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Safe passage for nonprofits whitley 11 04-11


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Safe passage for nonprofits whitley 11 04-11

  1. 1. Safe Passage for NonprofitsKeeping Your Nonprofit on the Right Path Presenter Miriam Robeson, Attorney November 4, 2011
  2. 2. Why Are We Here? Starting with 2010, the IRS has increased scrutiny of nonprofits with an aggressive program to revoke nonprofit status for out-of-compliance nonprofits Economy has decreased available funds for nonprofit budgets, but increased criticism of nonprofit Increase in media attention on unscrupulous nonprofits and nonprofit directors/officers It’s easier to PREVENT problems with nonprofit status – after problems become public, it may be too late to fixInformation Level –IntermediateAssumes some familiarity with basics of nonprofits
  3. 3. Why Are We Here – Part 2The Horror Stories and Bad Press Investigation of Fiesta, Sugar, and Orange Medical Association of Bowl games for abuse of Atlanta ED pleads guilty to nonprofit status and embezzling more than “extravagant $300,000 compensation” Nonprofit Status of 30 Closer to home credit counseling •Last Week – New Haven $1M organizations revoked for Bingo Scam failure to achieve a •2011 Noble County Executive Director jailed for embezzling nonprofit purpose and for from nonprofit excessive executive •2010 Lafayette Nonprofit Center compensation finds embezzlement after audit
  4. 4. Why We are Here – Part 3The IRS IRS increases nonprofit oversightEmployment Executive Activist Compliance Taxes Compensation Agenda (Tax forms) Since 2008, the IRS has added more than 100 employees to the Exempt Organizations SectionAs of June, 2011, the IRS has “automatically revoked”the nonprofit status of more than 275,000 nonprofits
  5. 5. What is Financial Accountability?The Board is Responsible for:Knowing the financial status of the NP Understanding the financial status Acting on financial needs of the NP Preventing financial mishaps Mitigating financial crisis
  6. 6. Accountability Board reports to Are you Good •Donors Stewards of the The Buck Stops •Government resources the with the Board •Sponsors •Grantors public entrusts in •Constituents your care?
  7. 7. Safe Passage for Nonprofits Compliance Accountability Best Practices Risk Management Danger Zones
  8. 8. Compliance – State Requirements Annual Business Entity Report • Indiana Secretary of State • Confirmation of existence Entity Annual Report (E-1) • Indiana State Board of Accounts • Financial Reporting for Grant Recipients Annual NP 20 • Indiana Department of Revenue • Tax Reporting form
  9. 9. Compliance - Federal IRS – 990 Form<$50,000 – 990 N >$50,000 – 990 EZ/990• Change in threshold • Due 5 + 15 beginning 2010 • 6 month automatic extension• On-line ONLY of time• Due 5 + 15 after end of • For most nonprofits – 990 EZ fiscal year • Minimal property or real• NO extensions of time! estate • Normal gross receipts < $200,000 • Total Assets < $500,000 Failure to file – automatic revocation of §501(c)(3) status
  10. 10. Compliance - Employment Employment Federal -- 941 – State -- WH-1 – taxes and reports Employer’s Employer’s State must be timely Quarterly Federal Tax Return filed! Tax Return January 1 – ONLINE Federal – EFTPS (electronic requirement for federal tax State – IN-Tax many payment system) organizations “Exempt” versus Employee Wages and Hours “non exempt” Classification employees laws Applies if you Fair Hiring and Does not apply receive Nondiscrimination to all employers government $$
  11. 11. Compliance - UBITUBIT – Unrelated • (A) Trade or business • (B) regularly carried onBusiness Income • (C) not “substantially related” to exempt Tax purpose • Rental income Examples: • Product sales (storefront) • Does not include investment income If UBIT constitutes “substantial portion” of income, nonprofit can lose exempt status!
  12. 12. Handout – 10 Tips for Keeping an Eye on FinancesFinancial OversightWatch the money – Watch the peopleFinancial Oversight is the review of both finances and financialpracticesEnsures safe, ethical financial proceduresProtects Nonprofits and the Directors/StaffProvides integrity and transparency to the publicCatches financial difficulties before they become financialimpossibilities
  13. 13. Handout – 10 Financial Priorities for Nonprofit BoardsAccountability - Financial  Financial Policies  Financial Controls  Monitor appropriate use of nonprofit funds  Audit - review
  14. 14. Handout – Nonprofit Financial Control PolicyAccountability -Financial Governance Policies Policies for –  Handling Money  Recording Money  Reporting Money
  15. 15. Handout – Document Destruction PolicyAccountabilityFinancial ControlsGAAP StandardsFinancial Procedures ManualRestrictions documented and honored • Donor restrictions • Grant requirements • Commingling FundsTraining program for Staff and BoardDocument Retention/Destruction Policy
  16. 16. Handout – Conflict of Interest PolicyAccountability - Governance Conflict of Interest Ethical Standards
  17. 17. Accountability - Conflicts of Interest Board Staff Member Conflicts Conflicts Donor Volunteer Conflicts Conflicts
  18. 18. Accountability - Personal Benefit A Nonprofit CANNOT distribute funds to members, officers or directors
  19. 19. Accountability - Ethics When are your actions… Question- Un-Legal? Illegal? able? ethical?
  20. 20. Nonprofit Ethical Issues - Examples Improper donor acknowledgements  Donations of time are not tax-deductible Donor “influence-buying” Improper arrangements with donors  Failing to include both spouses in joint gift paperwork Staff/ED/Board/Volunteer accepting gifts from donors Failing to take responsibility (“Not My Fault”)
  21. 21. More Examples - EthicsFailure to properly accountand restrict use of donor-specified donations (illegal Purchases from Board-and unethical!) member business without•Capital contributions used for proper disclosure (the copy operational expenses shop example)•“Borrowing” from restricted funds Failure to consult Improper oversight ofprofessionals for assistance, spending (financial control when needed (lawyer – policies) - Indianapolis accountant) Humane Society
  22. 22. Transparency – Credibility to Public Regularly provide information to the PublicRequired disclosures Recommended• Tax returns disclosures• Organizational Documents • Annual report • Articles of Incorporation • Basic Financial Statement • Bylaws • Report of Activities• Funds used for lobbying • Mission/Vision• Application for Exempt Status
  23. 23. Risk Management for Nonprofits Best Practices to Prevent Financial Crisis  Identify Risk  Ranks Risk  Identify Policies to manage risk  Implement protections  Implement procedures in event of crisis
  24. 24. Risk Management – D&O Insurance Directors & Officers Insurance Protects the Board and Key Staff D&O Insurance Breach of Duty Wrongful acts of the board Mismanagement covers What D&O Provides legal defense Pays claims Does What D&O Normal liability claims Criminal acts Doesn’t
  25. 25. Risk Management Plan Handout – Risk Management PolicyTypes of Risk to Manage • Board People members, volunteers, employ ees, clients, donors, the public. • Buildings, facilities, Property equipment, materials, copyrights, trademarks • Sales, grants, contributions, Income sponsors, fund raising • Reputation, stature in Goodwill community, ability to raise funds and appeal to prospective volunteers
  26. 26. Handouts – 10 Ways to Catch Fraud and Mistakes from Outside Handout – 15 Ways to Minimize Employee Fraud Risk Management - People Poor economy has resulted in an increase in criminal conduct against nonprofits Embezzlement by employees Embezzlement by officers Fraud from “outsiders” Phrase of the Day – “Trust But Verify”
  27. 27. Nonprofits and FraudWhat to do when it happens to you! Fraud in the Corporate Sector • Upper management commits 18% of fraud • Accounting Department commits 29% of fraud • (Source: Association of Certified Fraud Examiners) Top mistakes made in response to fraud • Fear-based (or other emotional) response • Letting the perpetrator “off the hook” • Assuming that the bank (or other organization) will “handle it”
  28. 28. Nonprofits and FraudWhat to do when it happens to you! If you suspect fraud – act immediately! • Lock-down data • Start a formal audit process with outside auditor • Change procedures and rotate staff responsibilities If you verify fraud • All of the above, PLUS • Confront the perpetrator (employee, officer, outside contractor) • Copy and compile evidence in a separate, protected and confidential file • Contact the police, if appropriate Handout – Someone Stole the Cashbox!
  29. 29. PR for NonprofitsPublic Relations During Fraud CrisisIf Fraud or DO NOT Have a plan ofembezzlement HIDE or action forfinds your Minimize the responseNonprofit, seriousness of •If employee: suspension,• How the public the event termination hears about •If board member: • If you are and perceives contacted by the resignation, the incident press, answer! - removal can drastically •Note appearance of if you don’t get impropriety is affect the your story enough to take nonprofit’s out, no one action for a board ability to move will, and member, but more speculation will evidence is needed beyond the to take action event. replace facts against an employee Handout – Public Relations in Times of Crisis
  30. 30. Preventing Fraud Have and use financial control policies Know who handles the money Remove temptation Review financial information • ALSO - have independent review of finances Be aware that it can happen to your nonprofit!
  31. 31. Other Danger ZonesLobbying – Abuse of Charity Nonprofit political Gaming Status activity
  32. 32. Danger Zone - Lobbying CANNOT DO CAN DO • Endorse political • Hold Candidate candidate forum • Spend more than • Educate the public 5% of annual on the issues budget on lobbying important to the activities nonprofit • Directly lobby • Encourage like- legislators minded supporters to contact their legislators
  33. 33. Danger Zone – Charity Gaming Rule 1 - Gambling is Rule 2 – Charity illegal in the State of Gaming is allowed, Indiana but regulated
  34. 34. What is “Charity Gaming?” Games of NOT Charity chance Gaming – NOT “Pay to Play” Regulated: • Raffles Door prizes for • Games of SKILL – • 50-50 Raffles Cost-Admission Guess the pennies, shoot the basket • Program “sticker” Event • Silent Auction prizes • Bingo • Casino Night
  35. 35. Danger Zone - Abuse of Status Improper Conduct IRS ConsequencesAbuse of Status Consequences Excessive – $$ Executive • Fines to Nonprofit Compensation • Fines to Board of Directors “Private • Fines to Staff Inurement” • PERSONAL LIABILITY FOR ALL! • Excessive compensation IRS Consequences • Unreasonable Rental – Revocation of Agreements Nonprofit Status • Unreasonable lending agreements • Unreasonable sales transaction
  36. 36. Has Your Status Been Revoked? Google: “recent IRS revocations” ,,id=141466,00.html Comprehensive List of “Automatic Revocations” (organized by state),,id=24009 9,00.html
  37. 37. What if you LOSE nonprofit status?If your organization loses nonprofit status, you areNOW a taxable corporationFile 1120 Corporate ReturnPay Income Tax (Federal and State)Donations NOT tax-deductible to donorLoss of eligibility for MOST grants, including pendinggrants
  38. 38. How can you recover NP Status? Loss of Status cannot be reversed or appealed Must go through re-application for tax exempt status  May include request for retroactive reinstatement to avoid taxes for “interim period”  Requires payment of user fee ($400 or $850)  Small nonprofits might be allowed to pay $100 user fee  Must write “Automatically Revoked” on application If exemptions do not apply, must provide complete packet of information for re-application
  39. 39. For More Information – Exempt Organizations  Publication 557 – Tax Exempt Status Info  Publication 78 – Approved nonprofit list Indiana Charity Gaming Commission Indiana Secretary of State Indiana Department of Revenue Charity Navigator Handout – Nonprofit Guide to Sarbanes-Oxley Handout – For Further Reading Handout – Where to Go for Government Compliance information
  40. 40. Safe Passage for NonprofitsComplianceAccountabilityBest PracticesRisk ManagementDanger Zones
  41. 41. Any Questions?Thank you for your attention! Miriam Robeson, Attorney Today’s materials are available on Miriam’s Website: /upcoming-workshops/