Leads to Better Profits.” Corporate Governance Institute. https://www.thecorporategovernanceinstitute.com/insights/news-analysis/board-diversity-leads-to-better-profits/#:~:text=Diversity%20brings%20profits,a%20priority%20for%20every%20organisation.

FreeWill. 2023. “Major Gifts: What You Need to Know for Fundraising Success.” Last modified December 11. https://www.nonprofits.freewill.com/resources/blog/major-gifts-guide-for-fundraising-success.

Give.org. 2024. “Wise Giving Wednesday: Guidelines for Good Governance.” Last modified February 28. https://give.org/news/guidelines-for-good-governance.

Give.org. 2026. “BBB Standards for Charity Accountability.” https://give.org/charity-landing-page/bbb-standards-for-charity-accountability.

Hsu, Wei, and Brian McAllister. 2024. “The Impact of Voluntarily Filing Form 990 on Donations, Government Grants, and Total Contributions.”Journal of Governmental & Nonprofit Accounting 13, no. 1 (May): 28–55. https://publications.aaahq.org/jogna/article/13/1/28/12566/The-Impact-of-Voluntarily-Filing-Form-990-on.

McRay, Greg. 2025. “Understanding the 501(c)(3) Public Support Test.” Foundation Group. June 6. https://www.501c3.org/understanding-the-501c3-public-support-test/#:~:text=The%20simplest%20definition%20of%20the,the%20public%20support%20test%20also.

National Council of Nonprofits. n.d. “Federal Law Audit Requirements.”Last modified 2026.https://www.councilofnonprofits.org/running-nonprofit/nonprofit-audit-guidec/federal-law-audit-requirements#:~:text=Currently%2C%20as%20a%20result%20of,to%20obtain%20a%20Single%20Audit.

USAFacts team. 2023. “How many nonprofits are there in the US?” USAFacts. Published November 16. https://usafacts.org/articles/how-many-nonprofits-are-there-in-the-us/.