IRS Update

From the IRS comes this announcement:

IRS Sends Compliance Questionnaires to 400 Colleges and Universities
Approximately four hundred U.S. colleges and universities will begin receiving compliance questionnaires from the Internal Revenue Service in the next few days as part of the agency’s focused effort to study key areas in the tax-exempt community. The college and university questionnaire will focus on unrelated business income, endowments and executive compensation practices. The questionnaires are being sent to a cross-section of small, mid-sized and large private and public four-year colleges and institutions.

Private nonprofit universities are generally exempt from tax under Internal Revenue Code section 501(c)(3) and like state universities are to unrelated business income tax.

Click here to read the rest.

This is part of a new compliance project for colleges and universities by the IRS. Will this effort by the IRS broaden out to other 501(c)3 organizations? Probably. I think they are looking at the biggest fish first but I'll bet it is just a matter of time until more of these types of letters will be sent.
Are there any lessons to be learned here? I think two at least:

• I'd say make sure that if you are doing any activities that might generate unrelated business income you should learn the rules (link opens a PDF) that apply.
• Make sure your salaries are justified.

Probably making sure your ready in general for the new 990 reporting will help as well.

New 990 To Do List

Even if your nonprofit is lucky enough to have a November 30 year end there is still plenty of stuff you need to be doing right now to get ready for this new reporting form. Thanks to Brian for this great list, it has been something I have been meaning to do for CAN as well as share with everybody. This is a work in progress, some things will be added as we go through this stuff but here is where it is so far:

THE NEW 990:
WHAT DO WE NEED TO DO RIGHT NOW?

Required Policies

• Conflict of interest policy
• Whistle blower policy
• Document retention and destruction policy
• Joint venture policy
• Expense reimbursement policy
• Non-standard gift acceptance policy
• Written debt collection policy (hospitals)

Practices & Procedures

• Need to prepare a written document which sets forth the procedures by which the Board of Directors will review the Form 990 before it is filed
• Document compensation reasonableness processes
• Professional fundraisers agreement
• Documentation regarding eligibility to receive grants

To Do List

• Estimate the total number of volunteers utilized during the year
• Identify any new program service activities conducted during the year
• Identify revenue and expenses for three largest program service activities
• Ensure that filing all 1099s when required to do (non-employee services in excess of $600)
• Prepare documentation to support classification of independent contractors
• Ensure that organization is preparing Form W-2G when required
• Make sure register with California Attorney General if conducting raffles and make sure undertake backup withholding if necessary
• Identify non-cash contributions in excess of $5,000 for which public charity disposed of within 3 years after receiving
• Document meetings of Board of Directors committees with authority to act
• Write-up re how satisfy public disclosure requirements
• Identify all key employees under the expanded definition
• Break out the revenue and expenses from gaming activities from the general fundraising activities
• Update Chart of Accounts (and audited financial statements) to include the expense categories listed on Part IX of the redesigned Form 990

Even if the phrase, "new 990" wants to make you stick your finger in your ears and say, "lalalalalalalalalalala" you can still go through this list and make sure your organization is more prepped than it is right now for the big event.

And please let me know if you think anything is missing from the list!

Why Your Financial Systems Matter

Thanks to the Independent Sector for the heads-up: From the Los Angeles Times comes a story about a local chapter of the Service Employees International Union. This story has everything -- everything that can give the public a reason to think nonprofits are poorly run or are run solely as a scam to make money for the founders: undisclosed payments made to businesses owned by family members, poor financial record keeping, lavish spending and possible misstatements of fundraising expenses.

Even if all the issues mentioned in the story are found to be justified, it is still almost a perfect example of everything you should not do. And just because something is legal doesn't mean it is ethical. Taking the time to think, "How will this look?" to the media, regulators, other nonprofits and especially the community you serve can only help your decision making, financial or otherwise. Having a strong financial system in place and people knowledgeable about those systems, as well as other nonprofit accountability measures, are key for all organizations regardless of mission or size.

The New 990 - Financial Accountability Resources

I'm going to start off an occasional series about the new form 990. As we move closer to the end of 2008 and closer to the time when we have to start using this form it is important to look at our organizational and financial systems and make sure they are able to give us the information we need so we can fill out this report or get the right information in a timely fashion to those who will fill it out for us.

An important aspect of what the updated form 990 is looking for is financial accountability. There are several questions in the governance section (pdf) of the form that ask us about our governance practices. Do we have the minutes of Board of Director meetings? Do we have a document retention and destruction schedule? Is there whistle blower policy at our nonprofit? Not sure what some of the term s mean exactly, or wonder if the IRS has a different meaning for a word? Check out their handy Appendix and Glossary (both pdf's). Both excellent resources.

Much of this is similar to what for-profits have to have because of the Sarbanes Oxley-act of 2002. A great resource for implementing policies like those asked for can be found here on the National Council of Nonprofit Associations website. I encourage you all to read about what information the new 990 will ask to keep track of and have on hand before we or our auditors have to fill this out. Preparation will save us time and money

Outcomes Measurement

Kate Barr at Balancing the Mission Checkbook has a nice piece on the recent report of an annual survey of public confidence in nonprofit groups by Professor Paul Light from NYU’s Wagner School of Public Service.

What intrigued me in her post is her mention of how Professor Light asks the questions about how nonprofits spend our money versus how I think the majority of nonprofits and foundations view our spending. The survey asks the public if they think nonprofits are spending their money wisely. Not program vs. management or any of the other typical benchmarks we use but if the public thinks we are doing a good job with our funds.

How could we show this for our own organizations? Is it possible that if a nonprofit spends 35% of its funds on administrative functions that the public would still view it as spending its funds wisely? Could foundations and corporate funders be persuaded to evaluate organizations in such a manner? Click the link above to find an example of an organization that may have figured out the right way to do it. Outcomes measurement is something we will all need to figure out a way to do for our nonprofits.

Nonprofit Deregulation?

On the Independent Sector's website is a really good article by Clara Miller, a leader in the sector who I think makes a lot of sense and has written extensively about nonprofit financial issues.

In this piece she once again lays out the complex world of nonprofit capital management. Things that we as nonprofit finance professionals take for granted that would send our for-profit counterparts into confused apoplexy. She posits that in our efforts to do good we may have let a patchwork of rules and regulations from many different sources cover us so that our capacity to meet our missions may seriously limited if not in jeopardy.

Read the article, or others by her, and tell us what you think about what she has to say and the issues she brings up in the comments section below.

Threats to Nonprofit Tax Exemptions

From the New York Times on May 26th.

In case folks out there have not heard of the recent challenges to nonprofit tax exemption and the Minnesota case I thought I would pass this along. Some concerns may be justified; how big should a university endowment be? Does that nonprofit hospital do enough to be considered a charity? Or maybe not. But those big dollars will get people talking and those nonprofits need to have a story to tell or one will be told to them.

A quote from the article really hits the mark for me:

The nonprofit sector is being pressed to be more business-like and to find new ways to fill the gaps between what [funders] will pay and what services cost, but then assessors want to treat us like businesses, which pay taxes.

I think this will be a big issue in the coming years as both charities and governments struggle to find more sources of revenue, especially in a troubled economy.

The Commensurate Test

From the Independent Sector's Memo To Members come these interesting bits of news:

1. IRS Plans to Make Greater Use of "Commensurate Test" in Oversight of Charities

   The commensurate test generally measures if a charity is undertaking, through contributions and grants, a charitable purpose commensurate in scope with its financial resources. Miller said that the Service will "re-energize" what he called a "little-used line of legal precedent."

   Thanks to some news about nonprofit college and hospital spending and levels of endowments the IRS wants to make sure we are using our funds for our charitable purposes and not hording our funds.
   

2. Senate Bill Proposes FTC Jurisdiction over
   Charities
   

   The business practices of 501(c)(3) nonprofits would be subject to Federal Trade Commission regulation and enforcement under a bill introduced last month by Senator Byron Dorgan (D-ND). The FTC Reauthorization Act of 2008 (S.2831) would expressly extend FTC jurisdiction by changing the current definition of “corporation” in the FTC Act to cover 501(c)(3) organizations. FTC commissioners stated in written testimony that their lack of jurisdiction “has prevented the commission from taking action against potentially anticompetitive conduct of nonprofits engaged in business.”

   Just to look at the dark side of this there have been a number of for-profit entities that have sued nonprofits because the for-profit businesses thought that the nonprofits had an unfair advantage over them because they didn't have to pay taxes. Is that what this is related to? Maybe they haven't heard of Unrelated Business Income?
   
   
3. IS Announces New Estimate for Value of Volunteer Time

Efficient Charities

Two stories from the Chronicle of Philanthropy last Thursday caught my eye.

The first is about congressional rumblings to have nonprofits post fundraising ratios and costs on a Postal Service web site.

Seriously.

No information was given on where the charities would pull this information from, when it would be updated and weather it would be checked out or not for accuracy. Not to mention who would maintain this database, how it would be funded or what kind of education and outreach about the information on said site and how to use it.

The second article is more in depth. It starts out with the IRS Commissioner Steven T. Miller stating that, even though the IRS may not have the jurisdiction to, it will be more aggressive in monitoring the "efficiency and effectiveness of charitable organizations." He was also disappointed that the IRS gave up the idea of placing "efficiency indicators." on the front of the 990 because he wants to help make "apples-to-apples" comparisons possible.

I was against having the "efficiency indicators" there precisely because I don't think that it helps much for comparison. Standard benchmarks like the ones listed in the article may be informative but I do not believe they tell you how efficient a charity is, especially in comparison to other charities. For profit businesses are formed to make profit. A dollar of profit is the same at one business as it is at another, so ratios work and are comparable. But nonprofits are formed to do many different things, too many to be able to come up with easy ratios and benchmarks that cross the sectors of the charitable universe.

Would you compare a big nonprofit hospital to a small after school sports program? You could but I don't think you would get much that is useful. Now hospital to hospital, sports program to sports program? You could make some comparisons with benchmarks and ratios that could yield some interesting information.

The myopic thinking that all nonprofits are the same just because they are nonprofits still baffles me. Especially in people who task themselves to regulate us.

Pledge Contracts

This article from the Chicago tribune reminded me of a few emails I have received recently. Several organizations have asked for samples of any "pledge contracts" I might have. I was mystified by this concept having never heard of such a thing. These callers wanted to make sure board members or other big donors would follow through with any pledges made and wanted legal recourse if they failed to do so.

I can see the rational of course, especially if it a large amount of money and the organization has budgeted for it. But it strikes me as a harsh way to do it, as the article mentions, like a sort of prenuptial agreement. But maybe that is the way to go, keeps everything on a nice professional level.

The article quotes an attorney on what he recommends for such an agreement:

Conduct a credit check on donors; include a "bad boy" clause in gifts
that come with naming rights so the non-profit can remove the name if
it deems necessary; wait to begin construction of a new, donor-paid
building until at least 30 percent of the pledge has been paid; and
make sure the donor's spouse signs any gift agreement.

Has anyone else encountered agreements like these?

Boot Camp Blog in '08

CAN and I will continue to bring you financial and accounting related tidbits in 2008 but I am still catching up after a long Holiday break. There will be a lot to talk about this year what with:

• The new 990 - I have read through the new form and read other comments on the updated form and I will be giving my two cents in the coming days
• The 990 N - It is now in effect.
• Accountability - and all the assorted efforts of Feds and States to regulate our sector.

Finally I wanted to pass on this really interesting story from the Nonprofit Quarterly in case you have not run across it yet. Maybe businesses will need to be more nonprofit like? Huh? Who's with me? I guess we will have to see.

IRS May Step Up Efforts to Identify Ineffective Charities

The Chronicle of Philanthropy ran this story on November 12, 2007, regarding a speech by Steven T. Miller, the commissioner of the agency’s tax-exempt and government-entities division.

“Efficiency and effectiveness have obvious implications when you consider the level of subsidy being provided here,” Mr. Miller said. “Should the public be able to rely on the Internal Revenue Service and the states to be sure when they make a contribution to an organization that the contribution is put to good use and not squandered?”

Is this the right path for the IRS to be on? Read the article and post your comments below since they are closed at the Chronicle's website.

New IRS Publications and Resources

Please note: all links in this post download PDF documents.

Publication 4630, The Exempt Organizations Products and Services Navigator lists all the resources available from the IRS to nonprofits. This is a nice, consolidated reference for everything they have for us.

Two other updated pieces are publications 4221pc (for charities) and 4221pf (for private foundations) provide an overview of activities that could jeopardize exempt status as well as information on record keeping, reporting and disclosure compliance requirements.

Both publications seem easy to follow and are further example of how (I think at least) the IRS is trying to make compliance info easier to access and grasp. As nonprofits we have A LOT to keep track of and rules to follow, so I appreciate the efforts the IRS is making to help.

Protecting Your Good Name

This link goes to an article from the Nonprofit Times' enewsletter article about domain names (www.yourcharity.org/com/net) and what happens when they expire. It illustrates the importance of making sure they DON'T expire so some other group doesn't grab the registration and take advantage of your nonprofit's good name.

How does this relate to accounting? Well, two ways, one is that in a smaller organization one person may be doing all the admin stuff, finance, HR and IT so this is important info to them. But another way it affects accounting directly is reminding us to keep track of bills that do not come monthly or even annually. Domain name registration invoices, like other bills you may have, are cheaper if you buy multiple years at a time. "Great," you think, "I'll save us some money and register us for three years." But in three years when the renewal emails come, and they are almost always emails and not paper bills, will they get paid? Do you have somewhere where you track annual or irregular payments, maybe a vendor list that is easily accessible? Some thing to think about.

Finance and Governance

More updates from the Smithsonian scandal, another big nonprofit in the news with stories about how much the top two people were paid and how little they did to earn the $$.

The Nonprofit Times has an article here on it. The Nonprfit Quarterly talks about the story as well and the editor in chief, Ruth McCambridge makes a good point:

With the changes to the 990 reflecting the efforts of the Senate and the IRS to get better governance out of nonprofits, shouldn't they hold the Smithsonian Board, and the other big nonprofits who have been in the news for the wrong reasons, to the same standards? That board includes the Chief Justice of the United States and half a dozen members of Congress.

Shall they be exempt from being taken to task for what all who look at the case cite as a failure of governance? It will be interesting to see how this moves forward.

990-T Disclosure Rules

I have mentioned this before but it looks like there is new guidence out there for how it will work.

The Internal Revenue Service recently issued interim guidance (Notice 2007-45) regarding the public disclosure of Form 990-T by tax-exempt organizations. The new disclosure requirements were initially set forth in the Pension Protection Act of 2006; Notice 2007-45 now provides the following additional specifics:

• The new Form 990-T public disclosure rules apply to all Forms 990-T filed after August 17, 2006
• The public disclosure rules for Form 990-T are the same as they are for Form 990
• Any religious or governmental entities not currently required to file a Form 990, but who file a Form 990-T, are required to publicly disclose their Form 990-T
• The Internal Revenue Service will not be making copies of the Form 990-T available to Guidestar
• The tax-exempt organization is not required to put a copy of the Form 990-T on their web site
• Tax-exempt organizations preparing a Form 990-T solely for purposes of claiming the telephone excise tax refund are not required to make such Form 990-T available for public inspection

Thanks Brian for the heads up!

WebCPA | Regulatory spotlight shines on NFPs

WebCPA | Regulatory spotlight shines on NFPs

Thanks to a board member for sending me this link. The article is another good round up of what is going on out there.

Accountability and Transparency, Part 1

Guidestar has another good piece on accountability and transparency. The top piece of information people listed as how they show they are accountable are the audited financial statements. All most all the things people listed come from the admin and finance side and to me show once again how important these roles are in any size nonprofit.

It also reminds me to remind you that if you have not done so please do go on to GuideStar.org and find your 990. If you have filed one they have it listed. But the nice folks there allow us to add to the information up there, describe our programs in more detail, add accomplishments and goals and even explain things if you think your organizations numbers are a bit off. As one of the first place someone may go to research your organization it behooves us all to keep our info current.