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IRS Stepping Up Nonprofit Oversight

The headline for this article is not really “new” news.  The Internal Revenue Service has been stepping up enforcement of its regulations governing nonprofits for several years now.  Those who have been keeping up with the changes to the Form 990 annual reporting requirement know this to be true.  What is new this time is that the IRS is focusing hard on two, key areas:  1) nonprofit pay practices and, 2) abusive activities by charities.  Let’s take a look at each of these.

1) Nonprofit pay practices. The topic of nonprofit pay practices has long been an area of concern for the IRS.  Federal regulations require that compensation paid to employees of tax-exempt organizations must be “reasonable”.  Unfortunately, “reasonable” is a subjective evaluation of the situation as a whole, not necessarily an objective check list.  Moreover, the IRS is the ultimate arbitor of what is considered reasonable.  So what is new?  The overall economic downturn, along with the focus on executive pay, has ramped up IRS scrutiny of the compensation nonprofits pay their executives.

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An Obituary for National Heritage Foundation?

On January 24, 2009, National Heritage Foundation filed for Chapter 11 bankruptcy protection in federal court.  Is this the end for NHF?

Read the Forbes story here

National Heritage Foundation, NHF, was founded by J. T. “Dock” Houk as a 501(c)(3) fiscal agency for nonprofits using a donor-advised funds scheme.  NHF operated under the premise that people shouldn’t have to be burdened by the regulatory compliance headache of running their own 501(c)(3) in order to do good and charitable things.  One could just start an NHF “foundation” and have donors give directly to NHF, but designate the funds to their “foundation”.  “Foundation” is in quotes because that is NHF’s terminology.  NHF “foundations” are not considered true foundations. The idea was that by signing up with NHF, people could have what looks like a charity, but piggy-back on NHF’s tax-exemption.  In theory, the “foundations” were an extension of NHF’s charitable mission.  In return for its efforts, NHF took a small percentage of the donations for operating expenses.

Read New York Times article on NHF from 2000

Like so many theories, NHF’s didn’t work so well in practice.  Early on, NHF aggressively promoted the idea that “foundation” directors should pay themselves well, even if they were the primary donor.  In other words, you could start a “foundation” to do whatever, donate to your own “foundation” tax-deductibly through NFH, then pay yourself for your good deeds.  Needless to say, this generated enormous controversy within charitable circles and drew the ire of the IRS and Congress.  But technically, there was no law directly prohibiting such since these “foundations” were part of NHF and, in theory, NHF controlled the expenditure of funds.

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US Bans Thrift Stores (updated)

Got your attention? Good…because what we’ve got to report on will shock you…and could have a devastating impact on some charities and the families that depend on them.

Congress, in a stroke of genius that was too smart by half, passed the Consumer Product Safety Improvement Act in August 2008. It takes affect February 10, 2009. The public is only now becoming aware of the draconian nature of the statute.

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