Behold; the Tax Man Cometh! How Not to Fear the IRS
By Levi Morehouse
Published on Tuesday, December 20, 2011
SPN NEWS NOVEMBER/DECEMBER 2011
Nonprofits should maintain a healthy respect for the IRS, which wields power to strip them of their tax-exempt status. While the for-profit sector gets the most attention from auditors, the IRS keeps an eye on nonprofits as well. Recently they have increased their staffing levels, so it's wise to operate as though you will be audited. You can mitigate your risk if you file timely reports and follow sound fiscal management practices. Here are the most important policies for both maintaining sound fiscal discipline within your organization and to be ready if the IRS comes calling.
990 Filing
The most common way of losing nonprofit status is by failing to file your 990 for three consecutive years. The IRS recently stripped 275,000 nonprofits of their tax-exempt status for this very thing. Another good way to invite IRS attention is to file with glaring errors. The principle here is that it's a complex form, but vital, and in the end, hiring a professional to do it right can save you money and grief.
Record Keeping
Having sound accounting and bookkeeping practices is of monumental importance. Below is a summary of the basic practices you need to maintain.
Create realistic budgets and practice financial planning and analysis. This will keep you working on projects that are within your capacity to complete, show you whether your assets are being used efficiently, and ensure that funds are available as needs arise.
Record all financial transactions according to a properly structured system of ledgers and journals. Create your accounts within the five following categories: assets, liabilities, expenses, income and retained earnings. If you're uncertain about how to account for something, don't let it go; do some research.
Follow a board-authorized policy and procedure manual that provides internal controls for fiscal management, including a system of checks and balances. For example, more than one person should be involved in collecting and depositing funds as well as cutting checks - paychecks, bills, grants, etc.
Take and keep minutes of all board meetings, especially financial decisions.
If this is not your area of expertise, consider outsourcing these functions. Outsourcing can save you time, trouble, and even money in the long run.
Proper Expenditures
To protect tax exempt status, nonprofits must take care to abide by certain expenditure restrictions, particularly in these areas the areas of lobbying and excess benefit transactions.
Lobbying
The IRS issues strict warnings about political campaigns (stay off!) and lobbying (proceed with caution!). The general rule is that 501(c)(3) organizations must not spend a "substantial" amount on lobbying. But if you want to play it safe while still retaining the ability to spend lobbying dollars, it could make sense for your organization to file the 501(h) election. This election, accomplished by the surprisingly simple Form 5768, subjects your lobbying activities to a mathematically-governed expenditures test. If you want to engage in more lobbying, another possibility is to start a 501(c)(4) sister organization.
Excess Benefit Transactions
Nonprofits do not exist to be a source of profit to their stakeholders. A few rules of thumb: don't allow funds to accrue to the benefit of an insider; don't pay anyone more than the value of goods or services they provide; and if you think you violated these rules, take steps to rectify the situation before the IRS does.
You have many important things on your plate to advance liberty and change the world. Keeping records and filing returns may not seem important, but it is absolutely vital to the health and safety of your organization.
Levi Morehouse is the CEO of Ceterus. Write him at levim@ceterusinc.com.
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