Posts Tagged ‘IRS’

I can already hear some of your sarcasm…

“Tell me something I don’t know!”

“You’re kidding!  The IRS?  Really?”

Point taken.  It seems like the IRS always wants to know a thing or two about you.  Whether it is your personal tax situation, your business or your nonprofit organization, the Internal Revenue Service seems to always be there.  We’ve spent a great deal of time educating you about the seriousness of the 2008 changes to IRS Form 990 and what they mean to your nonprofit.  Well, the screws are getting tighter with the recent release of additional changes for the 2009 return.  Specifically, it is the changes to the Schedule O that have the potential to shake things up pretty dramatically.

What is Schedule O? The name of the schedule, Supplemental Information to Form 990, sounds harmless enough.  It was introduced in 2008 as part of the overhaul to Form 990 that added Schedules C – R to what had previously been just Schedules A & B.  The purpose of the schedule is to provide the IRS with…wait for it…supplemental information about the activities of nonprofit organizations that is not captured elsewhere on the return.  What is new for the 2009 tax year is that Schedule O is required of all Form 990 filers.  This is where the game begins to change…

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The filing deadline for the 2009 Form 990 is May 17, 2010 for 501(c)(3) and other tax-exempt organizations running on a calendar year basis.  There is nothing particularly new about that.  What IS new is that this year’s filing obligation has the potential to cause an enormous amount of heartache to those nonprofits that are unaware of the requirements and fail to do what is necessary.  We touched on this briefly in our last article, but we want to expand on it a little bit.  We implore all of our clients and friends to read this article carefully and be informed.

ALL tax-exempt organizations must file Form 990. With the distinct exception of churches, all 501(c) nonprofits are required to file a version of Form 990.  We’ve been saying this over and over, but we still find that the message is not quite getting through.  To make it easy to understand, ALL means ALL.  No exceptions!

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As long-time readers of our articles know, most of our posts focus on tips and best practices for effective nonprofit management.  This post is going to be a little different.  There is so much going on right now that affects nonprofits, we thought it would be a good idea to provide you with a brief run-down of some things you need to know.  Some of it is related, some not.  Here we go…

1.  Many smaller nonprofits could lose their tax-exemption this year. How?  Tax filing year 2009 is the third year that the IRS has required the filing of Form 990-N for organizations averaging under $25,000 in annual revenue.  Prior to 2007, no filing was necessary.  IRS regulations state emphatically that any 501(c)(3) public charity that fails to file a required Form 990 for three consecutive years will automatically lose their tax-exempt status.  Unfortunately, many organizations are either still unaware or just whistling Dixie and not taking this seriously.  I expect panic to set in when letters of revocation start hitting mailboxes later this year. Read the rest of this entry »

2009 is rapidly coming to a close.  And once again, we find ourselves amazed at how fast the year has gone by.  Funny how we have this conversation every year, but we act like it’s the first time it went by this fast.

Just as December 31 rolls around every year, so does the need to plan for your nonprofit’s year end.  With only a few weeks left in the year, don’t put off until later some of the most important things you need to be doing right now.  Let’s take a look at some key, year-end necessities.

Strategic planning. The economic uncertainty of the past year has forced many nonprofits to shift gears and even change course.  For some, it has caused an existential crisis!  What has the economic downturn meant to your organization?  The end of the year is a natural time to (re)evaluate what you are doing.  Focus on maximizing impact for a minimum of expense.  Easier said than done, no doubt.  But now more than ever, it is imperative to be intentional with everything you are doing.  “Winging it” is ineffective in the good times.  It could be fatal in the bad times.

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IRS Audit Division

In our last post, we took a look at five of the most common sources that could spark an IRS examination or audit of your 501(c)(3) organization (or other nonprofit).  In this article, we’re going to equip you with five rules you need to know should you get the dreaded notification that your organization is going to be examined.

If you haven’t read the prior article, go here to read it first.

Rule #1:  Don’t panic. Breathe.  Yours is not the first nonprofit to ever be audited.  You can survive this.  I’m not going to lie and say it will be a pleasant experience, because it won’t be.  But, fear causes you to react out of emotion, not logic.  Slowing down and calming your nerves will put you in a much better frame of mind to tackle the next few steps.

Rule #2:  Don’t go it alone. If you could survey every person, business and nonprofit that has ever gone through an audit, I suspect you would find near unanimity about this one.  You need professional representation.  You simply do not have the depth of knowledge or understanding necessary to do this on your own.  It is very much like being your own lawyer at a trial…and you know what they say about that:  “Fool for a client…” Hopefully the professional who helped you prepare your IRS filings is competent to represent you.  Such representation, should it be necessary, is always a part of our preparation services.  A professional understands both the law involved and usually has experience dealing directly with the IRS.  Let them handle it.

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Free t-shirts for all audit targets! (no, not really)

There is one phrase in the English language that generates more fear and trepidation than any other out there:  IRS AUDIT.  Just hearing the words is enough to cause many a fearless person to break out in a cold sweat and to shrink in terror.  It is bad enough when an individual has to deal with IRS questions.  But when it happens to a nonprofit organization, there is plenty of pain to go around.  Directors, employees, members, donors…all can be affected.  Plus, just the potential bad publicity is enough to cause nonprofit leaders to reach for the Rolaids.

So how does a nonprofit avoid an IRS examination?  It helps to understand some of the situations and events that can trigger an audit.  In this article, we are going to look at 5 sources of audits and give you advice on how stay out of Uncle Sam’s cross-hairs.

1.  Complaints. One of the most common causes of IRS examinations is a complaint filed by a third  party.  Such “whistle-blower” situations may or may not have a shred of credibility to them.  Typically, if the IRS decides to look into the allegations, it will start out as a compliance exam.  It is possible for one of these exams to progress to the status of a full-blown audit, but most do not…at least for those organizations that are operating completely above board.

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At the end of every newsletter, we put out the call for “topic requests”.  We have used quite a few reader questions or topic suggestions for article topics.

Some questions or topics do not require a whole article to answer or discuss.  We save those to make a multi-topic article from time-to-time.  That’s what we’re going to do today.  Keep sending your questions or topics and make sure that you read our blog articles for more information on other topics.  On to the questions…

Q:  Can any or all of the nonprofit’s board members live out of state?

A:  While not required by federal law, many states have residency requirements for a corporation’s board members.  No states require that all board members live in the state of incorporation, only the registered agent is required to live in-state.  Our suggestion is that at least one board member live in the state of incorporation.

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The Alpha dog of the nonprofit world is the 501(c)(3).  It has federal income tax exemption, contributions to it are tax deductible to the donor and it is potentially state sales & property tax exempt.  Not bad.

The government provides incentives like these when an organization’s purpose is:  religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international sports competition or prevention of cruelty to children or animals.  But what about the other nonprofit organizations?  What are their purposes and what benefits do they get?  We’ll talk a little about the three most popular nonprofits other than the more well known 501(c)(3).

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Occasionally, you have to protect people from themselves.  Even those with the best of intentions can mess things up so badly that it can jeopardize what they are trying to accomplish.  In the nonprofit world, there are best practices, good practices and acceptable practices…and, really, really bad practices that will cause your organization, its board, donors and beneficiaries headaches galore.  This week, we are going to explore the Dirty (Half) Dozen Nonprofit No-Nos, in no particular order.  We will limit our discussion to 501(c)(3) nonprofits.

1.  Dictatorships. If you want to be your own boss and run the show as a benevolent dictator, then by all means, go start a business.  Just don’t start a nonprofit organization.  What many people fail to understand before they establish a 501(c)(3) organization is that nonprofits do not have shareholders, i.e., owners…only stakeholders.  Stakeholders can be defined as an organization’s board of directors, its members and its beneficiaries.  No one can legally assume ultimate control.  In fact, the IRS requires tax-exempt organizations to be structured such that control rests within a group of individuals.  This protects everyone involved.  Many times we’ve seen placeholder boards who basically rubber-stamp every decision made by a dictatorially-inclined president or executive director.  That does everyone a disservice.  Even worse, the IRS will hold all the leaders accountable for the governance and management of the organization, not just the dictator.

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Tonight’s title match:  In the red corner, numbering 948,954, representing over half of all 501(c)(3) organizations, are public charities.  And in the blue corner, numbering 108,594, having increased 54% since 1998, are the 501(c)(3)s known as private foundations.  Both competitors bring a long and varied history into the ring.  Though greatly outnumbered by public charities, private foundations bring a lot to the contest.  Let’s take a closer look at the differences, and similarities, between these title contenders.

Many people have a layman’s understanding of the difference between public charities and private foundations:  Public charities are understood to perform charitable work, while private foundations support the work of public charities.  That grassroots definition is, in practice, mostly true.  The specifics, however, are slightly more complicated.

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Last week we looked at some key points regarding nonprofit executive compensation.  This week, we want to take a closer look at best practices for paying everyone else your organization employs.

Payroll for nonprofits is a complex issue already.  Certain rules and exceptions apply that are different than what applies to for-profit payrolls.  As if that complication isn’t bad enough, many nonprofits seem bound and determined to create their own rules and exceptions that are categorically incorrect…and destined to get them in hot water with the IRS and/or their state.  Fortunately,  the principles we discussed last week apply to ordinary employees, as well as executives:  compensation must be reasonable, due diligence must be performed, and all decisions should be made at arms-length.  If you haven’t read last week’s post, I suggest you do so before you proceed…it will help.

In addition to those things, other considerations should be made.  This article is going to focus on two big issues:  1) payroll classification and, 2) types of payments.

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Nonprofit executive compensation tops the current list of IRS hot button issues.  A few weeks ago we talked about the fact that the IRS is ramping up its oversight and enforcement of nonprofit executive compensation.  With all the rancor surrounding executive perks and bonuses on Wall Street, expect that populist sentiment to spill over into the nonprofit sector as well.  It all adds up to the equivalent of a message written in the sky:  get your house in order!

So, how do you do that?  Let’s take a look at a few key points that will go a long way toward ensuring that the compensation package for your nonprofit’s leader(s) is appropriate.

Reasonable compensation. It all starts here.  The IRS requires compensation packages for nonprofit executives (and other nonprofit employees, for that matter) to be reasonable.  Unfortunately, the IRS doesn’t really define reasonable…at least not in a way that you could look up in Websters.  Reasonable compensation is best understood in light of factors the IRS examines when determining whether or not a charity is exceeding reasonableness with its compensation arrangements.  These factors look something like this:

• Actual job description
• Required level of education or experience
• Compensation averages in your area
• Number of hours worked
• The overall budget of the charity

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The issue of a charity having operations in a foreign country is rather complex, one that involves oversight not only by the Internal Revenue Service, but also Homeland Security.  It is fraught with pitfalls that can only be avoided if you understand the rules.  The Foundation Group has worked with thousands of 501(c)(3) clients with foreign activities…and each situation is different.  We can only scratch the surface in this article, but our goal is help you understand some of the challenges associated with foreign country activities.

This subject can best be divided into two primary scenarios:  1) direct activities and 2) charitable giving.  Let’s look at each in order:

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Once upon a time, there were two websites, each belonging to a different charity.  Our tale follows the adventures of these websites.

The first website…we’ll call it “the good site”…was considered a real asset to its owner.  While not fancy or flashy, it was nice to look at and was obviously well taken care of.  The content of the good site talked about the charity, the charity’s mission, its programs…it even had nice pictures of some of the volunteers helping the charity’s beneficiaries.  And, everything was correct and up to date.  The good site was very good indeed.

The other website…we’ll call it “the bad site”…was also considered a real asset to its owner.  It was fancy and flashy and quite beautiful to behold.  The content of the bad site talked a little about the charity, the charity’s mission, its programs…but, it talked a lot more about the charity’s president, John, and John’s for-profit business.  In fact, it was kind-of hard to tell who the website was supposed to be promoting, John or the charity.  There were some nice pictures of John, John’s family…even John’s dog…plus lots of conveniently placed “Buy Now” buttons for website visitors to snap up John’s new book.  The bad site was very bad indeed.

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Your board of directors is one of the most important assets your nonprofit has.  Assuming they understand their role and are there for the right reasons, your board members provide invaluable insight, direction and oversight.  They volunteer their time and expertise, usually for little more than a pat on the back.  They also assume a certain level of liability in exchange for their efforts.  The old phrase, “No good deed goes unpunished”, is not something you want to see come true.  Let’s explore how to protect those who give of their time to your organization.

Understanding the issues. The first step to properly protecting your board members is to educate them as to what they are responsible for.  It is discouraging to see the level of ignorance that many boards operate under.  We frequently encounter boards where some members are merely placeholders who are doing a favor for the founder.  They rarely participate in substantive discussions or planning, nor are they consulted with by the program director.  They have no idea that there is any liability to them, but there is.  This liability usually falls into three categories:  1) corporate (state), 2) federal (IRS) and, 3) general liability.  Let’s take a closer look at each:

1. Corporate liability:  Board members are the legal, governing body of a nonprofit corporation.  They collectively represent the organization and its interests.  Each nonprofit corporation is incorporated in a particular state, according to that state’s corporate law.  Board members are responsible to make sure the corporation follows state law and that it follows its bylaws.  It is not terribly uncommon to hear of court cases involving other board members, or members of the public, accusing the organization of not abiding by its bylaws.  And, if the corporation is an employer, the board members have a fiduciary responsibility to ensure that employment taxes and related things are properly handled. Read the rest of this entry »