Prove, Improve And Approve The 2008 Form #2 2003

Stephen D Spangler, CPA

Susan L. Schuchat, CPA

Cavanaugh & Co LLP

2381 Fruitville Road

Sarasota, FL 34237

“ Experience has taught us that in times of economic peril, we must be watchful. During hard times, there is often a rise in questionable or fraudulent activity, in overly aggressive or inappropriate fundraising, and in tax avoidance accommodation schemes of less than sterling character

Cavanaugh & Co LLP September 2009

… .Because public trust is so important to the sector, none of us wants the actions of the bad apples to overshadow all the good work that most tax-exempt organizations are doing.”

So……… in such difficult economic times what are we to prove to the general public, watchdog groups, reporters and potential donors who use our 990 and how best can we go about it?

Enhance Transparency

Promote Tax Compliance

Minimize the Burden on the Filing Organization

We’ll take a look at the following issues today:

Proof of Public support for 501(c)(3) entities is crucial – reported on Schedule A

Related party transactions

Compensation and private inurement

UBIT

Program services

Schedule A

Schedule A – refer to your handout

Does your accountant prepare this for you?

Do you know how it is prepared?

Do you know where you find out what support test you are required to complete?

How do you keep track and for how long must a donor be considered not providing public support (disqualified or high support)?

Can you change from one support requirement to another?

Conflict of Interest Policy

What are Related Parties?

A policy that defines conflict of interest, identifies the classes of individuals within the organization covered by the policy, facilitates disclosure of information that may help identify conflicts of interest, and specifies procedures to be followed in managing conflicts of interest.

“ Business relationships” are:

Employment relationships

Contractual relationships

Common ownership of business in excess of 35%

09/29/09 Cavanaugh & Co LLP

One person is employed by the other in a sole proprietorship or by an organization with which the other is associated as a trustee, director, officer, key employee, or greater-than-35% owner.

One person is transacting business with the other (other than in the ordinary course of either party’s business on the same terms as are generally offered to the public), directly or indirectly, in one or more…..

“ Indirect transactions”

………… ..transactions with an organization with which the one person is associated as a trustee, director, officer, key employee, or greater-than-35% owner.

Each is a director, trustee, officer, or greater than 10% owner in the same business or investment entity.

Ownership is measured by stock ownership (either voting power or value) of a corporation, profits or capital interest in a partnership or limited liability company, membership interest in a nonprofit organization, or beneficial interest in a trust.

Ownership includes “indirect” ownership (e.g., ownership in an entity that has ownership in the entity in question); there may be ownership through multiple tiers of entities.

An entity that is owned, directly or indirectly, (under constructive ownership rules of IRC section 267(c)), by a given person, such as the organization’s current or former officers, directors, trustee, or key employees listed in Form 990, Part VII, Section 1, or the family members thereof (listed persons) as follows :

1. A corporation in which listed persons own more than 35% of the total combined voting power;

2. A partnership in which listed persons own more than 35% of the profits interest; or

3. A trust or estate in which listed persons own more than 35% of the beneficial interest.

09/29/09 Cavanaugh & Co LLP Children & their Spouses Grandchildren & their Spouses Great Grandchildren & their Spouses Siblings

09/29/09 Cavanaugh & Co LLP Ownership of greater than 35 % Ownership is individual or combined

What types of compensation must be reported?

For whom?

Look at Schedule J of the 990

Requires that a 501(c)(3) public charity operate so that none of its income or assets unreasonably benefits any of its board members, trustees, officers, or key employees (“insiders”). These types of individuals

Precludes any of the income or assets of a charity from unfairly or unreasonably benefiting, either directly or indirectly, individuals who have close relationships with their organizations and the ability to exercise control over them.

The IRS encourages reliance on the rebuttable presumption test of section 4958 of the Internal Revenue Code and Treasury Regulation section 53.4958-6

Under this test, compensation payments are presumed to be reasonable if the compensation arrangement is:

.

Approved in advance by an authorized body composed entirely of individuals who do not have a conflict of interest with respect to the arrangement,

The authorized body obtained and relied upon appropriate data as to comparability prior to making its determination, and

The authorized body adequately documented the basis for its determination concurrently with making the determination .

It is important to note that participation includes a board member’s silence or inaction where he or she is under a duty to speak or act as well as any affirmative action by the board member.

Comparability data generally involves looking to compensation levels paid by similarly situated organizations for functionally comparable positions.

Once that test is met, the Internal Revenue Service may rebut the presumption that an amount of compensation is reasonable only if it develops sufficient contrary evidence to rebut the probative value of the comparability data relied upon by the authorized governing body.

The Sarasota Community Foundation has prepared a free 48 page compensation study and guide

http://www.cfsarasota.org/portals/0/nrc/2008NonprofitCompensationReport.pdf

Failure to prove reasonable compensation results in Section 4958 IRC Excess Benefit Tax

Excess Benefits tax is meant to be punitive in nature and affects both the organization and the excessively compensated person

Cavanaugh & Co LLP September 2009 Intermediate Sanction Section 4958 of IRC Excess Benefits Amount Paid Total Compensation $500,000 Reasonable Value of Total Compensation 400,000 Excess Benefit $100,000 (1) Initial Tax Rate 25% Initial Tax $25,000 (2)

Cavanaugh & Co LLP September 2009 Intermediate Sanction Section 4958 of IRC Individual Pays IRS $25,000 (2) Individual pays back charity 100,000 (1) Total individual pays $125,000 Excess Benefits tax on charity manager 10% Tax Charity Pays $10,000

Guidestar has issued a information paper which is available on its website:

The Private Inurement Prohibition, Excess Compensation, Intermediate Sanctions, and the IRS’s Rebuttable Presumption

A Basic Primer for 501(c)(3) Public Charities

Karl E. Emerson, Esq.

Montgomery, McCracken, Walker & Rhoads, LLP

UBIT – Unrelated Business Income Tax

Very large concern of the Internal Revenue Service and Congress lately

Creates tax revenues for government

Not declaring UBIT creates unfair competition with for profit entities

What is required on the 990

Suggestions for recordkeeping

Section 501(c)(3) and (c)(4) organizations and Section 4947(a)(1) charitable trusts, must enter the total expenses incurred, including the total grants and allocations (if any) included within the total expenses for each program service listed in Part III, line 4.

The expenses for all program services combined (Form 990, Part III, line 4e) must agree with the total of the program services column on line 25, column (B), Part IX, of the return. The detailed information (revenue, grants, etc.) required for the three largest program services need not be provided on Schedule O for the remaining program services.

Program services should be reviewed regularly to see if they are still within the scope of the organization’s original exemption.

Part III can be used to describe significant programs not previously reported to the IRS.

Note - the IRS (and everyone else) is increasingly looking at organizations’ websites and comparing them to information on their Form 990.

An organization may conduct multiple program service activities within the same year. In this situation, it is not unusual to have expenditures relating to more than one program.

Are you keeping adequate records?

Are you providing enough detail such as number of clients service, hours or volunteer services?

What are some of the ways you in the audience have changed your recordkeeping to accomplish this?

Program services should relate to the organizations original Application for Exemption Form 1023

Do not report a fundraising activity as an exempt purpose accomplishment unless it is substantially related to fulfilling the organization’s exempt purpose.

Offers an organization the opportunity to increase awareness about itself by fully describing its program services and all related expenditures. These activities can exert a positive influence upon a prospective donor.

Conversely, the lack of activities can provide an investigative reporter with an idea for a negative news story.

According to the IRS:

Governance is the exercise of authority and control over an organization.

Sarbanes Oxley Act (SOX) was passed in the summer of 2002………

… .. C reated largely in response to serious financial scandals involving Enron, WorldCom, Global Crossing and other companies with publicly held stock

… .. D irectly mandated or required the SEC and other bodies to enact a large number of corporate governance reforms

Most provisions of the act do not directly apply to nonprofit organizations

…………… However, external forces such as donors, grant makers, current and prospective board members may create the desire to voluntarily adopt many of the principles of the act

The Internal Revenue Service reviews the board composition of charities to determine whether the board represents a broad public interest, and to identify the potential for insider transactions that could result in misuse of charitable assets.

If an organization has local chapters, branches, or affiliates, the Internal Revenue Service encourages it to have procedures and policies in place to ensure that the activities and operations of such subordinates are consistent with those of the parent organization.

However the Act’s provisions relating to the following DO apply equally to nonprofits:

Criminal penalties for the obstruction of justice relating to the alteration, destruction or fabrication of documents

Establishing and adhering to document retention policies

Prohibition of retaliation against whistleblowers

Maximum penalties for wire and mail fraud increased from 5 to 20 years

Responsible for hiring, compensation and oversight of the company’s audit firm and is the reporting entity for the auditor

Each member of the audit committee (minimum of 3) is an independent member of the board

Implements procedures for receiving, retaining and responding to complaints regarding accounting, internal accounting controls or auditing matters

Has the authority to hire any assistance it requires

Discuss independent audit with management, auditors including press releases and materials provided to the outside

Discuss risk policies and risk management

Meet periodically with management, internal auditors and independent auditors

Discuss any problems discovered in the audit

Report regularly to Board of Directors

Set policies for any former independent audit employees

SEC required to promulgate rules under the SEC act of 1934 mandating that the principal executive officer and the principal financial officer certify in each 10-k and 10-Q that the reports:

Have been reviewed

Do not contain misstatements of material fact nor are misleading

Fairly presents the corporation’s financial condition and results of operations

Officers are responsible for establishing and maintaining internal controls

That the design of such controls ensures material information is made known to the officers

Evaluates and reports on the corporation’s internal controls

Discloses to the auditors all internal control deficiencies or significant changes in IC’s

Role of the Board of Directors

Oversee the effectiveness and ethical operation of the organization

Importance of Independent Directors

Assure the exercise of independent judgment in key committees and general board decisions

Audit Committee

Comprised solely of independent directors

Governance and Nominating Committees

Focus on core governance and board composition issues including size, leadership and codes

Compensation Committee

Determines the compensation of the chief executive officer and other officers and assures that compensation is tied to performance and predetermined goals and objectives

Ethics and Business Conduct Codes

Executive and Director Compensation

Monitoring Compliance and Investigating Complaints

Document Destruction and Retention

The directors of a charity owe it a duty of loyalty……….

To act in the interest of the charity rather than in the personal interest of the director or some other person or organization

To avoid conflicts of interest that are detrimental to the charity.

Audit committees (If no audit or financial committee, then appointed Board Members)

Should the whole Board approve the 990?

What do you disclose on the 990 related to Board approval and where?

“ When it comes to nonprofit governance, one size does not fit all.

Governance issues vary depending upon type, size, structure, and culture of the organization

… ..It is not our job to determine the organization’s governance structure, policies or practices, or to make decisions for them”

………… EO Determinations CPE-GOVERNANCE

May 2009

IRS GOAL IS NOT TO DICTATE SPECIFIC METHODS OF GOVERNING – JUST TO REQUIRE ADEQUATE DISCLOSURE

REMEMBER – THE 990 IS NOT CONSIDERED FILED IF IT IS NOT COMPLETE!!!!!

DON’T MISS ANY SCHEDULES REQUIRED

SOME SUGGESTIONS

Minutes, organizational documents, structures of committees and board

Your attorney (Excellent reference Bruce Hopkins Law of Tax Exempt Organizations )

Organizations to which your nonprofit is a member

Board of directors

Community Foundation of Sarasota

INTERNAL REVENUE SERVICE

www.irs.gov/charities/index.html

www.stayexempt.org

DOCUMENT RETENTION GUIDE

IRS Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities, available on the IRS website.

PANEL ON THE NONPROFIT SECTOR

• Issued reports in 2005, 2006 and 2007

http://www.nonprofitpanel.org/

AMERICAN LAW INSTITUTE project begun in 2000 to develop Principles of the Law of Nonprofit Organizations – draft issued in 2007

http://www.ali.org/index.cfm?fuseaction=projects.proj_ip&projectid=3

ABA COORDINATING COMMITTEE ON NONPROFIT GOVERNANCE

( issued its Guide to Nonprofit Corporate Governance in the Wake of Sarbanes Oxley in 2005)

http://www.ali-aba.org/index.cfm

BETTER BUSINESS BUREAU

http://westflorida.bbb.org/charity/

ERI ECONOMIC RESEARCH

www.erieri.com

CHARITY NAVIGATOR

http:/www.charitynavigator.org/index.cfm?bay=studies.ceo/

STRATEGIC PLANNING

http://www.managementhelp.org/plan_dec/str_plan/str_plan.htm

COMMUNITY FOUNDATION OF SARASOTA

https://www.cfsarasota.org/NonprofitCenter/tabid/53/Default.aspx

GUIDESTAR

http:/www.guidestar.org

P ANEL ON THE NONPROFIT SECTOR

http://www.nonprofitpanel.org

Any more questions?

Stephen D Spangler, CPA

Susan L. Schuchat, CPA

Cavanaugh & Co LLP

2381 Fruitville Road

Sarasota, FL 34237

Prove, Improve And Approve The 2008 Form #2 2003

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