Prove, Improve And Approve The 2008 Form #2 2003


Published on

On Tuesday, September 29, the Community Foundation of Sarasota County hosted a free 990 workshop for nonprofits with Cavanaugh & Co.

Published in: Education, Business
1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • Handouts for details
  • Handouts for details
  • Handouts for details
  • Refer to glossary
  • A conflict of interest arises when a person in a position of authority over an organization, such as an officer, director, or manager, may benefit financially from a decision he or she could make in such capacity, including indirect benefits such as to family members or businesses with which the person is closely associated. For this purpose, a conflict of interest does not include questions involving a person’s competing or respective duties to the organization and to another organization, such as by serving on the boards of both organizations, that do not involve a material financial interest of, or benefit to, such person.
  • There are no rules for “corporate” attributions Only “reasonable effort” to obtain required
  • compensation surveys or studies from outside compensation consultants for this purpose. independent compensation consultant used quality of any study, survey, or other data, used to establish executive compensation. You can purchase such studies, use other 990’s if satisfies, government DOL, Robert Half studies
  • Ask for examples and discuss
  • Handouts for schedule
  • If you haven’t followed the program services that were approved for tax exempt originally, creates a problem changes must be approved by the IRS
  • Thus, to correctly complete Part III, line 4, an organization may need to allocate various expenses among its different activities.
  • Data on Form 990, Part III, helps the IRS evaluate whether an organization’s program services focus on appropriate activities (including level of activity and content) for its exempt status. For Section 501(c)(3) and (c)(4) organizations and Section 4947(a)(1) trusts required to provide the expenses by each program service, the information provided in Part III also supplements the expenditures shown in Part IX of Form 990.
  • Need to improve this slide
  • Prove, Improve And Approve The 2008 Form #2 2003

    1. 1. <ul><li>Stephen D Spangler, CPA </li></ul><ul><li>Susan L. Schuchat, CPA </li></ul><ul><li>Cavanaugh & Co LLP </li></ul><ul><li>2381 Fruitville Road </li></ul><ul><li>Sarasota, FL 34237 </li></ul>
    2. 2. <ul><li>“ 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 </li></ul>Cavanaugh & Co LLP September 2009
    3. 3. <ul><li>… .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.” </li></ul>Cavanaugh & Co LLP September 2009
    4. 4. <ul><li>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? </li></ul>Cavanaugh & Co LLP September 2009
    5. 5. <ul><li>Enhance Transparency </li></ul><ul><li>Promote Tax Compliance </li></ul><ul><li>Minimize the Burden on the Filing Organization </li></ul>Cavanaugh & Co LLP September 2009
    6. 6. <ul><li>We’ll take a look at the following issues today: </li></ul><ul><ul><li>Proof of Public support for 501(c)(3) entities is crucial – reported on Schedule A </li></ul></ul><ul><ul><li>Related party transactions </li></ul></ul><ul><ul><li>Compensation and private inurement </li></ul></ul><ul><ul><li>UBIT </li></ul></ul><ul><ul><li>Program services </li></ul></ul>Cavanaugh & Co LLP September 2009
    7. 7. <ul><li>Schedule A </li></ul>Cavanaugh & Co LLP September 2009
    8. 8. Cavanaugh & Co LLP September 2009
    9. 9. <ul><li>Schedule A – refer to your handout </li></ul><ul><li>Does your accountant prepare this for you? </li></ul><ul><li>Do you know how it is prepared? </li></ul><ul><li>Do you know where you find out what support test you are required to complete? </li></ul>Cavanaugh & Co LLP September 2009
    10. 10. <ul><li>How do you keep track and for how long must a donor be considered not providing public support (disqualified or high support)? </li></ul><ul><li>Can you change from one support requirement to another? </li></ul>Cavanaugh & Co LLP September 2009
    11. 11. <ul><li>Conflict of Interest Policy </li></ul><ul><li>What are Related Parties? </li></ul>Cavanaugh & Co LLP September 2009
    12. 12. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    13. 13. <ul><li>“ Business relationships” are: </li></ul><ul><li>Employment relationships </li></ul><ul><li>Contractual relationships </li></ul><ul><li>Common ownership of business in excess of 35% </li></ul>09/29/09 Cavanaugh & Co LLP
    14. 14. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    15. 15. <ul><li>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….. </li></ul>Cavanaugh & Co LLP September 2009
    16. 16. Cavanaugh & Co LLP September 2009
    17. 17. <ul><li>“ Indirect transactions” </li></ul><ul><li>………… ..transactions with an organization with which the one person is associated as a trustee, director, officer, key employee, or greater-than-35% owner. </li></ul>Cavanaugh & Co LLP September 2009
    18. 18. <ul><li>Each is a director, trustee, officer, or greater than 10% owner in the same business or investment entity. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    19. 19. <ul><li>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 : </li></ul>Cavanaugh & Co LLP September 2009
    20. 20. <ul><ul><li>1. A corporation in which listed persons own more than 35% of the total combined voting power; </li></ul></ul><ul><ul><li>2. A partnership in which listed persons own more than 35% of the profits interest; or </li></ul></ul><ul><ul><li>3. A trust or estate in which listed persons own more than 35% of the beneficial interest. </li></ul></ul>Cavanaugh & Co LLP September 2009
    21. 21. 09/29/09 Cavanaugh & Co LLP Children & their Spouses Grandchildren & their Spouses Great Grandchildren & their Spouses Siblings
    22. 22. 09/29/09 Cavanaugh & Co LLP Ownership of greater than 35 % Ownership is individual or combined
    23. 23. <ul><li>What types of compensation must be reported? </li></ul><ul><li>For whom? </li></ul><ul><li>Look at Schedule J of the 990 </li></ul>Cavanaugh & Co LLP September 2009
    24. 24. <ul><li>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 </li></ul><ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    25. 25. Cavanaugh & Co LLP September 2009
    26. 26. Cavanaugh & Co LLP September 2009
    27. 27. <ul><li>The IRS encourages reliance on the rebuttable presumption test of section 4958 of the Internal Revenue Code and Treasury Regulation section 53.4958-6 </li></ul><ul><li>Under this test, compensation payments are presumed to be reasonable if the compensation arrangement is: </li></ul><ul><ul><li>. </li></ul></ul>Cavanaugh & Co LLP September 2009
    28. 28. <ul><ul><li>Approved in advance by an authorized body composed entirely of individuals who do not have a conflict of interest with respect to the arrangement, </li></ul></ul><ul><ul><li>The authorized body obtained and relied upon appropriate data as to comparability prior to making its determination, and </li></ul></ul><ul><ul><li>The authorized body adequately documented the basis for its determination concurrently with making the determination . </li></ul></ul>Cavanaugh & Co LLP September 2009
    29. 29. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    30. 30. <ul><li>Comparability data generally involves looking to compensation levels paid by similarly situated organizations for functionally comparable positions. </li></ul>Cavanaugh & Co LLP September 2009
    31. 31. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    32. 32. <ul><li>The Sarasota Community Foundation has prepared a free 48 page compensation study and guide </li></ul><ul><li> </li></ul>Cavanaugh & Co LLP September 2009
    33. 33. <ul><li>Failure to prove reasonable compensation results in Section 4958 IRC Excess Benefit Tax </li></ul><ul><li>Excess Benefits tax is meant to be punitive in nature and affects both the organization and the excessively compensated person </li></ul>Cavanaugh & Co LLP September 2009
    34. 34. 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)
    35. 35. 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
    36. 36. <ul><li>Guidestar has issued a information paper which is available on its website: </li></ul><ul><li>The Private Inurement Prohibition, Excess Compensation, Intermediate Sanctions, and the IRS’s Rebuttable Presumption </li></ul><ul><li>A Basic Primer for 501(c)(3) Public Charities </li></ul><ul><li>Karl E. Emerson, Esq. </li></ul><ul><li>Montgomery, McCracken, Walker & Rhoads, LLP </li></ul>Cavanaugh & Co LLP September 2009
    37. 37. <ul><li>UBIT – Unrelated Business Income Tax </li></ul>Cavanaugh & Co LLP September 2009
    38. 38. <ul><li>Very large concern of the Internal Revenue Service and Congress lately </li></ul><ul><li>Creates tax revenues for government </li></ul><ul><li>Not declaring UBIT creates unfair competition with for profit entities </li></ul>Cavanaugh & Co LLP September 2009
    39. 39. <ul><li>What is required on the 990 </li></ul><ul><li>Suggestions for recordkeeping </li></ul>Cavanaugh & Co LLP September 2009
    40. 40. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    41. 41. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    42. 42. <ul><li>Program services should be reviewed regularly to see if they are still within the scope of the organization’s original exemption. </li></ul>Cavanaugh & Co LLP September 2009
    43. 43. <ul><li>Part III can be used to describe significant programs not previously reported to the IRS. </li></ul><ul><li>Note - the IRS (and everyone else) is increasingly looking at organizations’ websites and comparing them to information on their Form 990. </li></ul>Cavanaugh & Co LLP September 2009
    44. 44. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    45. 45. <ul><li>Are you keeping adequate records? </li></ul><ul><li>Are you providing enough detail such as number of clients service, hours or volunteer services? </li></ul><ul><li>What are some of the ways you in the audience have changed your recordkeeping to accomplish this? </li></ul>Cavanaugh & Co LLP September 2009
    46. 46. <ul><li>Program services should relate to the organizations original Application for Exemption Form 1023 </li></ul><ul><li>Do not report a fundraising activity as an exempt purpose accomplishment unless it is substantially related to fulfilling the organization’s exempt purpose. </li></ul>Cavanaugh & Co LLP September 2009
    47. 47. <ul><li>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. </li></ul><ul><li>Conversely, the lack of activities can provide an investigative reporter with an idea for a negative news story. </li></ul>Cavanaugh & Co LLP September 2009
    48. 48. Cavanaugh & Co LLP September 2009
    49. 49. <ul><li>According to the IRS: </li></ul><ul><li>Governance is the exercise of authority and control over an organization. </li></ul>Cavanaugh & Co LLP September 2009
    50. 50. <ul><li>Sarbanes Oxley Act (SOX) was passed in the summer of 2002……… </li></ul><ul><ul><li>… .. C reated largely in response to serious financial scandals involving Enron, WorldCom, Global Crossing and other companies with publicly held stock </li></ul></ul><ul><ul><li>… .. D irectly mandated or required the SEC and other bodies to enact a large number of corporate governance reforms </li></ul></ul>Cavanaugh & Co LLP September 2009
    51. 51. <ul><li>Most provisions of the act do not directly apply to nonprofit organizations </li></ul><ul><li>…………… 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 </li></ul>Cavanaugh & Co LLP September 2009
    52. 52. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    53. 53. <ul><li>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. </li></ul>Cavanaugh & Co LLP September 2009
    54. 54. <ul><li>However the Act’s provisions relating to the following DO apply equally to nonprofits: </li></ul><ul><ul><li>Criminal penalties for the obstruction of justice relating to the alteration, destruction or fabrication of documents </li></ul></ul><ul><ul><li>Establishing and adhering to document retention policies </li></ul></ul><ul><ul><li>Prohibition of retaliation against whistleblowers </li></ul></ul><ul><ul><li>Maximum penalties for wire and mail fraud increased from 5 to 20 years </li></ul></ul>Cavanaugh & Co LLP September 2009
    55. 55. <ul><li>Responsible for hiring, compensation and oversight of the company’s audit firm and is the reporting entity for the auditor </li></ul><ul><li>Each member of the audit committee (minimum of 3) is an independent member of the board </li></ul><ul><li>Implements procedures for receiving, retaining and responding to complaints regarding accounting, internal accounting controls or auditing matters </li></ul><ul><li>Has the authority to hire any assistance it requires </li></ul>Cavanaugh & Co LLP September 2009
    56. 56. <ul><li>Discuss independent audit with management, auditors including press releases and materials provided to the outside </li></ul><ul><li>Discuss risk policies and risk management </li></ul><ul><li>Meet periodically with management, internal auditors and independent auditors </li></ul><ul><li>Discuss any problems discovered in the audit </li></ul><ul><li>Report regularly to Board of Directors </li></ul><ul><li>Set policies for any former independent audit employees </li></ul>Cavanaugh & Co LLP September 2009
    57. 57. <ul><li>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: </li></ul><ul><li>Have been reviewed </li></ul><ul><li>Do not contain misstatements of material fact nor are misleading </li></ul><ul><li>Fairly presents the corporation’s financial condition and results of operations </li></ul>Cavanaugh & Co LLP September 2009
    58. 58. <ul><li>Officers are responsible for establishing and maintaining internal controls </li></ul><ul><li>That the design of such controls ensures material information is made known to the officers </li></ul><ul><li>Evaluates and reports on the corporation’s internal controls </li></ul><ul><li>Discloses to the auditors all internal control deficiencies or significant changes in IC’s </li></ul>Cavanaugh & Co LLP September 2009
    59. 59. <ul><li>Role of the Board of Directors </li></ul><ul><ul><li>Oversee the effectiveness and ethical operation of the organization </li></ul></ul><ul><li>Importance of Independent Directors </li></ul><ul><ul><li>Assure the exercise of independent judgment in key committees and general board decisions </li></ul></ul><ul><li>Audit Committee </li></ul><ul><ul><li>Comprised solely of independent directors </li></ul></ul><ul><li>Governance and Nominating Committees </li></ul><ul><ul><li>Focus on core governance and board composition issues including size, leadership and codes </li></ul></ul>Cavanaugh & Co LLP September 2009
    60. 60. <ul><li>Compensation Committee </li></ul><ul><ul><li>Determines the compensation of the chief executive officer and other officers and assures that compensation is tied to performance and predetermined goals and objectives </li></ul></ul><ul><li>Ethics and Business Conduct Codes </li></ul><ul><li>Executive and Director Compensation </li></ul><ul><li>Monitoring Compliance and Investigating Complaints </li></ul><ul><li>Document Destruction and Retention </li></ul>Cavanaugh & Co LLP September 2009
    61. 61. <ul><li>The directors of a charity owe it a duty of loyalty………. </li></ul><ul><ul><li>To act in the interest of the charity rather than in the personal interest of the director or some other person or organization </li></ul></ul><ul><ul><li>To avoid conflicts of interest that are detrimental to the charity. </li></ul></ul>Cavanaugh & Co LLP September 2009
    62. 62. <ul><li>Audit committees (If no audit or financial committee, then appointed Board Members) </li></ul><ul><li>Should the whole Board approve the 990? </li></ul><ul><li>What do you disclose on the 990 related to Board approval and where? </li></ul>Cavanaugh & Co LLP September 2009
    63. 63. <ul><li>“ When it comes to nonprofit governance, one size does not fit all. </li></ul><ul><li>Governance issues vary depending upon type, size, structure, and culture of the organization </li></ul><ul><li>… ..It is not our job to determine the organization’s governance structure, policies or practices, or to make decisions for them” </li></ul><ul><li>………… EO Determinations CPE-GOVERNANCE </li></ul><ul><li>May 2009 </li></ul>Cavanaugh & Co LLP September 2009
    65. 65. <ul><li>SOME SUGGESTIONS </li></ul>Cavanaugh & Co LLP September 2009
    66. 66. <ul><li>Minutes, organizational documents, structures of committees and board </li></ul><ul><ul><li>Your attorney (Excellent reference Bruce Hopkins Law of Tax Exempt Organizations ) </li></ul></ul><ul><ul><li>Organizations to which your nonprofit is a member </li></ul></ul><ul><ul><li>Board of directors </li></ul></ul><ul><li>Community Foundation of Sarasota </li></ul>Cavanaugh & Co LLP September 2009
    67. 67. <ul><li>INTERNAL REVENUE SERVICE </li></ul><ul><li> </li></ul><ul><ul><li> </li></ul></ul><ul><li>DOCUMENT RETENTION GUIDE </li></ul><ul><li>IRS Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities, available on the IRS website. </li></ul>Cavanaugh & Co LLP September 2009
    68. 68. <ul><li>PANEL ON THE NONPROFIT SECTOR </li></ul><ul><li>• Issued reports in 2005, 2006 and 2007 </li></ul><ul><li> </li></ul><ul><li>AMERICAN LAW INSTITUTE project begun in 2000 to develop Principles of the Law of Nonprofit Organizations – draft issued in 2007 </li></ul><ul><li> </li></ul>Cavanaugh & Co LLP September 2009
    69. 69. <ul><li>ABA COORDINATING COMMITTEE ON NONPROFIT GOVERNANCE </li></ul><ul><li>( issued its Guide to Nonprofit Corporate Governance in the Wake of Sarbanes Oxley in 2005) </li></ul><ul><li> </li></ul><ul><li>BETTER BUSINESS BUREAU </li></ul><ul><li> </li></ul><ul><li>ERI ECONOMIC RESEARCH </li></ul><ul><ul><li> </li></ul></ul>Cavanaugh & Co LLP September 2009
    70. 70. <ul><li>CHARITY NAVIGATOR </li></ul><ul><li> http:/ </li></ul><ul><li>STRATEGIC PLANNING </li></ul><ul><li> </li></ul><ul><li>COMMUNITY FOUNDATION OF SARASOTA </li></ul><ul><li> </li></ul>Cavanaugh & Co LLP September 2009
    71. 71. <ul><li>GUIDESTAR </li></ul><ul><li> http:/ </li></ul><ul><li>P ANEL ON THE NONPROFIT SECTOR </li></ul><ul><li> </li></ul>Cavanaugh & Co LLP September 2009
    72. 72. <ul><li>Any more questions? </li></ul>Cavanaugh & Co LLP September 2009
    73. 73. <ul><li>Stephen D Spangler, CPA </li></ul><ul><li>Susan L. Schuchat, CPA </li></ul><ul><li>Cavanaugh & Co LLP </li></ul><ul><li>2381 Fruitville Road </li></ul><ul><li>Sarasota, FL 34237 </li></ul>