Proposed 501(c)(4) Regs Could Change Rules for Social Welfare Organizations AND Charities

voteI don’t know about you, but I have been watching the drama with the IRS and the Tea Party/Patriot/Progressive/Occupy organizations who received extra scrutiny due to their supposed conservative/liberal political involvement.  It has been like watching a train wreck – riveting in a twisted way.  A little more personal because as a taxpayer I have an interest in the casualties as well as the survivors (not to mention the fact that the taxpayers are footing the bill for all the political posturing); but still surreal, because there is nothing I could do to stop the madness.  Until, maybe, now….

Recently, the IRS issued proposed regulations regarding political activities of Section 501(c)(4) organizations, also known as social welfare organizations.  These regulations would have a direct and significant impact on social welfare organizations, but could also have a significant impact on 501(c)(3) organizations – the 80% or so of the nonprofit world known as charities.

What is the issue?  Social Welfare organizations must be “primarily” engaged in promoting the common good and general welfare.  Unlike charities, they can get involved in political campaigning, that is opposing or supporting candidates running for office, as long as this activity does not overshadow their efforts to promote the common good and general welfare.  While allowed, it has long been held that political campaigning does not, for this purpose, promote the common good or general welfare.  The regulations do not currently clearly define political campaign activity or how much is too much, leaving social welfare organizations subject to the interpretation of the IRS, in general, and individual agents, in particular who have their own political biases.

The proposed regulations do not address the question of “how much is too much?”, but they do attempt to create a bright-line test defining what political campaign activity actually is.  Some of the definitions simply put a sharper point on commonly-held thoughts.  “Communications expressing a view on the selection, nomination, election or appointment” of one or more clearly identified candidates seems to clearly be a political campaign activity as would the distribution of material prepared by or on behalf of a candidate or by a Section 527 organization (a PAC), although I can envision certain limited examples that could be argued to be OK under the current rules.  Some wade into the grey, like the proposed strict prohibition of having a political candidate at an event within 30 days of a primary election or 60 days of a general election even if the reason and content of the appearance is for a non-campaign reason.

There are other proposed rules that seem to tread new ground.  Conducting get-out-the-vote drives and voter education guides specifically referring to candidates and/or parties would now be political campaign activities.  These types of activities have traditionally been considered “educational” rather than “political” as long as they were nonpartisan and politically neutral and may not have been limited under existing rules.

These new rules have the potential of impacting charities as well as social welfare organizations. Charities have a strict prohibition against ANY political campaign activities, so what counts, and as importantly, what does not count as a political campaign activity has even more consequences to charities than to social welfare organizations.  The proposed regulations are clear that they do not (currently) apply to charities.  However, the regulations specifically ask whether or not they should.

The good news is that the regulations are in the “proposed” stage – and this is an example of when it is good to live in the U.S.  Whatever your interest or political persuasion, you, me and everyone else are invited to participate in the rule making process by making our views known.  Comments must be received by the IRS by February 27, 2014.  For a copy of the Proposed Regulations, including detailed requirements for submitting your comments click here.

Policies for Nonprofits: Whistleblower

By Douglas Cash, MBA, CFE, CFI, CFCIimsis053-015

I have worked in the fraud detection and investigation arena for over 20 years and there is one aspect of fraud that still amazes me: no one wants to be thought of as a “rat.” All too often, someone in the organization had an idea of wrongdoing, but didn’t know of a way to report it anonymously and/or confidentially until the last possible moment. The dilemma of being thought of as a “rat” versus not wanting to work with untruthful people often weighs heavily. In many cases, the potential “whistleblower” might prefer to resign from their position rather than report a work place issue.

If the employee does choose to resign, the organization loses twice over. First, the organization loses an honest employee and secondly, still retains the dishonest employee. This may result in a large amount of money being taken without authorization and cause a significant negative impact on the organization.

When was the last time you read a news story about embezzlement or employee theft where people were interviewed and said, “No one ever trusted that person, we all thought they were a crook?” Probably never. The comments are more in line with “That person was the most trusted and liked employee we had, the last person anyone would suspect of stealing.”

Depending on the size of the organization, the amount of money taken can have very different repercussions. For instance, $5,000 to $10,000 might not be an issue for a larger organization to lose; however, that same $5,000 to $10,000 might be a significant portion of a smaller organization’s budget and the loss would be devastating. According to the Association of Certified Fraud Examiners’ 2012 Report to the Nation, “Seventy-five percent of all businesses are affected by fraud on a yearly average and the average business loses five percent of its annual revenue.” With that information in mind, all businesses and organizations need to use as many fraud prevention and/or detection methodologies as they can.

Two of the easiest methodologies to implement are a toll-free confidential hotline for employees to report suspicious activity anonymously and a “whistleblower” policy. A detailed “whistleblower” policy spells out what type of activity is not authorized, what actions could be taken against the person(s) found violating the policy, and then holding all employees responsible to the same set of rules, no matter their position or tenure.

Prevention is easier and less expensive than detection. If you add in the potential costs of prosecution, either civil or criminal, as well as potentially never seeing your missing money again, it becomes clear that prevention is the best course of action for any organization to follow.

Take action; set up a “whistleblower” policy, start a confidential hotline, hold people accountable for their actions, and watch your organization flourish.

Doug  Cash is an Eide Bailly Forensic Accounting Manager.  He has more than 27 years of law enforcement experience, with an emphasis on white collar crime. He conducts fraud-related investigations, which include embezzlement, money laundering, identity theft and theft by misrepresentation.  Doug has completed courses in the Reid, Cognitive and Kinesic disciplines of interviewing and teaches classes on identifying deception in individuals.

FASB Removes Not-for-Profit Financial Communications Project from Agenda

On January 29th, the Financial Accounting Standards Board (FASB) voted to remove the “Not-for-Profit Financial Reporting: Other Financial FASB-logoCommunications” (NFPOFC) project from its agenda. The project intended to “study communications other than financial statements that not-for-profit entities use to tell their financial story.”  In a press release, FASB noted that the decision, in conjunction with others, “will allow us to direct our resources to financial reporting issues our stakeholders believe are the most important.”

Though Board members based decisions on different factors, the main reasons for this particular removal stem from the potential that a final recommendation could have been voluntary rather than mandatory and that the project would deal with an issue that goes beyond the scope of traditional Board activities.

The NFPOFC project was one of six projects removed from the FASB agenda.  Five projects were removed from the EITF agenda.


Policies for Non-Profits: Expense Reimbursement

prepare-signBy Karen Jess and Stacey Nelson

Having good clear, policies and procedures in place is critical for any organization and non-profits are no exception.  These policies provide clarity for staff, fiscal management guidance and protection, and assurance to grantors and donors that your organization makes every attempt to be good stewards of funds.

There are a number of policies needed for comprehensive and strong financial management, but we will start with Expense Reimbursement.  Whether your employees are traveling or purchasing items for your fundraiser, having a policy in place will provide guidance to determine if the expenses will be reimbursed by the company.

Though your policy may vary by your type of organization, there are some “musts” that need to be in every policy.  Your policy should:

  • Be well-communicated and accessible to all employees.
  • Be followed and enforced.
  • Require receipts.
  • Identify staff to approve expense reports prior to reimbursement.
  • Require that requests for reimbursement be submitted within a reasonable period of time.
  • Necessitate documentation that shows the purpose of the expense.
  • Align with IRS rules for an accountable plan.
    • Employees are typically reimbursed when they pay or incur expenses on behalf of their employer. But, unless those reimbursements are made in compliance with federal regulations, they are treated as wages to the employee. The consequences: the employer may owe payroll taxes on amounts reimbursed; the employee may be required to treat the funds as taxable income.

Samples and other helpful sites: