All eyes on the nonprofit community.
Heavier Compliance Burden
On June 23, 2004, the Senate Finance Committee (SFC) announced recommendations in response to publicized nonprofit abuses. At that time, it called for a compliance review of nonprofits every five years, requiring them to produce (1) articles of incorporation and bylaws, (2) conflicts of interest policies, (3) best practices, (4) financial statements and (5) a declaration, signed by the chief executive officer, that a return is true and accurate; see http://finance.senate.gov/hearings/tes timony/2004test/062204stfdis.pdf for details.
These requirements are remarkably similar to the criteria an organization has to meet when applying for an exemption. If they become law, they would essentially force an organization to reapply for exempt status every five years. In the past, a nonprofit organization was in danger of losing its exemption only if it abused its exempt status.
Response: Producing the materials necessary to comply with a compliance review would place a tremendous, additional burden on the already resources-trained nonprofit community. On the other side, how would the IRS Exempt Organizations Group--which is already stretched thin--take on the additional task of conducting reviews? In light of this, both the American Bar Association and the AICPA responded to the SFC's draft by requesting legislation that would specifically punish abusers rather than implement sweeping changes; see www.abanet.org/tax/groups/eo/achive. html and www.cpa2biz.com/Resource Centers/Tax/Exempt+Organization/ EO_Roundtable.htm.
More recommendations: In October 2004, the SFC announced its selection of a Panel on the Nonprofit Sector. Consisting of 24 nonprofit and philanthropic leaders, the panel was to provide recommendations to the SFC for "strengthening the governance, ethical conduct and accountability of the charitable sector"; see www.indepen dentsector.org/panel/main.htm.
The panel conducted discussions with over 100 members of a workgroup and an expert advisory group (groups) in December 2004 and January 2005. Their recommendations fall into four broad categories:
1. Improving transparency and financial management;
2. Improving government oversight and enforcement;
3. Improving governance and self-regulation; and
4. Compliance requirements for small organizations.
Though the draft recommendations are publicly available (see www.non profitpanel.org/workgrouprecs), the groups and panels intend to continue to study the issues and present their final recommendations this year.
The Service has also been retooling its audit processes to ferret out abuses by tax-exempt organizations. Moving from a coordinated examination approach to a team audit approach, it expects to "touch" more organizations on specific items, rather than concentrating on only the largest such entities.
Initiatives such as e-filing and data mining are also in the works. The IRS has recently announced that exempt organizations with total assets of $100 million or more will be required to e-file their 2005 return. E-filing of 2006 returns will be required for organizations with assets of $10 million; all private foundations will be required to e-file in 2007. This will assist the IRS in specific initiatives, although two have already begun in 2004 using more traditional analysis.
The IRS's first initiative was a fundraising notice that identified organizations receiving substantial donations but not reporting any significant fundraising expenses on the informational return. "Educational" letters were sent informing the organizations of the discrepancy, which should be addressed in future returns. In August 2004, IR News Release 2000-106 announced that 2,000 organizations would be selected for review of compensation practices and payments. These audits would specifically address the Sec. 4958 excess benefit regulations, as well as the rebuttable presumption of reasonableness.
Electronic access to data will most likely increase IRS scrutiny. An organization that viewed Form 990, Return of Organization Exempt From Income Tax, as "no-risk" will need to pay significantly more attention to ensure the validity and consistency of its data.
States' Attorneys General
Although the Sarbanes-Oxley Act of 2002 (SOA) currently affects only public companies, many state legislatures are recommending "Sarbanes-like" provisions for nonprofit organizations. California was the first state to pass such legislation (the Charity Integrity Act of 2004, SB 1262), but nearly half of the states have proposed similar laws. Most of their proposals read like watered-down versions of the SOA. Generally, they call for (1) mandatory independent audits based on organization size, (2) independent audit committees with financial expertise, (3) governing board review (including executive compensation review), (4) whistle-blower provisions and (5) certification of financial statements.
As the states enact these rules, it be important for nonprofit organizations to understand their home states' provisions, as well as those of any state in which they intend to solicit contributions.
Although nonprofit organizations will be feeling additional new pressure from three different sources, the message is basically the same: They are expected to be transparent and to uphold a higher standard than their for-profit counterparts. Most nonprofit organizations have nothing to hide, but the burden will be on each of them to comply with upcoming Federal and state legislative reforms, as well as IRS compliance requirements.
FROM GERALYN R. HURD, CPA, CHICAGO, IL, AND R. MICHAEL SORRELLS, CPA, GREATER WASHINGTON, DC
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|Author:||Sorrells, R. Michael|
|Publication:||The Tax Adviser|
|Date:||May 1, 2005|
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