File Under: Don’t Do This

The Disabled Veterans National Foundation (DVNF) is currently being investigated by the Senate Finance Committee based on allegations of improper spending and charges that not much of the funding raised actually went to veteran aid. The investigation began after reports by Charity Watch and CNN that the charity received almost $56mil in donations from 2008 through 2010 but “little if any direct cash” went to veteran support.

For the record, the DVNF’s official defense is that $16.1mil of cash and donated goods went to veterans and that having only started in 2007, they need to focus on building their donor base. That’s defending that only 28% of contributions are actually going to their intended purposes. Some veteran groups reported receiving cough drops and 11,000 bags of coconut M&Ms. Others reported receiving chef’s coats, hats and aprons that the DVNF claimed as donated goods worth $800K.

Form 990s are publicly available as a way of forcing transparency in organizations that solicit funds from individuals. Individuals are encouraged to look but not that many may be able to interpret quickly what they are seeing. Taking a look at DVNFs 990 filing for 2010 shows over $24.7mil in contributions received and over $10.7mil spent on fundraising. That’s 43.5% of every dollar raised going to raise the next dollar.

Generally people want to give their money to charities they know will actually put that money towards the program mission. This is why groups like United Way and Combined Federal Campaign require that organizations registered and receiving funds through them met certain ratios of program to fundraising.

This is also why your auditor will look at your functional expense ratios and look for any signs of fundraising expenses that have been inappropriately allocated to program in an effort to make the organization look more effective. I have had clients that struggled with ways to efficiently fundraise and asked me how to keep their ratios better. Ways of reaching your target audience fall outside of the scope of my expertise, but I can tell you that the ratio won’t get better without spending less on fundraising and more on programs. If you are spending too much on fundraising – you need to assess how effective your organization really is.

Donors need to learn to look at ratios to decipher where their funding stands the best chance of being used for programs. It’s important, however, to recognize that all organizations require funding to operate and overhead is inevitable and necessary so make a distinction between management vs. fundraising when making this assessment.

All organizations that get involved with direct-mail campaigns should educated themselves about joint costs as making mistakes with those can put your fundraising ratios at risk.

Read more from CNN’s report on DVNF and check out Charity Watch’s Hot Topic on DVNF. Read DVNF’s response here.

Look at Guidestar for public access to Form 990s.

Lack of Proper Appraisal Results in $18.5mil Charitable Deduction Denied

The Tax Court recently denied a taxpayer’s large charitable contribution deduction for donated real estate valued at $18.5 Million.  The Court denied the deduction because the taxpayer did not have the proper substantiation of the value under the tax code rules. The Court acknowledged the taxpayer did make the donation and also stated that the property’s value was probably greater than the amount the taxpayer was claiming.  (TC Memo 2012-152)

In order to take charitable deductions of more than $5,000 worth of noncash property, there are very strict substantiation rules that must be followed.  Among the rules is the requirement for the taxpayer to obtain a qualified appraisal for any noncash single item or grouping of items donated and valued by the taxpayer at over $5,000.

If you are a nonprofit 501(c)(3) receiving noncash donations, or a taxpayer who wishes to donate such items and take the charitable deduction applicable, we strongly advise you talk to your nonprofit tax specialist early in the process to make sure the taxpayer meets all the substantiation requirements so the desired tax deduction can be taken.

IRS Webinar on Churches and Religious Organizations

The IRS Office of Exempt Organizations is offering a free webinar for people associated with churches or religious organizations.

July 25, 2012

2pm EST, 1pm CST, 12 MST, 11am PST

Sign up using the following link:

http://www.visualwebcaster.com/IRS/87466/reg.asp?id=87466

Topics to be covered in the webinar are:

• What is the IRS definition of a “church” and a “religious organization”
• How to apply for tax exempt status
• How to stay tax exempt
• Special rules for compensation of ministers
• Recordkeeping and filing
• Rules limiting an IRS audit of a church

Decreased Revenue/Increased Demands on Regional Nonprofits

It’s not just you. If you work in the nonprofit sector in the D.C. Metro region, you may be feeling like there has been an ongoing decline in revenue and an increase in demands for your services. You aren’t alone. The Center for Nonprofit Advancement released its fifth regional study of nonprofits in the Greater Washington D.C. area and the study indicates there is some positive news in spite of ongoing declines in revenue and increases in demands for services.

The study’s key findings note that the overall diversity in funding streams is continuing to shrink among area nonprofits while more than half of study participants anticipate increased demand for their services. More than half of the participants are operating with 3 months or less of reserves.

The good news, according to the Center, is that “nearly half have heard from funding sources that they will maintain or give more in 2012.” That is significantly improved over the state of things in 2009, when only 15% were reporting confirmed support.

Read more about the study here.

Don’t Get Caught Sleeping on the New Participant Fee Disclosure Requirements…

After much regulatory noise over the past few years, participant fee disclosure looks to finally become a reality later this summer. While most people are currently planning their vacations, retirement plan sponsors and industry practitioners are strategizing on how to meet the new fee disclosure requirements.

Retirement plans subject to ERISA that allow for participant investment direction, including 401(k) and 403(b) plans, must provide participant fee disclosures for the first time later this year. There are two types of disclosures that must be provided to plan participants. Note that these disclosures are directly to plan participants and any financial statement disclosures are unaffected. For calendar year plans, the initial annual notice is due August 30, 2012 and the initial quarterly notice is due November 15, 2012. The annual notice must include general information on the plan’s operation and investments. Some of the required information includes plan level fees and expenses, available investments and associated costs, and fund performance compared to a benchmark. The quarterly fee disclosure must include information related to fees being paid directly by the participant.

The vast majority of retirement plan vendors have been preparing for these disclosures for the last few years and should be well prepared to assist their clients. Plan sponsors should have a game plan in place as to how and when they will be communicating with their plan participants. If not, then they should engage their plan providers as soon as possible to gain an understanding of what information they will be providing and determine if additional information is needed.

The Department of Labor and industry as a whole believes these new disclosures are very important and will have a significant impact on fee transparency. Failure to adhere to the content requirements and meet the deadlines may result in an unwanted visit from the DOL and potential penalties.

#benefitplan #participantdisclosure #erisa

Reconciliations (avoiding management letter comments, part 7)

One part of a good system of internal controls is performing reconciliations between general ledger accounts and supporting documentation or subsidiary ledgers.  The timing of the reconciliations depends on the account.  Completing reconciliations in a timely manner helps to find differences and errors and allows the organization time to look into any problems prior to completing year-end financial statements.

Some of the accounts that should be reconciled monthly are cash, investments, account receivables, and account payables.  Salary expense should be reconciled on a quarterly basis to the Form 941s that are filed.  A reconciliation between the contributions per the general ledger and the contribution database can be performed on a monthly, quarterly or yearly basis.

One way to stay on top of reconciliations is to create a checklist of reconciliations to be performed on a monthly, quarterly, and yearly basis.  This checklist would serve as a reminder of what reconciliations to complete when and could also provide a sense of accomplishment when the reconciliations are checked off each time they are completed.

This is part 7 of a continuing series on common management letter comments and how to avoid them.  Click to read part 1, part 2, part 3, part 4, part 5, and part 6.

Work Opportunity Tax Credit for Tax-Exempt Nonprofits

Recent changes to the Work Opportunity Tax Credit (WOTC) have made incentives for hiring eligible veterans available to tax-exempt nonprofit organizations. Under the VOW To Hire Heroes Act of 2011, the WOTC was expanded to include credits for nonprofit organizations that can be claimed against the employer portion of social security tax on wages paid to all employees during the first year beginning the day a qualified veteran begins work.

The tax credit for nonprofits is up to $6,420 per veteran, not to exceed the total social security tax for the period for which the credit is claimed. If an organization hired an eligible veteran between November 22, 2011 and May 22, 2012, it can still apply for the tax credit but the deadline is June 19, 2012. After that time and for hires beginning work before January 1, 2013, employers must file the necessary Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state within 28 days of hire in order to receive the credit.

In addition, nonprofit organizations must file a Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. The IRS recommends employers do not reduce required deposits in anticipation of any credit.

Click here for Form 8850 and instructions

Click here for Form 5884-C

Click here for Frequently Asked Questions regarding the VOW to Hire Heroes Act

Source: IRS.gov

#taxexempt #nonprofit #taxcredit #veteran #wotc

Approval of Journal Entries (avoiding management letter comments, part 6)

One part of a good system of internal controls is having all general journal entries reviewed.  This is also a key part of the segregation of duties in that someone other than the person making the journal entry reviews it.  This review is done to help prevent errors such as adjusting the wrong accounts and transposing numbers.  It also helps protect against fraud by making sure there is a valid reason for the journal entry and someone is not just increasing revenue to make the organization appear better.

Depending on the size of the organization, it can be difficult to determine who should be reviewing the journal entries.  If there are two or more people in the accounting department, one person can be the reviewer while the other person makes the entries.  If there is only one person in the accounting department, then it is necessary to go outside the department to get the journal entries reviewed.  This can be done by have the president or executive director be involved.  A Board member is also a good person to have review the journal entries.

There are also different ways to review the journal entries.  At some organizations each journal entry is reviewed prior to posting.  Other organizations review the entries on a weekly or monthly basis after they are posted.  One of the important things to remember is to document the review and approval.  The simplest way to do this is to print out the journal entries and have the reviewer initial them.  This should then be saved as support.

This is part 6 of a continuing series on common management letter comments.  Click here to read part 1, part 2, part 3, part 4, and part 5.

#nonprofit #nonprofitaccounting #fraud #internalcontrols

Update: FBI Now Involved in Fiscal Sponsor Scam

The FBI and the state attorney general’s office have gotten involved in the investigation of the International Humanities Center, which closed its doors after  three years of IRS scrutiny. IHC was a California-based 501(c)(3) organization that functioned as an umbrella structure and fiscal sponsor for over 200 nonprofits but it now appears it may have all been a Ponzi scam.  IHC closed its doors suddenly in January, with little explanation and almost $1 million unaccounted for. That figure is with only 49 groups reporting and may go higher as other groups come forward. Many of the groups have been completely crippled by the loss of their donations and donors’ reluctance to give once the news hit about the missing funds.

Source: LA Times

CEO Expenses and the Board

An Op-ed piece by Michael Peregrine at the Chronicle of Philanthropy provides a good reminder about why it is so important to pay attention to CEO expense account spending. The head of the foundation of the University of Texas Southwestern Medical Center, Dr. Wildenthal, is stepping down after an internal investigation concluded inappropriate spending including mingled business and personal purchases.

Dr. Wildenthal led the foundation for 22 years before tips reporting lavish international travel, fine wines and other extravagances spurred an internal investigation. Peregrine states “the entirety of the report leaves an impression – fairly or unfairly – of a respected executive who developed a sense of ‘entitlement‘ based on a record of extraordinary accomplishment.” He notes this created an atmosphere of excessive deferential attitudes to Dr. Wildenthal’s judgment in spending.

There’s only so much an auditor can do if we take issue with the exact nature of spending, in terms of whether this is really best way to meet your program or fundraising objective. We can bring it to the board’s attention but if the board isn’t willing to question it themselves or has bought into an executive’s reasoning for spending, all we can really do is repeatedly point at it. An audit opinion speaks to whether the numbers are free from material misstatement. This does include whether program spending was actually spent on the program (as opposed to personal spa days), but we don’t and can’t actually opine on whether the spending was particularly wise or frugal.

The board bears fiduciary responsibility to monitor spending and make sure there is sound judgment involved. When it comes to nonprofit organizational structures, the board is the highest authority and should not defer to an executive when it comes to questionable expenditures.

Read more of Peregrine’s piece here.