LUTZ BUSINESS INSIGHTS
Top Ten Compliance Tips for Nonprofits
DEYNA ROUSE, TAX SHAREHOLDER
“With great power comes great responsibility.” Our good friend Spider-Man reminds us of this adage (or rather, his Uncle Ben does). In any event, I like to paraphrase this statement when thinking about nonprofit organizations: “With great privilege comes great responsibility.” For the benefit of being exempt from income taxes, there are lots of responsibilities that nonprofit organizations (NPO’s) must bear in mind. This article shares a bit more insight into some of these responsibilities and the best practices that NPO’s should consider to keep themselves in line with the rules set out by the IRS and other governing bodies, with the primary goal being maintaining that tax-exempt status.
1. Federal Tax Filings
Most NPO’s, with very few exceptions, are expected to file an annual information tax return with the IRS. For public charities and many other types of NPO’s, this is Form 990. Private foundations must file Form 990PF. These filings are due 4.5 months after the organization’s year-end, with a 6-month extension available if requested. Some organizations may also be required to file Form 990-T if they have unrelated business taxable income. The penalties for not complying with these requirements include late filing penalties, which can max out at $10,000 for small organizations and $50,000 for large ones, so they can have serious impact on an organization’s financial position. Even worse, if an NPO doesn’t file their required Form 990 for three years in a row, the IRS automatically revokes their tax-exempt status, which can cause problems with donors, create income tax consequences, and cost the organization a lot of energy and financial resources to get that status reinstated. It’s best for NPO’s to have mechanisms in place to ensure that these annual filings are completed timely each year, and most organizations enlist the help of tax professionals to ensure compliance.
2. State Annual/Biennial Filings
Many states don’t require annual tax filings unless the organization has to file Form 990-T for Federal purposes, and Nebraska is one of these. However, most states require that NPO’s file annual or biennial reports to stay compliant with state registration laws. Also, some states require registration with the state prior to soliciting donations from their residents, so organizations should research these rules prior to soliciting donations. For Nebraska and Iowa, these preregistrations are not required. If NPO’s don’t heed their state’s nonprofit laws, they could risk prohibition from donation solicitations or even dissolution of their entity under state law.
3. Sales & Use Taxes
In Nebraska, only a limited number of NPO’s are actually exempt from sales and use taxes. As such, they need to be aware of their revenue sources that might cause a sales tax liability. Common ones to consider are event ticket sales (to the extent that goods or services are provided as part of the ticket price), live and silent auction sales, and proceeds from other fundraisers, such as car washes and rummage sales. NPO’s may also be subject to use taxes when they purchase items for use by the organization and don’t pay sales tax to the vendor, in which case they should self-assess use tax and remit it to the state. Organizations should consider seeking the assistance of a tax professional to stay compliant in this area. Consequences of not doing so include financial penalties for late filing or nonremittance.
4. Donor Acknowledgements
Organizations should create a policy for acknowledging donations received from supporters. Donors need these acknowledgements to properly deduct donations made. NPO’s should do their best to provide acknowledgements contemporaneously with the gift, and should include a statement indicating the value (if any) of goods and services provided by the organization. They should also include a description of the items donated, including cash. Complying with the donor acknowledgment guidelines ensures that donors are able to appropriately deduct contributions made.
5. Internal Controls
The biggest consideration for safeguarding the assets of an NPO is the segregation of duties, especially when it comes to cash. Making sure that there are adequate controls in place, especially around cash and credit cards used by an NPO, goes a long way in protecting the organization’s assets. Board oversight of the financial records of the NPO is also a best practice.
6. Budgeting & Performance Management
“If we don’t know where we’re going, how will we know when we get there?” This is a great concept to consider with regard to budgeting. The budgeting process causes an NPO to be thoughtful and intentional about the use of its resources and where it expends effort to generate revenue streams. It also provides a mechanism for accountability for outcomes in programming and staff management. Ignoring this important part of managing an NPO could lead to poor financial health of the organization and missed opportunities for growth and improvement.
7 – Employment Law Compliance
Many NPO’s utilize the services of individuals on a part-time basis, so it becomes important to distinguish between employees and independent contractors to ensure compliance with both payroll tax reporting and state unemployment and workers’ compensation laws. Worker classification may also impact the NPO’s benefit plan offerings such as medical insurance and retirement plans. Professional guidance in worker classification is a must. Organizations should seek the expertise of professional accountants or attorneys to ensure they are in compliance and avoid potential reclassifications that could cost them thousands in back wages, payroll taxes, and benefit cost.
8. Board Communications
Board members have a fiduciary responsibility to the NPO, and in some instances, can be held financially responsible for liabilities of the organization. As such, board members should have all of the information they need to make decisions in the NPO’s best interest. It is vital that board members are engaged and informed. Sometimes, something as simple as how board meetings are structured can have a material impact on this area. Agendas should be monitored to make sure they are comprehensive but also concise, and that they address the most important items impacting the organization at that time. Ignoring this vital function can lead to disengaged board members, poor decision-making, and loss of board support.
9. Policy Adoption
NPO’s should consider adopting policies that put them in a position to best manage the organization’s programming. Good governance concepts should prevail. The IRS even indicates which policies it deems most important by asking about them in Form 990 filing questions. These include conflict of interest, compensation, whistleblower, and document retention/destruction policies. Further, best practices may also include investment policies (if applicable) and policies around the NPO’s public relations and communications guidelines. All stakeholders of an NPO should be aware of policies adopted, and regular monitoring and enforcement of policies is a best practice.
As part of the privilege of being an organization exempt from tax, NPO’s are required to disclose some items to the general public for transparency. These include their annual Form 990 filings, Form 1023/1024 (original application for tax-exempt status), and organizational documents and bylaws. Also, NPO’s are required to disclose certain financial transactions and relationships with related or interested parties such as board members on their annual 990 filings as well. Not doing so can result in consequences such as excise taxes and potential revocation of tax-exempt status.
Being mindful of compliance requirements by all governing bodies with influence over NPO’s is serious business. Compliance should be made a priority to ensure the long-term sustainability and health of an organization. These guidelines do create work for NPO’s, but they also provide great insight into the best ways for organizations to operate. So just like Peter Parker’s secret identity is to him, compliance to NPO’s is not just a curse, but also a gift.
ABOUT THE AUTHOR
DEYNA ROUSE + TAX SHAREHOLDER
Deyna Rouse is a Tax Shareholder at Lutz with over 15 years of experience in taxation. She leads the IRS audit consulting and representation efforts at Lutz and regularly advises on IRS collections and procedural issues.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA in Accounting, with highest distinction, Creighton University, Omaha, NE
- Great Plains Federal Tax Institute, Board Member
- Gesu Housing, Board Member
- Friends of Nebraska Children, Board Member
- Rose Theater Guild, Board Member
- Nebraska Children & Families Foundation, Past Board Member
- Junior League of Omaha, Past Board Member
- Junior League of Omaha Foundation, Past Board Member
- Literacy Center of the Midlands, Past Board Member
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