Who Regulates the Non-Profit Sector?

The last tax blog is a tough act to follow. Who can compete with the non-profit BLOB? Is this the same Blob from the 1988 movie which consumes everyone in its path? I certainly hope not.

Some of you who are involved with non-profit organizations may think there is a so-called Blob in the non-profit world; the Internal Revenue Service (IRS). I wouldn’t go as far as saying that the IRS “consumes everyone in its path,” but the IRS does monitor and regulate the activities of all non-profit organizations.

Some responsibilities of the Internal Revenue Service’s Division on Tax-Exempt and Government are:

• Reviewing applications for tax exempt status (Forms 1023)

• Granting tax exempt status

• Revoking tax exempt status

• Reviewing and auditing the Forms 990 filed

• Enforcing the tax code

• Asserting penalties

As you can see, the IRS has many responsibilities and limited resources to monitor all non-profit organizations. The public cannot depend on the IRS alone to govern the non-profit sector.

State governments have their own laws governing nonprofit organizations. In most states, the attorney general is responsible for regulating non-profits. Many states have filing requirements in addition to the federal filing requirements. States are responsible for enforcing their laws and investigating complaints of consumers. In order to figure out the requirements of your state refer to the IRS’ State Links, which is a collection of state government websites for tax-exempt organizations.

The most important regulators of the non-profit world are the donors. Would you give your hard-earned money to anyone who asks? I think not. I would need more information in order to make an educated decision. How do they intend to use the money? Have they used the money as intended in the past? Is anyone profiting? These are just some of the questions you may ask before giving an individual money, so ask the same questions before supporting a non-profit organization. The IRS may provide us with valuable tools to monitor and review, such as the Form 990, but the responsibility for oversight is truly the donors.

Welcome to My Blog

Hello to everyone out there in Cyberspace (is that still what it’s called?) and welcome to our BLOG!

My 4 year-old daughter wanted to know why I was writing to a BLOB. Sad to say, I have been accused of worse.

Anyway, what do you think of the name of our blog? NON-PROFIT AFTER HOURS. Yep, you guessed it, my idea! We have gotten positive feedback on the name, and just one or two negative comments. Some people need to lighten up!

This is what I am supposed to be doing, correct? Just saying what is on my mind.

I’m blogging…….I’m blogging…..I’m blogging……

How am I doing so far?

Our blog is to be centered around the non-profit world, and for me, the tax related aspects of non-profits. Now, synonymous with the term “non-profit” organization is “tax-exempt” organization. Well, as I have heard from more than one person, if the organization is tax-exempt, there can’t be many tax-related aspects, and if there are, they can’t be that complex.

Well, as for me and my 4 year-old daughter’s BLOB, we say think again!

I have dealt with non-profits throughout my 30 plus year career working in taxes. However, I have focused on or “specialized” in this niche area for the last 10 plus years. And I will tell you, that some of the issues that arise in the non-profit area can rival any that come up in the for-profit arena.

Sure, you for-profit guys and gals have your Section 382 loss limitation rules, special allocation and substantial economic effect rules for partnerships, transfer pricing studies, S-corporation shareholder basis and at-risk-rules, blah, blah, blah…. But how many of my for-profit brethren work with religious organizations? Yes, we answer to a higher authority. Oh, and don’t even get me started with the issues surrounding joint ventures with tax-exempt organizations and the crazy, excise tax laden, world of Private Foundations. Private inurement…snap…don’t even go there!

The numerous issues that are out there along with the heightened scrutiny that non-profits are under from Congress, the IRS and state authorities make the non-profit world both an interesting and challenging area to practice. I was told that there is an internal struggle within the government regarding the “monitoring” of tax-exempt organizations. One school of thought is to increase regulation and oversight while the other says to let the organizations go about their business with minimal governmental intervention. We will see as time goes on, how this will play out.

I mean no offense to anyone as my blog is meant for all to read and from time to time, enjoy. Over the next few weeks, months and hopefully years, we will be exploring, together, the “tax related aspects” of “tax-exempt” organizations.

Until next time…….beware the non-profit BLOB!

Does Your Non-profit Organization Need a Physical Examination?

I recently turned the big “5” – “0”, and everyone, friends and family alike, told me I needed to get a physical. It had been a number of years since the last check-up with the doctor. Why do I need a physical? I feel fine (typical “guy” response, right?). Even though things seem to be OK on the outside and there were no noticeable problems that I could identify, how do I know that everything is OK on the inside? I don’t – hence the need for a physical examination.

What about your non-profit organization? Things seem to be going well on the outside – you’re meeting the objectives of your mission; you’re running at or near budget; the Board meets regularly and they seem happy with what they see and hear. So far, so good. But how are things going on the inside? Did you ever read in the paper or hear on the news how there was another theft in a non-profit organization (someone was stealing money over a long period of time), or the local NFP is going out of business due to lack of funding? I‘m sure with these entities that things seemed good on the outside while problems were brewing on the inside over a period of time. Maybe the situation would have been different if the non-profit had a periodic examination.

Here are some ideas to consider for your non-profit organization’s physical examination:

• Board of Director involvement – do you have the right committees focused on key oversight roles, including – audit/finance committee, strategic planning, mission related committees, executive review (addressing performance and compensation of key executives) – and do the people on these committees have the appropriate skills to perform these oversight roles.

• Adequacy of internal controls – consider periodic review and testing of internal controls (can rotate cycles each year – for instance, if the organization has good internal controls in payroll, maybe this cycle doesn’t need to be reviewed each year unless there are major changes in the policies, procedures or personnel).

• External audit – the organization may already be required to have an annual external audit due to state, regulatory, or by some other third party user (i.e. bank or donor). If not, consider obtaining an external audit by an independent accounting firm.

• Initiate/update a fraud/general risk assessment program – identify and evaluate fraud risk factors that may indicate the presence of:

• Incentives or pressures for management, employees, or volunteers to commit fraud.
• Opportunities to commit fraud, usually combined with a belief that the fraud will go undetected.
• Attitudes/rationalizations on the part of management, employees, or volunteers to justify committing fraud.

A tool you may find helpful in this area is “Managing the Business Risk of Fraud: A Practical Guide”. The guide is sponsored by The Institute of Internal Auditors, The American Institute of Certified Public Accountants, and the Association of Certified Fraud Examiners.

• Audit/Finance Committee oversight – this committee is key to making sure the items noted above (and others) are being addressed and the financial affairs of the organization are being monitored. This committee should:

• Work with management to establish financial budgets and assist with monitoring budget vs. actual performance.
•  Ensure the organization has good internal controls (which are reviewed and tested as needed - discussed above).
• Review internal financial statements and make sure they make sense and will be understood by the full Board.
• Participate in selecting external auditors and work with them to understand the results of the external audit and any related communications (i.e. management recommendation letters).
• Review and evaluate investment policies and performance (especially if the organization does not have a separate investment committee).

These are a few ideas to consider and get you started; we’ll discuss these topics in greater detail in the future. For now, the important thing to do is meet with your doctor (management and the Board) and determine the frequency and needs of your physical examination. Don’t procrastinate and wait until there’s a big problem. Do it now while you feel good and things are going well. You never know what’s happening on the inside unless you check. Feel free to contact us if you need a consult or a “second opinion”.