Nonprofit Compliance Mha 2011 01

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MN Hospital Assn. Trustee Conference 2011 presentation

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  • IRS is getting better at identifying all types and sources of compensation and treating them as a whole. Key employee has substantial authority in an organization (10%+ of budget) and compensation greater than $150,000 Highly compensated employee does not have to be a key employee; six-figure salary plus a “facts and circumstances” test
  • Nonprofit Compliance Mha 2011 01

    1. 1. Compliance 101: Scrutiny, Accountability, and Transparency Minnesota Hospital Association January, 2011
    2. 2. Topics <ul><li>What We Won’t Cover </li></ul><ul><li>How Did We Get Here? </li></ul><ul><li>US Congressional Oversight & Scrutiny </li></ul><ul><li>Federal (IRS) Issues </li></ul><ul><ul><li>Form 990 </li></ul></ul><ul><ul><li>Intermediate Sanctions </li></ul></ul>
    3. 3. Supplemental Resource Download this pamphlet from the Minnesota Council on Nonprofits website: http://www.mncn.org/info/principles_and_practices.pdf
    4. 4. What We Won’t Cover <ul><li>Each nonprofit organization faces a baffling array of program-specific and department-specific compliance issues unique to its mission. </li></ul><ul><li>However, </li></ul><ul><li>All nonprofit boards share a common framework of accountability and compliance. </li></ul><ul><li>And the framework is changing… </li></ul>
    5. 5. Nonprofit Boards - Three Duties <ul><li>Duty of care: </li></ul><ul><ul><li>actively participate in organizational planning and decision-making </li></ul></ul><ul><ul><li>make sound and informed judgments </li></ul></ul><ul><li>Duty of loyalty: </li></ul><ul><ul><li>put the interests of the nonprofit before any personal or professional concerns </li></ul></ul><ul><ul><li>avoid potential conflicts of interest </li></ul></ul><ul><li>Duty of obedience: </li></ul><ul><ul><li>ensure that the organization complies with all applicable federal, state, and local laws and regulations </li></ul></ul><ul><ul><li>remains committed to its established mission </li></ul></ul>
    6. 6. How Did We Get Here? <ul><li>Nonprofit sector is big and influential </li></ul><ul><li>Nonprofit sector is very splintered </li></ul><ul><li>Perception of eroding confidence in charity </li></ul><ul><li>Trends toward more public scrutiny </li></ul><ul><li>IRS changing role – reluctantly - from pure financial regulation to broader governance oversight </li></ul><ul><li>Form 990 & other information readily accessible </li></ul>
    7. 7. Regulatory Trends and Influences <ul><li>IRS Intermediate Sanctions </li></ul><ul><li>Sarbanes-Oxley (SOX) </li></ul><ul><li>Senate Finance Committee </li></ul><ul><li>House Joint Tax Committee (hospitals) </li></ul><ul><li>Panel on the Nonprofit Sector </li></ul><ul><li>IRS Governance Best Practices (now included in 2008 Form 990 questions) </li></ul><ul><li>IRS Inquiry Letters (hospitals & universities) </li></ul>
    8. 8. Enforcement Risk <ul><li>Disgruntled/former employees/donors/ patients </li></ul><ul><li>Media </li></ul><ul><li>&quot;Public Advocates“ </li></ul><ul><li>State Attorney General </li></ul><ul><li>IRS </li></ul><ul><li>&quot;Your 990 is showing!&quot; </li></ul>
    9. 9. IRS Form 990 <ul><li>Annual informational tax return filed by nonprofits and charities with the IRS </li></ul><ul><li>Generally speaking, all 501(c) organizations must file – exceptions are limited and specific </li></ul><ul><li>Churches are generally exempt from filing </li></ul>
    10. 10. New 990 – Governance Policies to Have in Place <ul><li>Written conflict of interest policy </li></ul><ul><ul><li>The IRS includes a sample conflict of interest policy in Appendix A of the Form 1023 (application for nonprofit recognition).  It was originally written for nonprofit hospitals, but it can be adapted to other charities and nonprofits: http://www.irs.gov/instructions/i1023/ar03.html </li></ul></ul><ul><li>Written whistleblower policy </li></ul><ul><li>Written document retention/destruction policies </li></ul><ul><li>Joint Venture policy </li></ul><ul><ul><li>Act exclusively in furtherance of tax exempt purpose </li></ul></ul>
    11. 11. New 990: Governance Practices to Have in Place <ul><li>Contemporaneous Minutes of Board and Committees </li></ul><ul><li>Review of Form 990 by Board before Filing </li></ul><ul><li>Public Disclosure of Tax Return (990) </li></ul><ul><li>Compensation Committee </li></ul><ul><ul><li>Review executive and director compensation </li></ul></ul><ul><li>Audit committee </li></ul>
    12. 12. New 990– Reporting Requirements <ul><li>Many other new and expanded reporting requirements that don’t involve governance policy </li></ul><ul><ul><li>Lobbying </li></ul></ul><ul><ul><li>Fundraising </li></ul></ul><ul><ul><li>Tax-exempt bonds </li></ul></ul>
    13. 13. Public Disclosure <ul><li>At your principal, regional, and district place of business, you must make available for inspection upon request: </li></ul><ul><li>Form 1023 – Includes </li></ul><ul><ul><li>Articles of Incorporation, Trust Indenture, or Association; </li></ul></ul><ul><ul><li>Financial information for the preceding 3 years of operation; </li></ul></ul><ul><ul><li>By-Laws </li></ul></ul><ul><li>Form 990 – last three years </li></ul><ul><li>IRS Correspondence </li></ul><ul><li>Documents must be mailed within 30 days upon request </li></ul>
    14. 14. Public Disclosure – Conditions and Exceptions <ul><li>Reasonable postage & printing costs </li></ul><ul><li>Harassment </li></ul><ul><li>Privacy (e.g., donor names in public charities) </li></ul><ul><li>Older documents (e.g., Form 1023 prior to 1987) </li></ul>
    15. 15. Conflicts of Interest <ul><li>Conflicts are almost inevitable </li></ul><ul><li>A conflict is not necessarily illegal </li></ul><ul><li>Conflicts must be disclosed in writing </li></ul><ul><li>Conflicts must be managed through policy </li></ul>
    16. 16. “ Intermediate Sanctions” The penalties imposed under Internal Revenue Code Section 4958 on persons involved in excess benefit transactions. Intermediate sanctions are an alternative to the revocation of an organization’s tax-exempt status when private individuals receive an excess benefit.
    17. 17. Change in approach -- causes <ul><li>Perception by IRS & Congress that nonprofits are getting away with abuses of their tax-exempt recognition </li></ul><ul><li>Traditional approach punishes the organization (and its beneficiaries) for bad acts of individuals </li></ul><ul><li>Individuals not held properly accountable for bad acts </li></ul>
    18. 18. Individuals covered under IS  All voting board members and their family members  All CEOs/Executive Directors and their family members  All treasurers and CFOs and their family members  “ Persons with a material financial interest in certain healthcare provider-sponsored organizations if a hospital that participates in the provider-sponsored organization is an applicable tax-exempt organization.” (And their family members)  Generally, donors of more than $5,000 if their contribution exceeds 2% of the nonprofit’s revenue for any period of time, and their family members.
    19. 19. Organizations Covered Under IS <ul><li>501(c)3 and 501(c)4 organizations </li></ul><ul><ul><ul><li>Note: private foundations are not covered under new Intermediate Sanctions regulations because they have similar regulations to follow already </li></ul></ul></ul><ul><li>Churches are covered under Intermediate Sanctions even if they haven’t filed for exempt recognition </li></ul>
    20. 20. Excess benefit transactions -- general Any transaction between an exempt organization (nonprofit) and a disqualified person where the value of the benefit to the individual exceeds that provided to the exempt organization
    21. 21. Penalties for excess benefit transactions <ul><li>First tier penalties </li></ul><ul><ul><li> Individual benefiting B 25% tax plus &quot;making the nonprofit whole&quot; </li></ul></ul><ul><ul><li>Organization manager B 10% excise tax (up to $10,000 per transaction) </li></ul></ul><ul><li>Second tier penalties </li></ul><ul><ul><li> Individual benefiting B 200% excise tax </li></ul></ul><ul><li>“ Managers” who “knowingly” approve an excess benefit transaction are subject to a penalty tax equal to 20% of the excess up to $20,000 </li></ul>
    22. 22. Excess benefit transactions -- employees <ul><li>Compensation </li></ul><ul><ul><li>Salary plus most benefits </li></ul></ul><ul><ul><li> “ Key employee” </li></ul></ul><ul><ul><li>“ Highly compensated employee” </li></ul></ul><ul><li>Revenue-sharing transactions B </li></ul><ul><ul><li>percentage compensation </li></ul></ul><ul><ul><li>compensation tied to nonprofit revenue </li></ul></ul>
    23. 23. &quot;Safe harbor&quot; -- &quot;rebuttable presumption of reasonableness&quot; <ul><li>Written bids for products, independent land appraisals, etc. Consultation with legal counsel, accountants, etc. (NOT BOARD MEMBERS) </li></ul><ul><li>Salary surveys and other third-party documentation of compensation trends </li></ul><ul><li>Boards and managers who rely on independent counsel are generally safe from IS penalties </li></ul>
    24. 24. Demonstrate reasonableness through documentation -- document, document, document! <ul><li>Conflict of interest policy for organization B </li></ul><ul><ul><li>The IRS includes a sample conflict of interest policy in Appendix A of the Form 1023 (application for nonprofit recognition): </li></ul></ul><ul><ul><li>http://www.irs.gov/instructions/i1023/ar03.html </li></ul></ul><ul><li>Board minutes documenting action on transactions including conflicts, recusal of board members, etc. </li></ul><ul><li>Written board recruitment program including questionnaires documenting conflicts </li></ul><ul><li>Annual written disclosure of board member and senior manager conflicts of interest </li></ul>
    25. 25. Thank You! <ul><li>818 S. Hawthorne Avenue </li></ul><ul><li>Sioux Falls, South Dakota 57104-4537 </li></ul><ul><li>(605) 336-0244 or (888) 4-SUMPTION </li></ul><ul><li>www.sumptionandwyland.com </li></ul>

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