Over-stated Value of Donated Medicine Gets Charity in Big Trouble with the IRS

In an IRS report that Forbes qualifies as “blistering”, Food for the Hungry, an Arizona based nonprofit, is accused of valuing the donation of deworming medicine at an estimated 81,000% above market costs.

The methods for valuing donated medical supplies have been getting increased scrutiny, as noted in an article last month in Forbes, but this is the first time a charity is facing a possible federal penalty of $50,000 for an inaccurate tax return.

The temptation to value donated supplies at above market cost is certainly high. One might argue that it is difficult to nail down a market, and a donation of an asset is offset with an expense so it generates no net income, but it can make a charity look more robust than it is, thereby attracting and keeping donors. Increasing donated supplies decreases the fundraising ratio and makes the organization look more efficient. In fact, the IRS stated in its report on the investigation that the intent of the over-valuation was to “mislead the public in order to raise more funds.”

There are sources for Average Wholesale Price (AWP) of pharmaceuticals such as Red Book (TM) and First Data Bank. The problem is that these sources rely on wholesalers to report their average costs and some are delinquent, meaning there is a possibility that the AWP might not really include the most up to date information.

Over-stating donated pharmaceuticals has caused at least one organization to get cut from the Forbes 200 listing, according to the Senior Editor, William P. Barrett, at Forbes. Barrett also notes what may be an even more scathing condemnation from the IRS in regards to Food for the Hungry, which is that they concluded the charity actually bought the pills and did not receive them as donated. In other words, one would assume that in no way, shape, or form should it be counted as revenue at all, much less massively overstated revenue. However, there is a grey territory of “donative intent” whereby the purchase price of the drug paid by the charity is considerably lower than the price a consumer would pay.

Food for the Hungry rejects the accusation, claiming what other organizations also involved with the deworming medicine have, that they stated values “in accordance with then-prevalent tax law and generally accepted accounting principles. ” In the meanwhile, they have gone from valuing the pills at $16.25 per pill to $1.54 per pill.

COSO Cube – the Rubik’s Cube (TM) of Control

The Committee of Sponsoring Organizations of the Treadway Commission (popularly known as COSO) has updated their internal control framework from its original 1992 framework.

Here is the old framework, referred to as the “Original COSO Cube“:

And the new framework in the “New COSO Cube“:

According to the Journal of Accountancy, “The definitions of internal control and objectives of the framework have not changed. Internal control is defined as a process designed to assure three objectives—reasonable assurance of effectiveness and efficiency of operations, reliable reporting, and compliance with laws and regulations. The original five components of the framework—control environment, risk assessment, control activities, information and communications, and monitoring—also have remained the same. But the updated framework provides a total of 17 principles across those five components to build on the concepts that COSO contributors believe proved useful in the original version.”

COSO Chairman David L. Landsittell stated “this update should allow organizations to more effectively utilize the framework to develop and maintain systems of internal control in support of their long-term success.”   The exposure draft is open to comments through March 31^st and can be found at ic.coso.org.

COSO believes this new Framework will bring significant benefits, including “increased confidence that controls mitigate risks to acceptable levels.” According to the Executive Summary, COSO’s goal was to focus on agility, confidence, and clarity by adding ways to evaluate effectiveness and help identify and analyze risks.

2011 Changes to 990

The Journal of Accountancy has an article about the changes to the 2011 Form 990. Changes noted include:

• Organizations must complete Schedule F, Statement of Activities Outside the U.S., if it had foreign investments during the year valued at $100K or more. This means any offshore investments and hedge funds whereas Sch F had previously been specific to revenue of $10K or more from foreign activities.
• Part X, Balance Sheet must now show distributive share of assets in any joint ventures including partnerships that would have been reported on a Schedule K-1.
• Distributive share of investment income, royalties and rental income from joint ventures should be reported on specific lines of Part VIII, Statement of Revenue.
• The definition of “grants and other assistance” has been adjusted to exclude certain payments by voluntary employees’ beneficiary associations.
• A donor’s phone bill for a text message donation now meets the requirement for written record if it shows the donee organization’s name, and the date and amount of contribution.

AICPA Opposed to Mandatory Audit Firm Rotation

The PCAOB released a proposal requiring mandatory rotation of audit firms (as opposed to just audit partners) for public companies which is getting a lot of feedback in advance of the public roundtable meeting in March 2012. The PCAOB’s argument is that rotation may increase auditor independence by decreasing reliance on specific client fees. There is no requirement of any rotation for non-profit or private company sectors but many organizations look to the standards set for public companies as guidance for best practices. Many of the requirements of a public company are not feasible for exempt organizations or private companies but in the rush to embrace Sarbannes-Oxley a number of organizations instituted one of the requirements that seemed the easiest to follow: auditor rotation. In actual practice, this could do more harm than good, which is the main point behind the growing opposition to the PCAOB’s proposal.

A number of professional associations have come out in strong opposition to this proposal, including the Institute of Internal Auditors, the AICPA, the New York State Society of CPAs, and the Virginia Society of CPAs, among others. The AICPA has also submitted its opinion of opposition to audit firm rotation to the IRS.

According to WCSCPA, the IRS themselves concluded that the costs and potential problems outweighed the potential benefits for nonprofits which is why the question of audit rotation was withdrawn from the Form 990 governance questions.

The main points in opposition to mandatory audit firm rotation include the following: Continue reading »

Get Out of Penalty Free, er…Reduced from the IRS for Offshore Accounts

As reported in Accounting Today, the IRS has again extended it’s deadline with its latest Offshore Voluntary Disclosure Program. The program is a third variation on the theme of encouraging offshore investors to report their accounts with a promised cap on the penalties along with a threat of how much they might have to pay later if they don’t come forward now.

The penalty cap has increased from 25% to 27% of the account balance with threats of up to 50% on non-reporters.  This time the program is open ended for the time being but it is harsher than in 2009 which allowed taxpayers to argue reasonable cause and get penalties reduced.

As part of the Foreign Account Tax Compliance Act, foreign financial institutions are to provide information on assets held by U.S. taxpayers. If the IRS finds out about your account from other sources, you are no longer eligible for the penalty cap.

Investors beware – your hedge funds held offshore count and need to be reported by filing an FBAR report!

Postage Increase

Did you know – the price of first class mail has increased as of today from 44 cents to 45 cents?  Forever stamps will still work!  Refer to www.usps.com for additional fee increases and details.

Good Reasons to Scrutinize Expense Reimbursements

Accounting Today has a slide-show of the most unusual items submitted on employee expense reports. The cojones of people to actually submit some of these is impressive but it serves as a fantastic reminder of why you should actually bother to look at the itemization on your employee expense reports. Examples cited include:

• speeding ticket
• repair costs for wrecking into a toll booth
• movie tickets
• socks
• spa day (my personal favorite – it’s like they’ve been reading my email)

And many more entertaining entries. It’s all about the perception of detection people. If employees (or executives, for that matter) know you are looking closely at expense reimbursements, they won’t try to put stuff through like this. Expense reimbursement fraud is rampant in the workplace. Key tips to keep in mind:

• Make sure to get receipts (itemized ones and actually look at them)
• Don’t accept photo copies of receipts  (if I photo copy one valid receipt 50 times – I can submit it 50 times)
• Make sure the expense actually makes sense for what that person was doing and that the timing of the expense actually lines up with the timing of their project or travel.

FASB Fatigued

Fitch Ratings and Accounting Today are reporting that accounting standard setters are experiencing some fatigue. Not surprising considering there have been 12 new accounting pronouncements in 2011. The FASB has been working with the IASB, focusing on issuing new accounting standards that will converge  U.S. standards with the dreaded international standards – IFRS. The credit rating agency stating it believes the emphasis on high quality along with the call for comments on updated proposals has slowed the two standard setting boards down.

According to the agency, “The major priority projects initially scheduled for a June 2011 completion are still at various stages of completion in 2012 and some will likely extend into 2013.” Even the SEC is postponing making a decision on incorporating IFRS.

The article does not get into the status of any determination of who will govern over nonprofit standards but it seems a logical conclusion that decision is also on hold.

Employers Required to Report Health Care Coverage on W-2’s for 2012

Starting in 2012, employers will be required to provide the value of employer sponsored health care coverage on the W-2s they send employees.  The first time this applies will be for W-2’s prepared next year, in January 2013, for 2012 compensation.  Here is a link to the IRS Notice 2011-28 which provides guidance on the reporting requirement:  http://www.irs.gov/irb/2011-16_IRB/ar08.html.  The IRS just issued a clarification to that notice with this notice: http://www.irs.gov/pub/irs-drop/n-12-09.pdf, Notice 2012-9.

MissionFish and What It Can Do For You

MissionFish is a fundraising tool for non-profits to use via eBay and PayPal.  MissionFish (www.missionfish.org) partnered with eBay in 2003 to become their exclusive charitable partner, helping to raise over a quarter of a billion dollars via the eBay Giving Works program.  The mission, according to their website, is to help nonprofits find new sources of unrestricted funding through online commerce. In 2011, the PayPal Charitable Giving Fund was established by eBay as a 501(c)(3) to operate MissionFish and further the charitable purpose.  MissionFish raises money in three ways. The seller can designate a portion of their proceeds, buyers can also add a donation to their purchase during checkout, and anyone with a PayPal account can donate at any time with no purchase or sale required.  For more information about MissionFish and to see if it would be a good fit for your organization please visit www.missionfish.org.