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The True Cost of Noncompliance

Noncompliance.  As the word suggests, noncompliance is the opposite of compliance.  But what does noncompliance mean as it relates to your nonprofit?  More important still, what is the true cost of noncompliance?

If you have been a client or follower of Foundation Group for any length of time, you have heard us hounding you to get your organization in compliance.  In other words, do everything you need to do comply with local, state and federal law regarding your nonprofit.  A complete list of compliance items looks rather daunting.  It typically includes everything from filing your corporate annual report to properly keeping your books and records to registering with your state’s Solicitations Department.  We tend to talk about these things so often, it can come across more as a series of dos and don’ts and, in the process, the true cost of noncompliance can get lost.  Let me share with you some real life examples that will help you see what I mean.  Each case discussed is an FG client that we have helped to clean up the mess:

Case #1 – IRS Form 990. Client X is a 501(c)(3) public charity that provides equine therapy to children.  The organization is a small nonprofit with a big heart to work with troubled kids.  The board and volunteers of X work hard to provide their services with very limited resources.  Although X’s board knew about Form 990, it just wasn’t as pressing as the day-to-day operations of the program.  Besides, the organization simply didn’t have the financial resources to pay someone to do it for them.  Eventually, X’s president struggled through it herself and filed it many months after the due date.  “Better late than never and better incomplete than not at all”, she thought.  All was assumed OK until X received a penalty letter from the IRS for nearly $5,000 for late filing, followed later in the year by an audit notice.  And they thought getting a Form 990 prepared properly was expensive…

Case #2 – Improper compensation and record-keeping. Client Y is a ministry organization that provides Christian counseling to the arts community.  Overall, Y did a better than average job of keeping it between the lines.  Several years ago, Y was the unfortunate recipient of an IRS audit.  Y was chosen at random by the IRS as part of a nationwide examination of executive compensation.  In the process of reviewing the organization’s books, it was discovered that the organization had lent the executive director around $6,000 to get some work done to his house.  This type activity is not illegal, but is not considered a best practice.  Y was advised prior to this to reconsider the idea, but the board was determined to help out the executive director.  But because the loan payback terms had not been properly structured, nor the transaction properly recorded in Y’s board meeting minutes, the IRS deemed the transaction to be taxable compensation to the executive director even though the loan was eventually paid back!

Case #3 – Charitable Solicitations registration. Client Z assists the homeless by meeting some of their immediate needs like food and shelter, but more importantly by teaching them vital life-skills.  One of Z’s primary means of soliciting is on the street, person-to-person.  Z knew about the requirement to register with the state’s Department of Charitable Solicitations, but didn’t want to delay fundraising until it registered.  Someone reported their activity to the state, which fined Z substantially and ordered it to cease and desist.  Z quickly complied, but the incident cost a great deal of time and money…and not a small amount of embarrassment.

To be sure, compliance has a cost, but it pales in comparison to the cost of noncompliance.  The above examples are but 3 of the hundreds we have helped through similar situations.  Protect your nonprofit…get compliant and stay there!

Greg McRay, EA

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 9 Comments
  1. Greg, great examples that point out the dollar costs and relationship costs of non-compliance. Few things could be more damaging to donor relations than having these types of errors made by an organization. It is a much more challenging task to get donors to contribute if there’s been a loss of trust.

  2. Very informative.Surely need your services and would want to work with you all the nine-yards.

  3. Thanks for these great examples of how not taking action can get nonprofits into a lot of trouble! So many times, people who aren’t familiar or comfortable with compliance issues just ignore them. And later, they pay for it. It’s too bad.

    Sandy

  4. Having the status of a nonprofit organization is a privilege. To maintain that status is a responsibility. If the responsibility is taken lightly, the privilege can disappear. Great blog post.

  5. Great examples about how choices made to cut corners or not being thoroughly informed can be costly in both time and financial resources AND have a larger cost to reputation.

  6. Greg,
    Thank you for these three examples. Whenever I discuss these issues in basic training workshops, I hear too many questions like “how often does the IRS every audit a nonprofit?” or “we’re too small for that to matter.” Now I’ve got more stories to share.

    Thousands of nonprofits are about to have their exempt status revoked by the IRS because they failed to file their 990s or 990-Ns. Too bad. I’ve listed the link where groups can check if they’re on the list at https://bit.ly/9GtKBc

  7. Excellent advice for above-board nonprofit administration. It can be no fun learning and sticking with all these rules and regulations but is a must especially in light of today’s buzz of “transparency.” I especially like your comments being a grant writer because a grant recipient MUST be compliant in being a gracious funding partner.

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