$500,000: the line that decides who audits your SGO under Treasury's §25F rules

Every SGO would get a yearly audit under the §25F rules Treasury and the IRS released on October 1, 2026, and one number decides who is allowed to perform it: $500,000. Proposed § 1.25F-4(e) says each organization that was an SGO during any part of the preceding taxable year "must undergo an annual financial and programmatic audit by a qualified independent third party and provide the audit results to each covered State on whose State SGO list the SGO appeared." Because the first state lists cover 2027, the first audits would look back at that year. These are proposed rules, but Treasury says SGOs may rely on them for 2027. Our full breakdown of the rules covers the rest of the package.

Above $500,000. An organization whose total receipts for its most recent taxable year were more than $500,000 "must hire an external, independent professional or accredited body that regularly assesses an organization's compliance, financial records, or processes (including internal controls) against specific standards." The receipts count is organization-wide, "whether or not required to be deposited into its section 25F segregated account," so money raised for other programs or for operations counts toward the line.

At or below $500,000. A smaller organization "may use a committee of independent persons unrelated to the organization's management to conduct the audit," and the report "must be signed under penalties of perjury by the persons preparing such report." Treasury describes this as a way to provide flexibility and reduce expenses for small entities.

What the audit has to cover. The proposed rule sets a minimum of seven items: how the SGO solicits applications and verifies each student's eligibility; how it selects recipients, including the priority for prior recipients and their siblings and the procedures that keep scholarships away from disqualified persons; how it sets award amounts; how it tracks payment, whether by direct payment, a qualified digital wallet, or reimbursement; verification that the money went to qualified education expenses; verification that the organization is located in the state; and verification that it met every operational requirement. The first six are audited at the level of the §25F segregated account, and the last follows whichever operational test the SGO uses, the organization-wide test or the account-level 90% rule safe harbor.

The annual certification. Separately, proposed § 1.25F-4(d) would require every SGO to certify to the IRS each year that it was a 501(c)(3) public charity and not a private foundation, kept a segregated §25F account for each state that lists it and deposited every qualified contribution there, met the operational requirements, awarded nothing to a disqualified person, was located in each listing state, sent donors timely written acknowledgments, and commissioned the audit and gave the report to its states. Alongside it comes a set of numbers: applicants, scholarships awarded, the highest, lowest, and average award, the number of schools recipients attended, spending by expense category, income, and the share of prior-year and current-year income spent on scholarships. Treasury says this information would help states, the IRS, and "taxpayers considering making a qualified contribution" judge an organization's "compliance with the requirements of section 25F, its size, and its mission." Organizations that file a Form 990 would attach it; others would file it separately by the 15th day of the fifth month after the period ends, with a copy to each state.

What it costs. Treasury estimates audit costs of $10,000 to $30,000 a year per SGO. It expects about 53% of SGOs to be above the $500,000 line, at roughly $30,000, and the other 47% to pay closer to $10,000, for a total of $12 million to $15 million a year across the program. Treasury also expects some organizations near the line to refer donors to another SGO for a year to stay under it, an amount it puts at $1.9 million to $2.2 million a year that it expects to reach other SGOs rather than be lost.

The state side of this is in the temporary regulations, which apply from September 1, 2026 and require a state, for each SGO on its list, to certify that it reviewed the organization's annual audit report, with a transition rule for new organizations that have no operating year to report yet. The full proposed text is in our archive of the proposed regulations, and comments are due December 1, 2026.

For an organization planning its first year, the practical move is to budget for the audit now and keep records it can be audited against from the first gift: the segregated account, the donor acknowledgment log, and a file on every award. Our SGO compliance calendar lays out the yearly deadlines, the free SGO Builder walks through setting up those systems, and the SGO directory shows who is already operating.