whether you 990 or not, changes are coming

Whether You 990 or Not,Changes ARE ComingBarbara Clemenson, CPA, CFRE

Outline• Causes of Increased Scrutiny

• Pressures for Increased Scrutiny

• Results of Increased Scrutiny

• Recommendations for Meeting the Pressures of Increased Scrutiny

Causes of Increased Scrutiny• Notorious Corruption Cases:

Business, Government and Nonprofit

• General Atmosphere of Skepticism and Economic Pressure

Causes of Increased Scrutiny

Notorious Corruption Cases: Business, Government and Nonprofit

Causes of Increased ScrutinyGeneral Atmosphere of

Skepticism and Economic Pressure

Skepticism

• Nonprofit Hospitals

• Executive Compensation

• Gifts in Kind

• Family/Friends Relationships

Causes of Increased ScrutinyGeneral Atmosphere of Skepticism

and Economic Pressure

Economic Pressure

• As resources become more stretched and restricted

• Scrutiny to reduce spending, and pressure to increase revenue, intensifies.

Pressures for Increased Scrutiny• Regulation in the For Profit

Sector: Sarbanes-Oxley, 2002

• General Methods of Government

Intervention in the Nonprofit

Sector: Federal and State

Levels

• Self-Regulation

• Lobbying

Pressures for Increased ScrutinyRegulation in the For Profit

Sector: Sarbanes-Oxley, 2002

If we do not regulate ourselves, we WILL be regulated by others!

Pressures for Increased Scrutiny• Governmental Pay-Go Rules:

If new legislation is introduced that will increase the federal budget, it must pay for itself through:

–Increased taxes

–Reducing other budget items

–Closing tax loopholes

Pressures for Increased Scrutiny• The Senate Finance Committee

believes there is $1.8 billion being lost annually through fraudulent or inappropriate donor reporting.

• Senator Grassley (R), former Chair, was pushing for nonprofit Sarbanes-Oxley type legislation .. But then, Hurricane Katrina happened.

Pressures for Increased Scrutiny• New Approach = Piecemeal

legislation Tacking nonprofit regulation on to other laws, tackling “abuses” one at a time.

• American Jobs Creation Act of 2004 (auto donation regulation)

• Pension Protection Act of 2006 (August 2006)

Pressures for Increased ScrutinyPension Protection Act• Recordkeeping for monetary donations• Donated clothing and household items:

Good condition; Appraisals for items worth more than $500

• Small charities, under $25,000, need to annually electronically file notice

• Reporting payments by controlled organizations

• Tax-free donations from IRAs by taxpayers 70 ½ + up to $100,000 for 2006 and 2007.

Pressures for Increased ScrutinyCurrent Government Intervention

Areas of Interest:• Donor advised funds and supporting

organizations

• Technical corrections bill on the Pension Protection Act --

• General sessions in the House Ways and Means Committee this summer on the nonprofit sector

Pressures for Increased ScrutinyGeneral Methods of

Government Intervention: • IRS in February 2007

published a draft of Good Governance Practices for Nonprofit Organizations

http://www.irs.gov/pub/irs-tege/good_governance_practices.pdf

Pressures for Increased ScrutinyGeneral Methods of Government

Intervention: • IRS Good Governance• This has NOTHING directly

related to do with finances. The IRS’ rationale is that NPOs with good governance will be more likely to act responsibly.

• Scope expansion!

Pressures for Increased ScrutinyGeneral Methods of Government

Intervention:

• IRS Good Governance• The IRS will monitor other self-

regulation proposals, looking for an emergence of good practices.

• Might those practices be legislated in the future?

Pressures for Increased ScrutinyGeneral Methods of

Government Intervention: State Levels

• States increasing reporting and regulation of the NPOs

• States passing Sarbanes-Oxley type laws: CA was the first

Pressures for Increased ScrutinySelf-Regulation

• Independent Sector: Panel’s

Advisory Committee on Self

Regulation Draft Principles• http://www.nonprofitpanel.org/selfreg/

index.html

Pressures for Increased ScrutinySelf-Regulation

Independent Sector Draft

Principles cover:

• Facilitating Legal Compliance

• Effective Governance

• Strong Financial Oversight

• Responsible Fundraising

Pressures for Increased ScrutinyLobbying

• Alliance for Charitable

Reform, a project of The

Philanthropy Roundtable.• http://www.acreform.com/

Results of Increased Scrutiny

•Revised 990

•Increased Oversight of New Nonprofits

•Pressure for Disclosure

Results of Increased Scrutiny

Revised 990

• Increased scrutiny of

donor advised funds:

– Line 1a

– Line 22a

Results of Increased ScrutinyRevised 990• Increased scrutiny of

compensation and related party transactions

• Lines 23 and 24• Lines 25a, b and c Schedule A

Part 1.• Lines 50 a and b• Line 63• Part V-A, V-B

Results of Increased ScrutinyRevised 990

• Increased scrutiny of compensation and related party transactions

• Part XI

• Schedule A Part VII: Relationships to other NPOs

Results of Increased Scrutiny

Increased Oversight of New Nonprofits–Seeds of Grace, Mission

–Postcard Annual Registration for small NPOs (under $25,000)

Results of Increased Scrutiny

Pressure for DisclosureIRS forced disclosure on 990

Expected public information for funders and media

Best practices

Recommendations

• Governance

• Finances

• Employment

• Relationships

RecommendationsGovernance• Widen your community

representation.–Conduct a board assessment to

determine strengths and skill needs of your present Board.

–Perhaps use the resources of a third party to find new Board members. [We tend to recruit people we know, who are like us.]

RecommendationsGovernance• Widen your community representation.

The IRS is looking boards reflecting broad public interests, rather than the interests of a small group of donors or related parties. Specifically they are reviewing boards for the inclusion of:– Public officials– Individuals with expertise in organization’s

area of operations– Leaders from the local community– Representatives of the constituency the

organization serves– Others representing a broad cross-section of

community interests.

Recommendations

Finances• Honestly report, understand

and explain your finances.• “Acceptable percentages”• CFO Cover Story,

Misgivingshttp://www.cfo.com/article.cfm/8477078?f=search

Both of these resources are in the convention notebook.

RecommendationsEmployment

• Make sure you are following all federal, state and local labor laws.

RecommendationsEmployment• Are you paying aliving wage?

Recommendations

Relationships• Move towards NOT having people from

the same family working at the Mission or on the Board.

• Move away from doing business with related parties. It’s not illegal right now, as long as those transactions are disclosed, but that is an area where it might well become prohibited in the future.

Recommendations

Relationships• Advantages:

– Looks better in the eyes of the community

– By having family and friends out in the community working at other organizations, you extend the outreach of and connections with the Mission.

Resources: www.irs.gov

Resources: www.irs.gov

Conclusion• Man looks at the outward

appearance, but the LORD looks at the heart. I Samuel 16:7– Man DOES look at the outward

appearance!

• We are taking pains to do what is right, not only in the eyes of the Lord but also in the eyes of men. II Corinthians 8:21– We might be within our legal rights, and

still be doing things that don’t pass the “smell” test in the eyes of our community.