KLR Mission Matters Blog - Providence, Rhode Island, Newport, Boston, Massachusetts

By Frank Monti

Few people are probably upset that the IRS is in the middle of a problem.  Even though most of us have never had an up-close and personal interaction with the IRS, it is the one government agency that everyone fears.  So I suppose it is somewhat natural to smile a bit as we hear about their problems.

I thought that in this blog I would try to shed some light on the issue.  Although most of the readers of this blog are charitable organizations, exempt under Section 501(c)(3) of the Internal Revenue Code, there are actually 29 different sections of 501(c) under which an entity can find tax-exempt status.  Some of the media hype is about certain organizations that have sought tax-exempt status. Some of the general public is outraged because many people only think of charities when they think of a tax-exempt organization.

The specific section of 501(c) that is under scrutiny is 501(c)(4). 501(c)(4) organizations are generally civic leagues and other corporations operated exclusively for the promotion of “social welfare”, such as civics and civics issues, or local associations of employees with membership limited to a designated company or people in a particular municipality or neighborhood, and with net earnings devoted exclusively to charitable, educational, or recreational purposes. An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community.

501(c)(4) organizations may also inform the public on controversial subjects and attempt to influence legislation relevant to its program and they may participate in political campaigns. Contributions to such organizations are generally not tax deductible.  The ability to participate in political campaigns is controversial because while there are laws requiring disclosure of donors to political campaigns, there are no such requirements relative to the financial supports of 501(c)(4) organizations.

Each of the political parties has its share of 501(c)(4) organizations and after the success of the Tea Party in 2010 there were many new applications for recognition of tax-exempt status by new 501(c)(4) organizations related to the Tea Party movement.  These are the applications that the IRS is accused of slowing down or otherwise targeting for enhanced scrutiny.

There are many who question whether the 501(c)(4) organization is appropriate for a purely political organization.  Allowing the 501(c)(4) organization to become involved in political campaigns is not the same as creating a 501(c)(4) organization that is entirely devoted to a political candidate or party.  Actually both sides of the isle are concerned with the current situation and the recent headlines are really intended to get readers upset with the tax-exempt organizations.  Many want to stop what they consider an abuse of the 501(c)(4) tax-exempt status. 

The IRS is probably right to try to keep politics out of the tax-exempt arena – not just the 501(c)(3) organizations, but all 29 of the exempt 501(c) categories.  The tax code is not the place for politics.  Free speech doesn’t need the tax code as it is a basic guarantee and transparency in identifying who is saying what in our political campaigns is a worthy goal.  The IRS probably had good intentions in giving these organizations a second look.  The problem now is that those good intentions are going to be lost in a sea of rhetoric, the intentions of which may be totally unrelated to preserving the purity of the tax-exempt entity.  Those in the tax-exempt field should be on guard to protect this portion of the Internal Revenue Code from the fallout of this issue.

By Frank Monti

At the end of April each year, the director of the IRS Exempt Organization division speaks to the sector at a Georgetown University exempt organization conference.  This year, Lois G. Lerner spoke on April 25th.

Ms. Lerner first explained why the IRS appears to move at a snail’s pace.  She noted that the IRS projects are complex, require sophisticated planning, and go through many phases over their lifetimes.  They include questionnaire development, statistical sample design, training, data gathering and analysis and, finally exams.  As a result, their project work-plans seldom fit into an annual plan and take multiple years to completely play out.  So, going forward, the IRS hopes to not only announce the initiation of a project on a particular topic, but to also tell us exactly what work they plan to do regarding that project in the current year.

For example, the IRS just issued their final report on something called the Colleges and Universities Project which was launched in 2008.  One of the central issues in this project was Unrelated Business Taxable Income (UBTI).  The IRS statistics on UBTI show that only half of the organizations reporting Unrelated Business Income (UBI) are required to pay a tax liability.  This is due to the deductions that these organizations are taking to offset the UBI.

In the Colleges and Universities project the IRS conducted 34 examinations and found that UBTI was under reported at 90% of the institutions examined.  The under reported taxable income totaled over $90 million and could result in more than $60 million in tax liability for the impacted organizations.

The errors were from claiming losses from activities that did not qualify as a trade or business, misallocating expenses to offset UBI, identifying certain income producing activities as exempt when they were unrelated and erroneously calculating net operating loss carry forward amounts.

Today more and more not-for-profit entities are seeking to create social ventures as a way of raising funds.  That is they are trying to expand their tax-exempt mission and earn revenues from the sale of goods and/or services to the general public.  Such entities could face significant UBI issues and, while these issues may not be a reason to avoid this type of commerce, it must be entered into with full knowledge of the law and regulations.  The IRS colleges and universities project presents evidence that the knowledge of the UBI laws and regulations may be lacking.

Stay tuned for more on the findings from the IRS Colleges and Universities Project.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.

By Frank Monti

This week I was reading one of the many nonprofit news and blog items that flow into my mail box.  One that caught my eye was from Peter Kramer of the Nonprofit Finance Fund titled Top Indicators of Nonprofit Financial Health.  Peter’s thesis was that there is an explosion in the amount of data available these days and all of this data presents a challenge to nonprofit leaders to tell a clear and compelling financial story.  So he isolated 6 financial metrics that one might focus on in evaluating the financial condition of a not-for-profit organization.

One that struck me was called Consistent Surpluses. I have touched on this subject in a couple of past blogs:  Nonprofit vs. Not-for-Profit and Can a Nonprofit Organization Have Too Much Profit? .  In my blogs, I advocated profitability as an annual goal and, therefore, was pleased to see Mr. Kramer call for consistent surpluses as an indicator of financial stability.  Kramer points out that “nonprofit is the basis for the tax-exempt status but is certainly is not an operational objective”.  The reason why I advocate using the phrase “not-for-profit” instead of “nonprofit” is because not-for-profit helps to emphasize that the business model for the organization is one of servicing the mission and the organization does not exist with a purpose of profit maximization.  The organization should not exist with a purpose of no profit.

3 reasons why the best tax exempt organizations must also profitable:

1. Consistent surpluses are a direct result of strong financial management and control.
2. Consistent surpluses not only point to strong financial management and control but also lead to the accumulation of cash reserves.
3. Accumulated surpluses or financial reserves allow for breathing room necessary for when things don’t go according to plan or when funds are needed to address mission critical opportunities in a timely manner.

So, while I have advocated for budgeted surpluses and written to assure you that there is no such thing as too much profit in a not-for-profit organization, I hope that the call for consistent surpluses by another nonprofit writer will help to convince you that your not-for-profit organization is a business. Losing money or even breaking even is not a desirable condition.  Annually, on average, less than 40% of the not-for-profits report a surplus.  This does not bode well for the nonprofit sector and those who depend on it for their safety net.

For more nonprofit information on compliance reporting, endowments, government reporting and more, sign up to receive our weekly e-newsletter.

By Frank Monti

Recently, I have received a number of questions relative to the law and accounting for endowment funds.  I interpret this as a good sign for charitable organizations as the creation and maintenance of an endowment fund can be the cornerstone of a strong financial foundation for any organization. 

In the old days of endowment management, it was generally held that institutions could spend the annual income generated by a fund – the interest and dividends received – and retain the net capital gains to provide for endowment growth.  That policy of endowment management had a potentially negative impact on an organization’s investment strategy as the need for income had to be balanced with the availability of growth-oriented investments.

In the mid 1970’s most states passed the Uniform Management of Institutional Funds Act (UMIFA) that required institutions to invest endowment assets on a total return basis.  That is, maximizing the total return (interest, dividends and net capital gains) was to be the objective and preference was not to be given to interest or dividend paying investments when income was needed.  This law also required a different way of determining annual spendable endowment funds since the receipt of interest and dividends may be substantially reduced in favor of total return investment strategies.  As a result, the concept of spending policy income was born.

The spending policy is simply a percentage of the total endowment fund’s value; e.g. 4% of market value.  Once this policy is established the amount of annual spending is the mathematical answer after applying the percentage times the market value.  All of the earnings above the spending policy amount are retained for endowment growth.

Generally accepted accounting principles (GAAP) require that the spending policy amount be determined prior to or at the very beginning of the fiscal year.  It is inconsistent with GAAP to calculate the annual spending amount after seeing how the financial picture for the year is shaping up.  Likewise, it is inappropriate to specify a spending policy range – e.g. between 3% and 5% - and then select a specific spending policy amount within the range after seeing the results of operations.

In 2009, the UMIFA laws were updated into the UPMIFA laws.  The Uniform Prudent Management of Institutional Funds Act (UPMIFA) updated UMIFA and added clarity to the spending policy concepts.  I will write more on UPMIFA in a future post.

Although not required by either Act, I typically have a few general recommendations regarding spending policy.  First, if a board wants to create a policy that the annual spending policy amount will fall within a range, that is OK.  However, that does not constitute the spending policy; rather that is a policy established for creating a spending policy.  The organization still needs to establish a single percentage rate that is to be applied to the endowment’s market value to determine the annual spending amount.

Our second, the spending policy figure should be applied to an average of endowment market values rather than the single market value at a single point in time.  This will have the impact of reducing wide variances in spending amounts as endowment market values fluctuate.  For example; a spending policy of 4% of the average endowment quarterly market value over the past 12 quarters will result in an annual spending amount that moves up or down slowly even though individual quarterly market values over that time period may move drastically.

The third recommendation is a further refinement our second suggestion.  We recommend that the endowment spending calculation be performed based on average endowment quarterly market values determined 6 or 9 months prior to the beginning of the fiscal year in which the spending will occur.  For example: a calendar year organization whose spending policy is 4% of the average endowment quarterly market value over the 12 quarters ending on March 31st of the previous year will result in the organization being able to determine endowment spending at least 8 months prior to the beginning of the year and allows them to easily move this figure into their annual budget process.

Let us know what you would like to read more about below in the comments section. Do you have more questions about endowments?  Contact any member of the not-for-profit services team at 888-KLR-8557.

For more nonprofit information on compliance reporting, endowments, government reporting and more, sign up to receive our weekly e-newsletter.

By Frank Monti

Many believe that any form of incentive compensation in a not-for-profit organization is inappropriate or worse, against the law.  This is totally not true.  As a matter of fact, in 2002 the IRS published an Information Letter (INFO 2002-0021) that listed the 12 factors that it considers in determining whether an incentive compensation agreement is OK or a violation of prohibited private inurement.

Before we get to the IRS factors, we should consider whether incentive compensation is appropriate to the task at hand whether that is in a for-profit or not-for-profit environment.  There are many who believe that linking compensation directly to performance is a process with diminishing results.  These people believe that intrinsic motivation, where performance of the task is its own reward, when coupled with a fair level of compensation is best.  This blog is not for debating that topic.  There is plenty of material out there if you want to delve more deeply into the behavioral ramifications of each type of program.

In a not-for-profit organization, one would think that intrinsic motivation is natural since the organization is mission oriented and achieving the mission is usually a rewarding experience.  (Is that really any different from any other business?  Wasn’t Steve Jobs thrilled that people liked his products?)  Even if you do believe that not-for-profit work is more intrinsically rewarding, this does not mean that there are not some situations in which an incentive compensation financial reward would not be in the best interest of the organization. 

For example:  In an organization that has a clinical counseling component, it is often a challenge for the organization to avoid excessive missed counseling appointments. When a client fails to show for their scheduled appointment, the organization does not realize the third-party payment that is linked to that counseling session while still incurring costs relating to the counselor and the physical space that goes unused. In such a situation, it is entirely appropriate to incent the clinician to devise procedures that will result in reduced no-shows. 

Reduced no-shows are in the best interest of the people being counseled as well as the organization.  What can be wrong with a program that encourages the clinician to help achieve that goal?  Claiming that the clinician should not need a financial incentive to reduce no-shows is an admirable theoretical position that should not be adhered to while the programmatic and financial results suffer.

Of course, I have also seen some companies that had so many financial incentives that some employees felt they should be tipped for holding the door open for a fellow employee. 

The IRS has said the following in regard to incentive compensation at not-for-profit organizations.

The incentive compensation agreement should:

1. Be approved by the board of directors or compensation committee with a conflict of interest policy;
2. Result in total compensation that is reasonable;
3. Be utilized only where there is an arm’s length relationship between the employer and the employee rather than where there is impermissible participation by the employee in management and control of the employer;
4. Have a ceiling on the amount the employee can earn;
5. Consider data that measures quality of service to the employer’s constituents;
6. Accomplish a charitable purpose, such as keeping expenses within budgeted amounts if the compensation amount is based on net revenue;
7. Serve a legitimate business purpose, such as achieving efficiency or economy of operations;
8. Provide rewards based on services actually performed by the employee rather than rewards based on the employer’s performance in an area where the employee performs no significant functions.

The incentive compensation agreement should not:

1. Have the potential for reducing charitable services provided by the employer;
2. Transform the employer’s principal activity into a joint venture between it and the employee or subcontractor;
3. Serve as a device to distribute the employer’s profits to the person or persons who control it;
4. Result in abuse or unwarranted benefits because prices or operating costs don’t compare favorably with those of similar organizations.

Remember, all not-for-profit organizations are a business with a mission to be accomplished.  Use every tool available to you to achieve your goals. Do you have incentive compensation plans? What are some of the challenges you have faced?.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.

By Frank Monti

Almost all nonprofit organizations have web sites that they are using for a variety of activities, fund raising being one of them.  In general, we advise our clients to limit the use of the term “advertising” and instead focus on requesting “program underwriting” from corporations and acknowledging that underwriting support by mentioning the company on the organization’s website.

As noted in the KLR white paper titled “Corporate Sponsorships”, payments received by nonprofits from corporations may be nontaxable sponsorship revenue or taxable advertising income. The key is whether the content of the recipient’s acknowledgment of its corporate benefactor stays within acceptable guidelines.  There is a fine line between what is considered advertising in the nonprofit world and what isn’t. The IRS has provided specific guidance on this, specifically addressing acknowledgments that nonprofits place on their websites.  An exempt organization is deemed to have simply acknowledged a sponsor if it merely includes the sponsor’s internet address (including a hyperlink) on its website.  However, if there is a hyperlink to a sponsor’s website where there is an endorsement of the sponsor’s product by the exempt organization, the endorsement is considered advertising.

The key to our suggested “underwriting acknowledgments” is to remember that the nonprofit cannot endorse, compare or otherwise make a qualitative comment about a company’s product or service.  Nonprofit Public Television provides the best example of underwriting acknowledgments that contain the name and logo of the sponsor along with the sponsor’s tag line (Ex: Home Depot – “your home improvement store”) without any further endorsement.

It is perfectly allowable to include an underwriter’s logo and link to their website on your nonprofit website as long as the nonprofit organization does not endorse the company or its products.

For more information on advertising or questions about your website staying within the allowable endorsement limit, please email us.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.

By Frank Monti

If there is one topic that is near and dear to the IRS, it is the proper classification of workers. Classifying workers was even the topic of a blog post of mine earlier this year. Unfortunately, this is an unusually appropriate topic for not-for-profit organizations because they frequently retain workers for special projects or programs.  All too frequently the not-for-profit organization looks upon these special workers as subcontractors and the IRS believes that in many instances these workers are more properly classified as employees.

There are a number of reasons why an organization hiring a temporary worker would rather classify that worker as a subcontractor.  It is easier to add a worker outside of the normal payroll system.  The subcontractor knows that their job is temporary.  The organization does not have to pay payroll taxes and other employee benefits to the non-employee.

Recently, the IRS has expanded its Voluntary Classification Settlement Program (VCSP in IRS language) and it hopes that more taxpayers will take advantage of this program for “achieving certainty under the law” by reclassifying their workers as employees for future tax periods.  It is important to realize that classifying a worker as an employee rather than a subcontractor is, in the IRS’s mind, a way of “achieving certainty under the law.”

I am not sure if the IRS has ever suggested to an employer that an employee would be more properly classified if reported as a subcontractor.  If every worker in America were classified as an employee, the government would be happy – that we can be certain of!

While I poke fun at the IRS hinting that you can only be certain of your worker classification if you classify your workers as employees, I can attest to the uncertainty of classifying workers as subcontractors.  The IRS publishes a fair amount of guidance on who qualifies for the subcontractor classification.  However, having worked with this guidance and been involved in IRS worker classification audits, I know that the guidance and IRS field audit interpretation of the guidance is certainly less than certain.

So what is the expanded VCSP?  The IRS has expanded the criteria for qualifying for this program.  Now larger organizations may apply including businesses, non-profit organizations and even government entities.  Even if you are currently engaged in an IRS audit (as long as it is not an employment tax audit), you may qualify for the program.  If you are accepted into the program you will no longer be subject to the special six-year statute of limitations and will only have to deal with the past three years.  The expanded program also waives (until 6/30/13) the requirement that you filed Form 1099 for the subcontractors you employed.  These and other modifications to the VCSP are described in IRS Announcement 2012-45 and there is a Q&A on this subject posted on the IRS website.

If you are accepted into the VCSP program you will generally pay an amount that is effectively equal to just over 1% of the wages paid to the reclassified workers.  The IRS will not assess interest or penalties and these workers will not be part of a payroll tax audit.  If you think that the VCSP program can assist you in removing some uncertainty about some of your workers, please contact me, Frank Monti, CPA  or any member of our Not-for-Profit team for additional assistance.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.

By Frank Monti

The Office of Management and Budget (OMB) has issued for comment new guidance for Cost Principles, Audit and Administrative Requirements for Federal Awards and Audits of States, Local Governments, and Non-Profit Organizations.  This is part of the OMB’s federal grants improvement initiative that was started last year.  Below I have highlighted some of the more significant provisions being proposed.

The first most significant proposal is to increase the Single Audit threshold to entities that have federal spending of $750,000 or more.  This would represent an increase from the current $500,000 threshold for Single Audits that was established in 2003.  Organizations that fall below the $750,000 threshold would still have to make their records available for review or audit by the Federal agency, a pass-through entity or the Government Accountability Office (GAO).  In addition, the threshold for major program determination may be revised to $500,000 which is up from the current $300,000.

There are also proposed changes to the determination of high-risk vs. low-risk type A and B programs as well as changes in the percentage of coverage required in a Single Audit.  The percentage of coverage required in a single audit is proposed to be reduced from the current 50% (normal) and 25% (low-risk auditees) to 40% (normal) and 20% (low-risk auditees).

One of the more significant changes relative to the amount of audit work required in a Single Audit are the changes to the types of compliance requirements required to be tested. Currently 14 types of compliance requirements are required to be tested by the auditor.  The proposal reduces these to 6 types of compliance requirements.  Those requirements include: (1) Activities Allowed or Unallowed and Allowable Costs/Principles; (2) Cash Management; (3) Eligibility; (4) Reporting; (5) Subrecipient Monitoring; and (6) Special Tests & Provision. However, the federal agencies providing the funding will be allowed to request that some of the deleted types of compliance requirements may be requested where they could be considered essential to the oversight of the program.

The proposal does not just point toward reductions in work effort.  For example, when there are findings, more detail will be required to be reported.  The questioned cost threshold, however, will be increased from $10,000 to $25,000.

All of the related circulars and guidance published by OMB (A-21, A-87, A-110, etc.) will be streamlined into one document including Circular A-133.  This will produce a more streamlined set of guidelines for both the auditor and the federally funded agencies.  Although the audit thresholds are increasing, this is basically keeping pace with inflation and it would be inappropriate to conclude (or hope) that the Single Audit is going to be any less stringent in the years to come.

If you have questions or would like more information about your A-133 please contact Frank Monti, CPA or any member of the NFP Services Team.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.

By Frank Monti

Last week I discussed some of the items in the IRS Exempt Organization Division’s 2012 report and their 2013 agenda.  This week I am focusing on how the IRS is using the Form 990.  Understanding how the IRS uses this form will help you file a better Form 990 this year and in the future.

One of the items on the 2013 IRS Exempt Organization (EO) Division’s agenda is the continued development and testing of potential “indicators of noncompliance” exhibited in the Form 990.  They will use this information in their examination division for follow-up with organizations.  Although the IRS revised the Form 990 way back in 2008 they are only now accumulating sufficient data to use in their quest to increase compliance with laws and regulations.

Very early in this process the IRS found that many organizations do not always accurately reflect their activities.  If those organizations had been more careful in completing their returns, they might not have been identified by the IRS “indicators” or selected for examination.  Thus, it is more important than ever that all organizations follow instructions, compute properly and report all information requested on their Forms 990 accurately. The bottom-line is that the IRS uses the Form 990 responses to select returns for examination, so it is in your best interest to file a complete and accurate return.

One of the studies now being conducted by the IRS is something they term as the “charitable spending initiative.”  In this long-range study, EO is using data from filed Forms 990 to focus on the sources and uses of funds in the charitable sector and their relationship to charitable accomplishments.  For example, some organizations report relatively large fund-raising expenditures when compared with expenditures for the organization’s charitable programs.  The examinations that resulted from this indicator disclosed that in approximately 33% of the cases that reported high expense ratios turned out to be lower after examiners completed a full review of the books and records.  Thus, it is apparent that organizations are not accurately allocating their expenses between program and administrative and fund-raising functions.

Of course, some organizations that the IRS audited were found to be devoting too little of their resources to their charitable mission.  The EO revoked the exempt status of four organizations due to either very little or no charitable activity or for inurement to an officer or director.  Close to 100 organizations that received field audits had employment tax return issues resulting in additional tax assessments and financial penalties.

Compensation levels continue to be a concern for the IRS.  The EO is not only focusing on high reported compensation levels but it is also reviewing organizations that report high annual gross receipts with low total compensation to officers, directors, trustees and key employees.  The IRS is concerned with whether some organizations may be circumventing the goal of transparency by hiding compensation levels in other expenditure line items.  During 2013 the EO Division will gather information from a random sample of organizations to further examine the reporting of compensation levels.

As you might imagine, political activity was a key concern in 2012.  The IRS identified over 300 cases of potential impermissible campaign intervention.  In addition to developing a list of organizations with potential impermissible campaign activity from the Form 990, the IRS receives referrals from outside sources alleging political campaign intervention which it also evaluates and tests for compliance with the law.  Follow-up on these leads will continue into 2013.

Many organizations reported taxable unrelated business activities on their Form 990 but then did not file a Form 990-T.  As hard as it is to believe that this could occur, the IRS reported receiving over $260,000 in delinquent tax payments from this activity.  Once again, the IRS found that in 25% of the cases the organization had completed the Form 990 incorrectly and there was not unrelated business activity although it had been reported as so in the 990.

It appears that the message coming out of the IRS is that in a high percentage of cases, insufficient care is being taken in the preparation of the Form 990. Due to the IRS’s increased ability to identify “indicators of noncompliance” incorrectly prepared returns are more likely to trigger IRS questions or audits.  The not-for-profit community is probably going to be surprised by this increase in activity related to the Form 990 because historically the filing of this Form, seldom if ever, caused a response from the IRS.  Times are changing!

Related Posts:
Highlights of the 2013 Exempt Organization Work Plan posted 2/6/13
Making the Most of Your IRS Form 990 posted 9/17/12
Using Form 990 & Cost Allocation to Calculate Your Non-for-Profit Success posted 3/15/12

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.

By Frank Monti

Lois Lerner, Director of the IRS Exempt Organizations division recently presented the 2012 Annual Report and 2013 Work Plan (the Plan) to Congress. This lengthy and complex plan riddled with industry jargon and analysis is very difficult for many people to understand and read. Although lengthy, it did cover some important points that you and your organization may find helpful.  This blog is a review of some of the most important areas of her presentation to Congress, including explanations and more details on what the IRS will be focusing on in the coming years.

Some of the key points in Director Lerner’s presentation include:

International activities

In 2013 the IRS will be focusing more of its attention on international activities. International activities, specifically making sure that the assets of U.S. charities that are not diverted to non-charitable purposes when those funds are sent abroad, are under close examination of the IRS.  If your company is operating in this area, be sure all record keeping and documentation is adequate as there is a high probability it will be reviewed by the IRS.  This includes compliance forms such 926, and possible international informational reporting forms such as 8865 and 5471.  The IRS has also noticed that in general, many nonprofits with international operations have failed to file the required Foreign Bank and Financial Accounts Report (FBARs) and will be looking more closely at this area of operation. International charities should also make sure excise taxes on net investment income, taxes on unrelated business income and employment taxes are reported accurately and sufficiently as the IRS is focusing on these points as well.  Payments to foreign vendors for services also falls under this category and you must ensure you have proper documentation to show backup withholding does not apply, if payment were made to foreign vendor who provided services outside of the U.S.

Group Exemptions

If your organization is operating under a group exemption, be aware that this is another area that the IRS will look into in 2013.  The group exemption option requires a fair degree of control by the primary organization over the activities of the group members as well as specific requirements for reporting at the end of each year.  If you are operating under a group ruling, be sure to review the requirements and your compliance in those areas.

Fraudulent Mortgage Foreclosure Companies

Another concern of the IRS is mortgage foreclosures. Foreclosures have risen over the past several years and there has been an increase in the number of organizations that claim to help individuals facing foreclosure.  Many of such organizations have the same issues that the IRS exposed a few years ago when it examined the credit counseling industry and they are concerned about activities that are not charitable (i.e., commercial in nature or activities that provided financial benefits to related businesses at the expense of the homeowner).

Self Declarers

Organizations exempt under Sections 501(c)(4), (5) and (6) generally have not sought a determination letter from the IRS.  They are known as “self declarers” and the IRS will be performing work in 2013 to learn more about whether such organizations have classified themselves correctly and are complying with applicable rules and regulations.

Form 990

As you know, the IRS introduced a new version of the Form 990 designed to promote transparency and improve compliance. The IRS is using these potential noncompliance indicators from the Form and testing them to determine if they are, in fact, good indicators of non compliance. I will touch upon this topic more next week in my blog about how the Form 990 is being used by the IRS.

If you have questions or would like more information about the 2013 Exempt Organization Work Plan please contact Frank Monti, CPA or any member of the NFP Services Team.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements. The KLR Nonprofit team is active in our local community and not-for-profit organizations, visit our Facebook page to see photos from our latest volunteer event.