UPDATE: Moving forward, theIRS plans to release the names of organizations that fail to file their paperwork every month, according to the Chronicle of Philanthropy.
According to the Chronicle of Philanthropy and the IRS, 275,000 groups just lost their exemption status. The IRS has been lenient and extended the window for three years for organizations that were lagging to file the required forms. Congress passed a law in 2006 that increased reporting requirements and lowered the threshold for what triggered the need to file. This was the beginning of additional scrutiny focused on tax-exempt groups. Essentially, if you aren’t going to pay taxes, you have to prove why you’re legitimately tax exempt on an annual basis.
The IRS believes that most of the affected organizations are likely defunct groups but any that are still in operation will have to apply to get their charity status back. The IRS has published an Automatic Revocation of Exemption List, which is available on their website, organized by state, and is intended to serve as a notice to donors and others that contributions to these groups will no longer be tax deductible. In addition, the groups may now owe taxes on income.
The IRS is inviting comments on the new redesigned Form 990. If you would like to make a comment, now is your chance! Here is a link if you would like to read the areas that the IRS is asking for comments and instructions on how to comment: http://www.irs.gov/pub/irs-drop/a-11-36.pdf
Many non-profit organizations are not aware that in 2006 legislation changed to require ALL non-profit entities to file tax forms starting in 2007. The Pension Protection Act of 2006 instructs the IRS to revoke tax exemptions of groups failing to file for three consecutive years which will be coming up fast this May 17, 2010. Revocation of non-profit status can be avoided by filing an extension before May 17th (the 15th is on a Saturday).
Previously, only organizations with revenues of $25,000 or more were required to file and many small charities are still functioning under that assumption. While this may represent a hardship for many small entities, it is part of an effort to provide more information to the donor community and tracking of non-profit entities in a more systematic manner. The IRS sent out approximately 665,000 letters to groups falling below the $25,000 threshold to notify them of the change in regulation and seem to be making an effort to help these groups reach compliance. No one involved is eager for a revocation en masse on May 18th!
Organizations with less than $25,000 in revenue can bring themselves into compliance by filing a simple e-postcard with the IRS.
Please keep this deadline in mind for any dormant groups, sub-organizations or affiliates and help get the word out. Go to the IRS website: http://www.irs.gov/charities/article/0,,id=217087,00.html for instructions on filing.
Additional information: http://www.nytimes.com/2010/04/23/us/23exempt.html
The new Federal Form 990 has one especially welcome change in Part IV, Checklist of Required Schedules, whereby there is a new question if the organization was included in a consolidated, independent audited financial statement for the tax year. Many people were disgruntled last year with the new 2008 990 because the instructions clearly explained that you had to check “no” if your organization had an audit as part of a consolidation and did not receive a standalone report. To see the new 990 and instructions for 2009, click this link: www.irs.gov/app/picklist/list/formsInstructions.html
Over the last few years the non-profit industry has seen an increased amount of pressure to be transparent and make public the procedures in place to increase transparency. Many organizations have noted the increase in questions on the new Form 990 and asked for clarification on their purpose. Many of these are designed to make the organization consider their transparency and their procedures that ensure that.
Questions such as “Does the board review the 990 prior to its submission,” highlight that the IRS thinks this is probably a good idea to consider implementing. Having a board review would increase the level of board involvement and the level of monitoring activities in place. Having the board actively involved in the approval process of the 990 is one way of increasing transparency because there’s one more level of awareness and one less place to hide anything. The board’s job is in essence to protect the public trust. Transparency and accountability go hand in hand.
Documenting procedures that ensure transparency is not just a 990 consideration however. The 990 has just been deemed an appropriate place to make these procedures public and certainly it has had the effect of making organizations scrutinize their current procedures.
An area deeply affected by transparency and the public’s perception is fundraising. Fundraising ratio requirements are ripe for fraud and can increase incentives for dishonest reporting. It is exactly this kind of dishonestly that the push for transparency seeks to uncover. An out of whack ratio may make some donors turn away and a perception of dishonesty over that ratio would turn donors away in droves. It can murky territory that an organization wants to avoid by being as transparent as possible.
Zimmerman-Lehman, a fundraising consulting firm in San Francisco has come up with a helpful transparency quiz so that organizations can take to see how they measure up. There are 20 questions and the more ‘yes’ boxes you have, the higher your transparency. Questions include:
- Does your organization periodically evaluate your programs and services to ensure they are effective at accomplishing their goals?
- Does the Board review the prudence of overhead expenses (administration and fundraising expenses) and fundraising ratios?
- Does your organization utilize recruitment strategies that create boards with diverse backgrounds, experience, and the organizational and financial skills necessary to advance the organization’s mission?
- Does your organization have policies that ensure the independence of a substantial number of board members (free of conflicts of interest)?
- Does your organization share information with the public about its Form 990?
- Are your fundraising materials honest and do all funds raised support the programs they were given for?
It can be helpful to review a questionnaire such as this against your own organization’s policies because there are bound to be some suggestions that would not have come up without some ‘outside of the box’ thinking. Many of the questions posed suggest policies that would be fairly easy to implement and go a long way towards that goal of providing transparency. For the full quiz and to see how your organization stacks up, see http://www.zimmerman-lehman.com/transparency.htm
The IRS has received a number of questions about the use of attachments when filing Form 990, Return of Organization Exempt From Income Tax.
To address some of these questions, the IRS has updated a series of “frequently asked questions” (FAQs) concerning the redesigned Form 990.
The recently updated FAQs are available on the IRS Web site:http://www.irs.gov/charities/article/0,,id=211430,00.html
For more information, contact Kathy Cuddapah, Aronson & Company’s Nonprofit Practice, at (301) 222-8206 or email@example.com
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