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Due to the weather, our physical offices will be closed Wednesday, 2/15; however, our we will be serving clients remotely. Please contact us via phone or email. Our physical offices will reopen for regular business hours on Thursday, 2/16. Please stay safe and warm.
The notice sends shivers down your spine — the IRS has called or written to inform you that your organization has been selected for an audit. Now what? Understanding the nuts and bolts of IRS reviews can help reduce your risk of running into trouble.
The IRS conducts three types of reviews of not-for-profit's:
1. Field audit. If your initial contact letter schedules an agent to visit your premises, the IRS is conducting a field, or in-person, examination. Field audits are done at an organization’s location, the organization’s representative’s office or an area IRS office. It usually takes place where the not-for-profit’s books and records are located.
Field audits fall into two categories. A general program exam usually is conducted by a single IRS agent. A team examination program audit focuses on large, complex organizations and may involve a team of examiners.
2. Office /correspondence audit. If the initial letter asks you to deliver documents to an IRS office by mail, you are undergoing a correspondence audit. An agent generally conducts the audit using letters and phone calls to work with the organization’s officers or a representative.
But a correspondence audit can expand to become a field audit if the issues grow more complex or the not-for-profit doesn’t respond. Both correspondence and field audits can expand to include prior and subsequent tax years.
3. Nonaudit. The contact letter might indicate that the IRS is conducting a compliance check, which isn’t an audit but may include a checklist with specific questions. Or the compliance check may ask about information and forms that your not-for-profit is requred to file or maintain, such as Forms 990, W-2 or W-4.
Compliance checks are an accountability tool, like audits, but are simpler and less burdensome and don’t directly determine a tax liability for any particular period. They can, however, lead to an audit.
Not-For-Profit's are chosen for reviews based on several methods, including:
Form 990 plays a strong role in the selection process. In its FY 2012 Annual Report & FY 2013 Workplan, the IRS delivered this “bottom-line message” to not-for-profit's: “The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”
An audit begins with the initial contact and continues until audit findings are discussed in a closing conference (in person or by phone) and a closing letter is issued. Both the conference and the letter will explain your appeal rights.
A compliance check also starts with the initial contact letter, and the IRS may contact your organization again if it needs more information or you don’t respond. The agency typically issues a closing letter at the end of a compliance check.
During a field audit, the agent will tour your office and interview an officer or representative. For a correspondence audit or compliance check, IRS personnel will review requested items submitted via mail and follow up as needed. They may request additional information.
This can be serious business – worst-case audit findings include adjustments to tax liability or tax-exempt status. If you get a call or letter from the IRS, contact your CPA immediately.
Here are some ways Stockman Kast Ryan + CO can help:
Feel free to contact us with questions, clarifications, or assistance with any IRS dealings.
In a slow economy, many nonprofit leaders worry about having enough money to meet their organizations’ financial obligations each month. But those who effectively monitor their nonprofits’ cash flow can successfully predict when the money coming in will balance with the money going out, when they’ll have a surplus of cash, and when they’ll have a shortage. They can plan — and take actions — accordingly.
Cash flow management involves analyzing cash inflows and outflows based on the timing of receipts and payments. It’s more than taking your annual budget figures and dividing by 12 to come up with a static, monthly amount — this won’t give you an accurate snapshot of your cash flow.
Take an annual event. If it’s a holiday dinner, costs rise in November and December as you plan, and pay for, the event. Costs also may bump up noticeably in, say, January if you publish an annual membership directory then. In fact, costs can vary significantly from month to month for a variety of reasons — for example, as heating and cooling costs rise and fall or staffing needs change.
To begin managing your not-for-profit’s cash flow, create a cash flow report using a simple grid. Along the top, list all 12 months and label them either “actual” or “projected.” Going down the page, create rows for the following information:
Beginning balance. This line shows the amount of cash you had at the start of the month.
Cash coming in. Create line item entries for the largest income categories you’ll have for each specific month. Total all the individual entries to calculate the amount of incoming cash.
Cash going out. Make line item entries for the largest categories of expenses, combining as necessary. Total all individual entries to calculate the amount of outgoing cash.
Net inflow/outflow. Subtract your cash going out from your cash coming in to determine your net inflow or outflow.
Ending balance. Add the beginning balance to the net inflow/outflow number to get an idea of your cash position for each month.
Use historical data in addition to what’s on your calendar for the year ahead to help create your projections. Remember, you’re creating a time-based report, not simply averaging expenses and income over 12 months.
Be realistic about when cash will actually come in. If your big fundraiser is cash-based, you’ll have the money in the month of the event. But if you’re executing a fundraising campaign, donations can come in months after your initial mailings. Reflect that in your projections.
To complete your cash flow report, compile a total of your cash on hand and estimates of cash receipts and their due dates. You’ll also need to enter into the report payment amounts and schedules for personnel expenses (including salaries, wage increases, taxes and benefits).
Other data you’ll need includes consulting and professional services fees, occupancy charges (including rent and insurance), and office charges (including telephone service, equipment rental, service contracts and supplies). Last, be sure to include financing costs and all other expense categories (including travel, postage and printing).
We can help you devise your cash flow report and review maiden entries. We can walk you through the analysis process to help ensure that your reports are used to your nonprofit’s best advantage. Over time, the ability to successfully project and manage cash flows and positions — along with effectively managing the budget and having sufficient liquidity — will be key to your organization’s viability.
Your status with the IRS as a tax-exempt “public charity” gives you significant benefits — paying no federal, state or local income taxes is the most obvious advantage. And the good news doesn’t stop there.
The designation also enables you to receive donations, may qualify you for special grants and government funding, and can entitle you to special rates for services, such as mail delivery. In short, the status better enables your organization to apply its financial resources toward its mission and goals than if it were a for-profit entity.
But keeping your 501(c)(3) status isn’t automatic. Here are some important dos and don’ts to follow if you want to retain the privilege:
Do comply with reporting obligations. Your nonprofit is required to file some type of IRS Form 990 — Form 990, Form 990-EZ or Form 990-N, depending on the amount of your total annual receipts and total assets — each year. If you fail to do so for three years in a row, your tax-exempt status will be revoked.
If you’re required to file the full Form 990 or Form 990-EZ, be sure to annually complete Schedule A, Part I (“Reason for Public Charity Status”) to identify why you aren’t a private foundation. Check the box that coincides with the reason that you’re a public charity for the current tax year.
You also must file all required payroll tax returns for your employees and 1099 forms for independent contractors, and answer related questions about these workers on your Form 990.
Do maintain the required level of public support. As detailed on Schedule A to the 990, if your nonprofit is primarily supported by a government unit or the general public or is a community trust (Box 5, 7 or 8 on Schedule A, Part I), you’ll also need to pass the public support test on Part II of Schedule A. If your organization is exempt because it receives more than one-third of its support from contributions and activities related to its exempt function, as outlined in IRC Section 509(a)(2), you’ll need to pass the public support test on Part III of Schedule A each year.
Do pay employment taxes and properly withhold from employees’ paychecks. Even though your organization doesn’t pay income taxes, you must still pay applicable employment taxes, such as the employer portion of each employee’s Social Security and Medicare taxes. And you must withhold from your employees’ paychecks the employee portion of employment taxes, as well as federal, state and local income taxes where applicable — and remit the withheld amounts to the appropriate governmental agency.
Do use a formal process to approve compensation. The salaries and benefits you pay your executive director and “key employees” are available to the public on your Form 990 and have been identified as a primary focus of exempt organizations’ audits by the IRS. Even more important than the compensation total is the process you use to determine that the compensation is reasonable and comparable to amounts paid by organizations of similar size and activity. The IRS sees this review and approval as a responsibility of your board of directors or one of its committees.
Don’t operate for the benefit of private interests. No part of a 501(c)(3) organization’s earnings or equity can benefit individuals, such as the organization’s founders, executives or board members — or their family members. Your nonprofit was granted its tax-exempt status to benefit the public, not private parties or interests.
Don’t generate excessive unrelated business income (UBI). UBI is income from a trade or business activity that is regularly carried on and is unrelated to your exempt mission. Although the Internal Revenue Code is silent as to how much is too much, excessive UBI has been interpreted as spending a “significant” amount of time on the unrelated activity.
For example, if an organization has more expenditures for the unrelated activity than program expenses, the IRS likely will consider terminating its exempt status. But courts have considered an organization spending even as little as 10% of its total efforts on a UBI activity to be too much.
Don’t pay more than market rates for goods and services. Ensure you’re using your organization’s resources wisely by getting at least three quotes before purchasing a significant asset or establishing a service contract or a standing order for supplies. If you ever decide to do business with related parties (board members, founders, executives or their businesses), the other quotes will support the “going rate” in your market and show you aren’t providing an excess benefit to the related party.
Should the IRS determine that you’ve provided excess benefits, your organization and its leaders will be subject to penalties as well as the possibility of losing the nonprofit’s exempt status.
Don’t engage in substantial lobbying or any political campaign activities. Two methods can determine whether lobbying activities are “substantial.” One considers the time spent by compensated employees and volunteers on lobbying activities. The other is the expenditure tests.
Your nonprofit can elect to use the latter option — called a 501(h) election — by filing Form 5768. (Churches are ineligible.) The 501(h) election sets a defined limit on the amount of resources an organization can use to influence legislation before losing its exempt status, based on a percentage of its total expenses.
Political campaign activities include making contributions to a political campaign fund or making public statements for or against a candidate (either written or verbal). Participating in any of these activities can result in the IRS either revoking your exempt status or imposing certain excise taxes on your organization.
One of the top priorities for nonprofits is engaging with their supporters and building relationships. It’s no surprise, then, that interest is surging in technology that can help nonprofits do just that. How can your organization maximize the potential of current technology tools and avoid wasting time with passing fads? Let’s look at what’s working.
According to the Pew Internet and American Life Project, 58% of American adults had a smartphone as of January 2014, and 42% had a tablet computer (a dramatic jump from only 4% in September 2010). As of May 2013, Pew reports, 63% of adult cell phone owners used the Internet on their phones — twice as many as four years earlier. And 34% of the cell Internet users said that they mostly use their phones to go online, as opposed to using a desktop or laptop computer.
With mobile Internet access poised to surpass that of conventional computers in the coming years, some nonprofits are wisely taking steps now to develop mobile websites and apps. Why do you need a mobile-specific website? Imagine a supporter who receives an e-mail call to action on his phone and immediately clicks through to your regular site, only to find that it’s difficult to read and use on his phone’s small screen. That’s a lost opportunity — one that will only multiply as users increasingly rely on phones for their online communications.
Mobile websites and apps provide your supporters with information at their fingertips and allow them to act, including donating, on the go. As with any type of online transaction, of course, it’s important to establish strong internal controls to protect users’ data and privacy and prevent the fraudulent misappropriation of funds.
Mobile websites and apps also can help nonprofits leverage their supporters’ social networks. The past few years have taught many organizations the critical role that social networks can play in spreading their missions to wider audiences than ever and attracting new supporters and donors.
Some may have initially scoffed at the idea that Facebook or Twitter could provide real value. But few can argue with the power of social media at this point, particularly for nonprofits. It’s an indisputable fact that people are much more likely to engage with organizations endorsed by friends, families and trusted sources.
That’s one reason why peer-to-peer fundraising has taken off in recent years. Thanks to social media, it’s much easier for participants in your 5K race, cycling event or dance-a-thon to drum up financial support for their efforts. By providing social media tools as part of your registration materials, you empower your participants to personalize their pitches and meet or surpass their — and your — fundraising goals. Again, though, you’ll need to have proper internal controls in place, such as firewalls, encryption and other protections for credit card data.
Social media also allows nonprofits to easily and cost-effectively participate in back-and-forth, multiparty conversations, rather than just one-way communications. A single posting might elicit numerous enthusiastic responses that can snowball as the posting is passed along by readers with a click of a button.
Engaging in social media doesn’t mean you can afford to neglect your existing website, though. Instead, savvy nonprofits are expanding their Web presence.
Your website visitors should find a simple, secure way to donate, as well as a range of compelling content that will bring them back again and again. Online videos, for example, offer effective, inexpensive opportunities to tell your organization’s story and mobilize viewers. Partnering with an experienced Web-design firm to improve your online presence can be an investment with results measuring far greater than the cost.
The tools listed above are by no means the only technological advances that can pay off for your organization or enhance your outreach efforts. Nonprofits are also turning to cloud computing, social analytics and software that produce solid financial metrics. Such advances are no longer a luxury — they’re a matter of survival. If your organization has lagged behind, now is the time to jump into the water.
Has your nonprofit frozen wages or awarded minimum pay increases over the last few years while asking employees to take on new responsibilities? Are they being asked to contribute more to your benefit plan, or take a benefits cut?
Such organizational moves often are necessary during tough economic times. That said, don’t lose sight of the importance of your staff, from hiring and training them to rewarding them for their performance, and providing motivation to stay.
When asked to list their organization’s assets, nonprofit leaders are likely to name investments, facilities, real estate, cash and other tangible assets. Too often, personnel are left off the list.
But without a knowledgeable and canada goose black friday sale 2015 committed staff, you stand little chance of delivering program services or raising enough money to fund them. And when you consider the cost of hiring, training and mentoring staff, not to mention the losses your nonprofit incurs when an experienced employee leaves, it’s easy to see why you should assign a high value to your people.
Finding and keeping good staff starts with smart hiring. Just as you wouldn’t buy a mutual fund without researching its performance and strategy, don’t hire staffers without thoroughly vetting them for potential rewards and risks.
Experience, education, canada goose black friday sale skills and employer recommendations are merely a starting place. Good hiring requires employers and job candidates to honestly assess their respective objectives. Don’t hire someone simply because you’re desperate to fill an empty position. Shaky starts rarely lead to long-term success. Similarly, don’t court a candidate who seems likely to jump ship when a “better” offer comes along — no matter how impressive his or her resumé.
When a new employee comes aboard, ensure he or she receives comprehensive training — not only related to job responsibilities, but also about your not-for-profit’s culture and ethics. Staffers need to buy in to your mission and support the programs you’ve established.
Also ensure that employees understand your evaluation and compensation system — and feel like full participants. Often, they leave a job claiming their employment expectations weren’t met and the employers are left scratching their heads about what went wrong. Staffers must be able to voice perceived obstacles to their successful long-term employment without fear of reprisal. If you want to keep them, listen and try to find ways to help them succeed.
Although financial compensation is generally the best way to reward and retain people, there are other ways you can let employees know you value them — without busting your budget. For example, consider tangible rewards other than money. You could write a personal “thank you” note and enclose a small gift card when a staff member achieves something special. Or you could reward that person with an extra vacation or personal day. Another idea: Offer the employee more flexible hours, such as earlier starting and leaving times or the option to telecommute.
And don’t forget the value of praise and recognition. Acknowledge employees for a job well done at staff meetings or in your nonprofit’s newsletter. Or invite “star” employees to be introduced at a board meeting, or to represent your nonprofit at an industry conference. All of these actions reflect your confidence in those individuals and indicate their importance to the organization.
Your nonprofit may be unable to compensate employees quite as well as its for-profit counterparts. But, if your focus is on valuing and growing your assets — that is, your employees — all you need is a little creativity in order to reward them in many other ways.
The Financial Accounting Standards Board (FASB) has issued new guidance that permits private companies following Generally Accepted Accounting Principles (GAAP) to, in some circumstances, elect not to consolidate the financial reporting from variable interest entities (VIEs) that lease property to them. It may apply in situations where an owner of a private company is also an owner of a second business entity that leases property to the company.
The guidance, Accounting Standards Update (ASU) 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, is a consensus of the Private Company Council (PCC). It’s intended to improve private company financial reporting regarding consolidation of lessors.
The Financial Accounting Foundation, FASB’s parent organization, established the PCC in May 2012. Its purpose is to improve the process of setting accounting standards for private companies that prepare their financial statements in accordance with GAAP.
Among other things, the body was tasked with working with FASB to determine whether alternatives to existing GAAP standards can ease the burden on private companies of preparing GAAP-compliant financial statements while better addressing the needs of users of those financial statements. Earlier this year, FASB issued the first two private-company GAAP alternatives, ASU 2014-02 and ASU 2014-03, addressing goodwill and interest rate swaps, respectively. ASU 2014-07 is the third private company alternative that FASB has issued.
Under GAAP, a company must consolidate the financial reporting from an entity in which it has a controlling financial interest. Two models are typically used to determine whether a company has a controlling interest in an entity: the voting interest model or the VIE model.
Under the VIE model, a company is deemed to have a controlling financial interest in an entity when it has 1) the power to direct the activities that most significantly affect the entity’s economic performance, and 2) the obligation to absorb losses, or the right to receive benefits, of the entity that could potentially be significant to the entity. To determine whether the VIE model applies, a company must determine whether it has an explicit or implicit variable interest in the entity and whether that entity is a VIE.
An explicit variable interest stems from contractual, ownership or other financial interests in the entity that directly absorb or receive the variability of the entity. An implicit variable interest involves the absorbing or receiving of variability from the entity indirectly. The identification of such interests is a matter of judgment based on the relevant facts and circumstances.
A VIE generally is a corporation, partnership or any other legal structure that is used for business purposes and either doesn’t have equity investors with voting rights or has equity investors that don’t provide sufficient financial resources for the entity to support its activities.
The new guidance specifically applies to leasing arrangements. Private companies commonly lease facilities from separate lessor entities owned by one of the company’s owners. The lessor entity usually is established for tax, estate planning or legal liability purposes — not to structure off-balance sheet debt arrangements. Typically, the lessor entity’s only asset is the leased facility, and the lease is the only contractual relationship between the lessee company and the lessor entity.
Existing GAAP guidance requires the lessee company to determine whether it holds a variable interest in the lessor entity (for example, a guarantee of the lessor’s debt). If it does, and the lessor is a VIE, the lessee company must assess whether it holds a controlling financial interest in the lessor under the VIE model. If the entities are under common control, the lessee generally must consolidate the financial reporting from the lessor.
The PCC found that, despite the cost and complexity of applying the GAAP VIE guidance in such a case, most users of private company financial statements consider the consolidation of the lessors under common control irrelevant. These users tend to focus on the cash flows and tangible worth of the stand-alone lessee entity, not the cash flows and tangible worth of the consolidated group presented under GAAP.
Moreover, consolidation of the lessor distorts the lessee’s financial statements. As a result, users who receive consolidated financial statements often request a consolidating schedule that they can use to reverse the effects of consolidation.
Under ASU 2014-07, a private company lessee can elect an alternative not to apply the GAAP VIE guidance to a lessor if:
In addition, if the private company explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, the principal amount of the obligation at inception can’t exceed the value of the asset leased by the private company from the lessor.
If a private company elects to apply the accounting alternative, it should apply the alternative to all current and future leasing arrangements satisfying the above conditions.
Electing the alternative would also free a private company from providing GAAP-compliant VIE disclosures about the lessor entity. The private company won’t be totally off the hook, though. It must disclose the following information:
These disclosures are required in combination with the other GAAP-required disclosures about the private company’s relationship with the lessor entity, such as those for guarantees, leases and related party transactions.
A private company that elects the accounting alternative must apply it retrospectively to all periods presented on financial statements. The alternative will be effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted for any period for which the company hasn’t yet issued financial statements.
If you have questions regarding how this guidance affects the preparation of your financial statements, please give us a call. We’d be happy to answer your questions.
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You may not be aware of some of the services local CPA firm, Stockman Kast Ryan and Company of Colorado Springs provides that could benefit you and your business. Here is just a partial list: