Prove, Improve And Approve The 2008 Form #2 2003

Stephen D Spangler, CPA

Susan L. Schuchat, CPACavanaugh & Co LLP2381 Fruitville RoadSarasota, FL 34237

“Experience has taught us that in times of economic peril, we must be watchful. During hard times, there is often a rise in questionable or fraudulent activity, in overly aggressive or inappropriate fundraising, and in tax avoidance accommodation schemes of less than sterling character

Cavanaugh & Co LLP September 20092

….Because public trust is so important to the sector, none of us wants the actions of the bad apples to overshadow all the good work that most tax-exempt organizations are doing.”

Cavanaugh & Co LLP September 2009 3

So……… in such difficult economic

times what are we to prove to the

general public, watchdog groups,

reporters and potential donors who

use our 990 and how best can we go

about it?


1) Enhance Transparency

2) Promote Tax Compliance

3) Minimize the Burden on the Filing

Organization


We’ll take a look at the following issues today:

Proof of Public support for 501(c)(3) entities is crucial – reported on Schedule A

Related party transactionsCompensation and private inurementUBITProgram services


Schedule A



Schedule A – refer to your handout

Does your accountant prepare this for you?

Do you know how it is prepared?

Do you know where you find out what

support test you are required to complete?


How do you keep track and for how long must a donor be considered not providing public support (disqualified or high support)?

Can you change from one support requirement to another?


Conflict of Interest Policy

What are Related Parties?


A policy that defines conflict of interest, identifies the classes of individuals within the organization covered by the policy, facilitates disclosure of information that may help identify conflicts of interest, and specifies procedures to be followed in managing conflicts of interest.


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“Business relationships” are:

Employment relationships Contractual relationships Common ownership of business in excess

of 35%

One person is employed by the other in a sole proprietorship or by an organization with which the other is associated as a trustee, director, officer, key

employee, or greater-than-35% owner.


One person is transacting business with the other (other than in the ordinary course of either party’s business on the same terms as are generally offered to the public), directly or indirectly, in one or more…..



“Indirect transactions”

…………..transactions with an organization with which the one person is associated as a trustee, director, officer, key employee, or greater-than-35% owner.


Each is a director, trustee, officer, or greater than 10% owner in the same business or investment entity.

Ownership is measured by stock ownership (either voting power or value) of a corporation, profits or capital interest in a partnership or limited liability company, membership interest in a nonprofit organization, or beneficial interest in a trust.

Ownership includes “indirect” ownership (e.g., ownership in an entity that has ownership in the entity in question); there may be ownership through multiple tiers of entities.


An entity that is owned, directly or indirectly,

(under constructive ownership rules of IRC

section 267(c)), by a given person, such as the

organization’s current or former officers,

directors, trustee, or key employees listed in

Form 990, Part VII, Section 1, or the family

members thereof (listed persons) as follows:


◦ 1. A corporation in which listed persons own more than 35% of the total combined voting power;

◦ 2. A partnership in which listed persons own more than 35% of the profits interest; or

◦ 3. A trust or estate in which listed persons own more than 35% of the beneficial interest.


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Grandchildren&

their Spouses

GreatGrandchildren

& their Spouses

Siblings

Children & their Spouses

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Ownership is individual or

combined

Ownership of greater than

35%

What types of compensation must be reported?

For whom?

Look at Schedule J of the 990


Requires that a 501(c)(3) public charity operate so that none of its income or assets unreasonably benefits any of its board members, trustees, officers, or key employees (“insiders”). These types of individuals

Precludes any of the income or assets of a charity from unfairly or unreasonably benefiting, either directly or indirectly, individuals who have close relationships with their organizations and the ability to exercise control over them.




The IRS encourages reliance on the rebuttable presumption test of section 4958 of the Internal Revenue Code and Treasury Regulation section 53.4958-6

Under this test, compensation payments are presumed to be reasonable if the compensation arrangement is:

◦ .


1. Approved in advance by an authorized body composed entirely of individuals who do not have a conflict of interest with respect to the arrangement,

2. The authorized body obtained and relied upon appropriate data as to comparability prior to making its determination, and

3. The authorized body adequately documented the basis for its determination concurrently with making the determination.


It is important to note that

participation includes a board member’s

silence or inaction where he or she is under

a duty to speak or act as well as any

affirmative action by the board member.


Comparability data generally involves

looking to compensation levels paid by

similarly situated organizations for

functionally comparable positions.


Once that test is met, the Internal Revenue

Service may rebut the presumption that an

amount of compensation is reasonable only if

it develops sufficient contrary evidence to

rebut the probative value of the comparability

data relied upon by the authorized governing

body.Cavanaugh & Co LLP September

2009 31

The Sarasota Community Foundation has prepared a free 48 page compensation study and guide

http://www.cfsarasota.org/portals/0/nrc/2008NonprofitCompensationReport.pdf


Failure to prove reasonable compensation results in Section 4958 IRC Excess Benefit Tax

Excess Benefits tax is meant to be punitive in nature and affects both the organization and the excessively compensated person



Intermediate Sanction Section 4958 of IRC

Excess Benefits

Amount Paid Total Compensation $500,000

Reasonable Value of Total Compensation 400,000

Excess Benefit $100,000 (1)

Initial Tax Rate 25%

Initial Tax $25,000 (2)


Intermediate Sanction Section 4958 of IRC

Individual Pays IRS $25,000 (2)

Individual pays back charity 100,000 (1)

Total individual pays $125,000

Excess Benefits tax on charity manager 10%

Tax Charity Pays $10,000

Guidestar has issued a information paper which is available on its website:

The Private Inurement Prohibition, Excess Compensation, Intermediate Sanctions, and the IRS’s Rebuttable Presumption

A Basic Primer for 501(c)(3) Public Charities

Karl E. Emerson, Esq.Montgomery, McCracken, Walker & Rhoads,

LLP


UBIT – Unrelated Business Income Tax


Very large concern of the Internal Revenue Service and Congress lately

Creates tax revenues for government

Not declaring UBIT creates unfair competition with for profit entities


What is required on the 990Suggestions for recordkeeping


Section 501(c)(3) and (c)(4) organizations

and Section 4947(a)(1) charitable trusts,

must enter the total expenses incurred,

including the total grants and allocations (if

any) included within the total expenses for

each program service listed in Part III, line 4.


The expenses for all program services

combined (Form 990, Part III, line 4e) must

agree with the total of the program services

column on line 25, column (B), Part IX, of the

return. The detailed information (revenue,

grants, etc.) required for the three largest

program services need not be provided on

Schedule O for the remaining program services.


Program services should be reviewed regularly to see if they are still within the scope of the organization’s original exemption.


Part III can be used to describe significant programs not previously reported to the IRS.

Note - the IRS (and everyone else) is increasingly looking at organizations’ websites and comparing them to information on their Form 990.


An organization may conduct multiple program service activities within the same year. In this situation, it is not unusual to have expenditures relating to more than one program.


Are you keeping adequate records? Are you providing enough detail such as

number of clients service, hours or volunteer services?

What are some of the ways you in the audience have changed your recordkeeping to accomplish this?


Program services should relate to the organizations original Application for Exemption Form 1023

Do not report a fundraising activity as an exempt purpose accomplishment unless it is substantially related to fulfilling the organization’s exempt purpose.


Offers an organization the opportunity to increase awareness about itself by fully describing its program services and all related expenditures. These activities can exert a positive influence upon a prospective donor.

Conversely, the lack of activities can provide an investigative reporter with an idea for a negative news story.



According to the IRS:

Governance is the exercise of authority and control over an

organization.


Sarbanes Oxley Act (SOX) was passed in the summer of 2002………

◦ …..Created largely in response to serious financial scandals involving Enron, WorldCom, Global Crossing and other companies with publicly held stock

◦ …..Directly mandated or required the SEC and other bodies to enact a large number of corporate governance reforms


Most provisions of the act do not directly apply to nonprofit organizations

……………However, external forces such as donors, grant makers, current and prospective board members may create the desire to voluntarily adopt many of the principles of the act


The Internal Revenue Service reviews the board composition of charities to determine whether the board represents a broad public interest, and to identify the potential for insider transactions that could result in misuse of charitable assets.


If an organization has local chapters, branches, or affiliates, the Internal Revenue Service encourages it to have procedures and policies in place to ensure that the activities and operations of such subordinates are consistent with those of the parent organization.


However the Act’s provisions relating to the following DO apply equally to nonprofits:

◦ Criminal penalties for the obstruction of justice relating to the alteration, destruction or fabrication of documents

◦ Establishing and adhering to document retention policies

◦ Prohibition of retaliation against whistleblowers◦ Maximum penalties for wire and mail fraud

increased from 5 to 20 years


Responsible for hiring, compensation and oversight of the company’s audit firm and is the reporting entity for the auditor

Each member of the audit committee (minimum of 3) is an independent member of the board

Implements procedures for receiving, retaining and responding to complaints regarding accounting, internal accounting controls or auditing matters

Has the authority to hire any assistance it requires


Discuss independent audit with management, auditors including press releases and materials provided to the outside

Discuss risk policies and risk management Meet periodically with management, internal

auditors and independent auditors Discuss any problems discovered in the audit Report regularly to Board of Directors Set policies for any former independent audit

employees


SEC required to promulgate rules under the SEC act of 1934 mandating that the principal executive officer and the principal financial officer certify in each 10-k and 10-Q that the reports:

Have been reviewed Do not contain misstatements of material

fact nor are misleading Fairly presents the corporation’s financial

condition and results of operations


Officers are responsible for establishing and maintaining internal controls

That the design of such controls ensures material information is made known to the officers

Evaluates and reports on the corporation’s internal controls

Discloses to the auditors all internal control deficiencies or significant changes in IC’s


1. Role of the Board of Directors◦ Oversee the effectiveness and ethical

operation of the organization

2. Importance of Independent Directors◦ Assure the exercise of independent judgment in

key committees and general board decisions

3. Audit Committee◦ Comprised solely of independent directors

4. Governance and Nominating Committees◦ Focus on core governance and board composition

issues including size, leadership and codes


5. Compensation Committee◦ Determines the compensation of the chief

executive officer and other officers and assures that compensation is tied to performance and predetermined goals and objectives

6. Ethics and Business Conduct Codes7. Executive and Director Compensation8. Monitoring Compliance and Investigating

Complaints9. Document Destruction and Retention


The directors of a charity owe it a duty of loyalty……….

◦To act in the interest of the charity rather than in the personal interest of the director or some other person or organization

◦To avoid conflicts of interest that are detrimental to the charity.


Audit committees (If no audit or financial

committee, then appointed Board Members)

Should the whole Board approve the 990?

What do you disclose on the 990 related to

Board approval and where?


“When it comes to nonprofit governance, one size does not fit all.

Governance issues vary depending upon type, size, structure, and culture of the organization

…..It is not our job to determine the organization’s governance structure, policies or practices, or to make decisions for them”

………… EO Determinations CPE-GOVERNANCE May 2009


IRS GOAL IS NOT TO DICTATE SPECIFIC METHODS OF GOVERNING – JUST TO REQUIRE ADEQUATE DISCLOSURE

REMEMBER – THE 990 IS NOT CONSIDERED FILED IF IT IS NOT COMPLETE!!!!!

DON’T MISS ANY SCHEDULES REQUIRED


SOME SUGGESTIONS


Minutes, organizational documents, structures of committees and board

Your attorney (Excellent reference Bruce Hopkins Law of Tax Exempt Organizations)

Organizations to which your nonprofit is a member

Board of directors

Community Foundation of Sarasota


INTERNAL REVENUE SERVICE www.irs.gov/charities/index.html www.stayexempt.org

DOCUMENT RETENTION GUIDE IRS Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities, available on the IRS website.


PANEL ON THE NONPROFIT SECTOR • Issued reports in 2005, 2006 and 2007 http://www.nonprofitpanel.org/

AMERICAN LAW INSTITUTE project begun in 2000 to develop Principles of the Law of Nonprofit Organizations – draft issued in 2007

http://www.ali.org/index.cfm?fuseaction=projects.proj_ip&projectid=3


ABA COORDINATING COMMITTEE ON NONPROFIT GOVERNANCE

(issued its Guide to Nonprofit Corporate Governance in the Wake of Sarbanes Oxley in 2005)

http://www.ali-aba.org/index.cfm

BETTER BUSINESS BUREAUhttp://westflorida.bbb.org/charity/

ERI ECONOMIC RESEARCH◦ www.erieri.com


CHARITY NAVIGATORhttp:/www.charitynavigator.org/index.cfm?bay=studies.ceo/

STRATEGIC PLANNINGhttp://www.managementhelp.org/plan_dec/str_plan/str_plan.htm

COMMUNITY FOUNDATION OF SARASOTA https://www.cfsarasota.org/NonprofitCenter/

tabid/53/Default.aspx


GUIDESTARhttp:/www.guidestar.org

PANEL ON THE NONPROFIT SECTORhttp://www.nonprofitpanel.org


Any more questions?


Stephen D Spangler, CPA

Susan L. Schuchat, CPACavanaugh & Co LLP2381 Fruitville RoadSarasota, FL 34237

Prove, Improve And Approve The 2008 Form #2 2003

Education

cpa cavanaugh

filing organization

sterling character cavanaugh

indirect ownership

stock ownership

business relationships

listed persons

proof of public support