IRS Review of Form 1023 and Release of Form 1023-EZ

The IRS has been under pressure to reduce the amount of time it is taking them to review and approve exemption applications. The IRS is currently reviewing exemption applications filed in July 2013. While they are making progress, there is still room for improvement. As part of the Exempt Organizations unit reorganization, most of the exemption applications will now be sent to the Cincinnati office for review. The only applications that will stay with the technical unit in D.C. are those related to tax-exempt hospitals, certain 501(c)(4) organizations, and those where technical assistance is requested.

The IRS recently released a draft Form 1023-EZ (streamlined application). This new form is a 2-page document designed to be less burdensome for organizations to complete. Currently, organizations seeking 501(c)(3) status must file Form 1023, consisting of up to 26 pages depending on which schedules are filed. However, not all organizations will qualify to file the shorter form. Some of the organizations specifically excluded from using the short form include churches, schools, supporting organizations, credit counseling organizations, and those who have been previously revoked. In order for organizations to use the Form 1023-EZ, they must meet the following criteria:

•No more than $200,000 of projected annual gross receipts in any of the next three years;
•Annual gross receipts of not more than $200,000 in any of the past two years; and
•Total assets not in excess of $500,000

The draft 1023-EZ asks for information on the officers and directors of the organization, legal formation, whether or not the governing documents include the required provisions for exemption, the charitable purpose, activities conducted, and what type of classification the organization is seeking. Filers must check a box to certify they will not conduct activities that would violate the tax-exempt status. The form identifies these items in a bulleted format. The purpose of this shorter form is to allow smaller organizations to streamline the application process. While this seems to be a step in the right direction for small organizations, it does raise the question on whether the information gathered will be enough for the IRS to truly ensure the organization will be organized and operated for exempt purposes.

Are You Losing 5% of Your Annual Revenue to Fraud?

By: Dave Studebaker

forensic_magnifying glassUnfortunately, nonprofits are not immune to fraud. In fact, some would say that nonprofits make the perfect target for fraud: they often have a small, trustworthy staff with limited segregation of duties and weak internal control systems. A 2012 study by the Association of Certified Fraud Examiners (ACFE) estimates organizations suffer losses averaging 5% of revenues annually. How much does that equate to in your organization?

The most common type of fraud is misappropriation of assets, which can occur through false time or expense reporting, skimming cash, fictitious payments (either fake vendors or fake employees), or theft of the organization’s physical property.

In order to reduce risk of fraud, one must understand fraud, especially the three conditions which develop into the “perfect storm” for a fraud. When all three are present, risk of fraud increases dramatically.

Pressure: This is the motivation for the fraud in the first place. The individual has financial problems he/she is unable to solve through legitimate means. Issues and home, unexpected medical expenses, gambling or drug additions are common pressures that have led to frauds.

Opportunity: The individual observes a weakness in the organization’s control systems that allow a fraud to go undetected. Absent a strong internal control system, any individual who transacts business on behalf of the organization could have an opportunity to commit fraud.

Rationalization: According the ACFE, over 80% of fraudsters are first time offenders with no prior criminal background. They do not perceive themselves as criminals and have justified the fraud to themselves. Commonly, they “intend to pay it back” or it is “because they were underpaid in the first place.”

Your nonprofit can take several simple steps to dramatically reduce exposure to fraud risk by reducing opportunities for fraud to occur. Pressures and rationalizations are much harder to detect, but not impossible.

  1. Begin with your culture – Educate your employees to raise awareness of fraud, including its potential impacts. Establish a code of conduct to define clearly what is and what is not, acceptable behavior. Set a strong ethical culture at the organization – this makes it harder to rationalize a fraud and also increases fellow employee’s awareness of fraud, increasing the likelihood of detection.
  2. Implement and promote a whistleblower hotline – An anonymous way for anyone involved in the organization to report suspicious behavior. Tips of suspicious activity are the #1 way frauds were detected in the ACFE survey.
  3. Maintain proper segregation of duties – no one individual should perform all steps in any cash receipt or disbursement cycle. Reviews by a knowledgeable individual should be performed over all significant reconciliations, payroll, journal entries, and expense reimbursements.
  4. Be observant – Does an individual appear to be living beyond his or her means? Is the employee going through a divorce or child custody dispute? Are they having an affair? (Affairs can be a particularly expensive secretive behavior.) Is the individual or a family member experiencing significant medical problems? All can exert pressure to steal from an organization.
  5. Obtain employee theft and dishonesty insurance – Many business policies have some level of coverage included. While this won’t help prevent fraud, it can help mitigate the damages if a fraud occurs.

If you have questions or need guidance, contact your accountant or business advisor to help you assess your control system and recommend practical solutions.

How Do You Rank?

GuideStar.org reports 8 million visitors on an annual basis. Have you visited this site lately to see what pulls up for your organization? The site contains several categories of information for nonprofit organizations, such as general information, financials, documents, people, mission & impact, and reviews. As a nonprofit, you have the ability to modify some of the information showing in these categories. For example, did you know you can earn a gold, silver or bronze logo for updating certain information on the site? Your organization may even qualify to receive a free premium subscription, depending on how active you are in participating on the site.

There are other watchdog sites out there that provide donors with rankings and scores for nonprofit organizations. Charity Navigator is known as America’s largest charity evaluator. The organization evaluates 501(c)(3) organizations that have filed a Form 990 for at least 7 years. The nonprofits must be receiving public support of more than $500,000 and have total revenue of more than $1 million in order to be evaluated. Charity Navigator rates organizations on financial health and accountability as well as transparency. They claimed to have 7 million visitors in 2013.

If you haven’t visited these sites lately, you may want to in order to see how your organization is being represented and ranked. Depending on what you uncover, it could spur some good discussion at the management and board level.

Simplified Accounting for Interest-rate SWAP Agreements Not Available to Nonprofit Organizations

calculatorBy Ksenia Popke

Companies often find it difficult to obtain a fixed-rate loan because lenders are reluctant to lock in the interest rates they charge. Forced to accept floating interest rates, some borrowers enter into a “receive-variable, pay-fixed” interest rate swap, which in essence, converts their floating-rate loan into a fixed-rate loan. Here’s how it works: the borrower pays interest on the loan at the floating rate, then, under the swap, receives interest at the floating rate. Those payments essentially cancel each other out. Then, the borrower pays interest under the swap at the fixed rate. The combination of the floating-rate loan and the swap work to convert the initial floating-rate loan into a fixed-rate loan.

Interest-rate swaps are derivatives, and historically have been required to be recognized and reported at fair value unless the reporting entity qualifies for, and elects to apply complex hedge accounting rules. Because of limited resources and the fact that hedge accounting is difficult to understand and apply, many organizations lack the expertise to comply with the requirements. Some also question the relevance and cost associated with determining and presenting the fair value of a swap entered into solely for the purpose of converting a floating-rate loan into a fixed-rate loan.

Well, FASB listened, and recently issued Accounting Standards update No. 2014-03 Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps–Simplified Hedge Accounting Approach, which provides a simplified hedge accounting alternative—a so-called “practical expedient”—that permits the swap to be measured at settlement value instead of fair value.

Unfortunately, as in many other cases, the simplified approach is available only to certain private companies—thus, it is not available to nonprofit entities. Nonprofits, for now, will have to continue to fair value their swaps as before under Topic 815 of the Codification.

Who is Looking at Your 990?

It’s been said that more people will look at your Form 990 than your Annual Report. The IRS requires nonprofits to make their Form 990 available for public inspection. Individuals can access your organization’s Form 990 without you even knowing. The most common place to find public inspection copies is at GuideStar.org. However, there are many other sites that provide access to the forms.

So who is really looking at your return and why? The IRS is viewing the forms for compliance requirements as well as identifying areas of concern. Prospective board members are most likely pulling a copy of your return to learn about your organization. Many grantors and major donors will view the form before providing financial support. Your competitors will view your form and compare themselves to you. Others include state agencies, reporters and media and watchdog groups that may be trying to benchmark you, seeing how you spend your money, or looking for a story.

If you think no one is looking at your Form 990 you are wrong. It’s important to prepare the Form 990 to meet IRS requirements as well as to meet public perception judgments. Have you looked at your Form 990 from the view of the general public? If so, what story does it tell?

NPOs – What a Great Place to Work!

By Peggy Jennings

The NonProfit Times (NPT) recently posted their 2014 list of the best nonprofits to work for and this fueled my thinking.  What makes one place to work better than another?  How do you distinguish a Great place to work?

My experience working with nonprofits has shown me that this statement is spot on.  I have seen that all nonprofits can be great places to work if they pay attention to a few key tenants:

  • Maintain enthusiasm for your mission
  • Provide opportunity for personal growth
  • Respect and appreciate all levels of personnel
  • Share decision making to foster creativity

In fact, these principles are good for all of us to follow in our workplace; however, it can be overwhelming to take these from concept to practice.  So, here are a couple suggestions that I have seen over the years that work for maintaining mission enthusiasm:

  • Encourage the sharing of stories and data that demonstrate your success:  Whether you have regular and formal staff meetings or frequent water cooler chats, make mission a part of the conversation.  Many organizations get so caught up in the details of day-to-day tasks that they forget to take a step back and say, “Wow!  Look at what we’ve done!”   Always make your mission the center of your conversations.
  • Get into the field on a regular basis:  Depending on your organization, you likely have some way employees can “experience” your mission!  Pull your accountant, operations, or marketing person out of their office cube for just a few hours every so often, and put them into an environment where they can see your mission in action.  Obviously, this is an easier task for human services organizations, but all other nonprofits can (and should!) find a way to make this happen.

What do you think?  What makes an organization a great place to work?  What practical suggestions do you have for achieving employee satisfaction?

Why Does the Form 990 Matter?

Now is the time of year when many nonprofits are preparing and reviewing their Form 990s in anticipation of the May 15th deadline. It’s important to take a minute or two and reflect on why the filing matters. First off, the Form 990 is an informational return that provides an abundance of information about the organization that goes beyond the financial information. Most importantly, it’s widely available for public inspection. Lastly, the Form 990 provides insight regarding an organization’s governance, operations and programs.

To state the obvious, the other reason the filing matters is it is a requirement for maintaining tax-exempt status. The Form 990 informs the IRS about activities, financial status and also demonstrates how the organization is meeting the qualifications of a specific classification of tax-exempt status. Organizations that do not file for three consecutive years will lose tax-exempt status.

It is more important than ever to file a complete and accurate return. Penalties for failure to file range from $20 per day for small organizations up to $100 per day for organizations with gross receipts greater than $1 million. The IRS is using the information gathered from Form 990s to develop potential indicators of noncompliance for their exam process. Filing a complete and accurate return is important to avoid IRS scrutiny.

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