Tag Archives: Non-profit

New IRS Form 990 Audit Selection Methodology

The IRS has recently improved its audit selection process shifting from a subjective selection to a data-driven selection. Previously, subjective audit selection indicated that audits were driven by issue-specific determination. For example, following an IRS study on hospitals, more hospitals were selected to be audited compared to previous years. Similarly, following an IRS study on colleges and universities more audits of colleges and universities were performed.

The IRS has developed a data-driven approach that incorporates nearly 150 analytics based on nonprofit organizations’ Form 990 data in an effort to eliminate subjectivity. In doing so, the IRS intends to expand the number of organizations that could potentially be audited. If an organization “fails” too many analytical evaluations, it is more likely to be audited by the IRS. While no specific analytics have been published, industry experts anticipate the IRS to focus on the following sections of Form 990:

  • Inconsistent information
  • Reporting amounts in column (C) of Part VIII, but not reporting that a Form 990-T was filed on Part V, Line 3.
  • Preparing Schedule L to report an insider transaction, but reporting on Part VI, Line 12 that the organization did not implement a conflict of interest policy.
  • Responding affirmatively to a Part IV inquiry, but not completing the applicable Form 990 schedule.

Although the IRS’s method of audit selection was updated, its budget has not increased for nonprofit organizations. Despite the budget stagnation, the new data-driven audit selection method has increased return change rates to over 90%, which represents a substantial increase in change rates compared to the 70% seen with subjective audit selection. Furthermore, there has been a 20 -day reduction in average audit completion since the implementation of data-driven audit selections – from 233 days in 2015,when subjective audit selections occurred to 213 days in 2016.

For more information on this new approach, click here.

Mitigating Risk from Your Third-Party Vendors

A third-party vendor is an ancillary process outside the control of your organization, which performs a function or provides a service that isn’t central to your operating purpose, for example, a third-party payroll company.

Although your exempt organization may rely on third-party service providers, your management team carries the ultimate responsibility for maintaining an effective internal control system that produces accurate financial reporting. Taking ownership of this third-party responsibility has become one of the biggest hurdles for exempt organizations as more and more processes move to third-party providers.

Below are some suggestions on how to implement internal controls over financial reporting (ICFR) to assist your exempt organization with meeting the organizational goal of producing accurate financial information:

  • When engaging vendors with an impact on ICFR, ensure your evaluation process and/or request for proposals (RFP) includes consideration for meeting your organization’s internal controls standards.
  • Periodically evaluate key performance indicators (KPIs) of service providers with respect to service requirements relevant to ICFR.
  • Review a Service Organization Control (SOC) 1 report and determine whether follow-up actions are necessary.
  • Implement controls to verify the reliability of data relevant to ICFR that are sent to and received from service providers.

The internal control function is an indispensable tool in promoting efficiency and effectiveness of your exempt organization. It improves employee confidence, supports external reporting needs, and assists in ensuring your exempt organization serves its mission by using sound ethical practices.

INTERESTED IN LEARNING MORE?

For more information, please contact Aronson’s Melissa Musser, CPA, CISA, at mmusser@aronsonllc.com or 240.364.2598.

Have an RFP you would like to submit? Click here.

 

A Welcome Break on the Fee for 1023-EZ Application for Tax Exempt Status

check the boxEffective July 1, 2016, the application fee for filing the Form 1023EZ has been lowered to $275. The old fee was $400. That’s a savings of $125, and is a welcome relief to small nonprofits applying for tax exempt status.

The new streamlined Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, was introduced by the IRS in 2014 to provide relief for small nonprofits applying for tax exempt status from having to complete the full Form 1023, Application for Recognition of Exemption Under Section 501(c)(3). The full form is 26 pages long, and the IRS estimates it requires an average of 15 ½ hours to prepare, with 185 hours of other reading and record keeping; compared to 2 ½ pages and 5 ½ hours to prepare the EZ version, with an additional 12 ½ hours reading and record keeping. So the new 1023-EZ form is a winner when it comes to cutting down on paper work and time invested to comply with IRS requirements.

And customer satisfaction rates are way up for the IRS on the Streamlined EZ form compared to the regular long form.

Not every organization is eligible to complete the streamlined EZ form. Here is a summary of the not-so-short list of twenty-six points your organization needs to pass in order to qualify:

  1. Gross receipts (estimated) will be less than $50,000 for each of the succeeding three years,
  2. Did not exceed $50,000 in gross receipts in each of the past three years (if already operating),
  3. Total assets valued at fair market value are less than $250,000,
  4. Were formed under laws in the U.S. (States, territories and possessions),
  5. Have a mailing address in the U.S. (States, territories and possessions),
  6. Are not a successor to, or controlled by, an entity suspended as a terrorist organization,
  7. Are organized as a corporation, unincorporated association, or a trust,
  8. Are not a successor to a for-profit entity,
  9. Are not a previously revoked organization, or a successor to a previously revoked organization, with the exception of a revocation due to not filing a Form 990 series form for three consecutive years,
  10. Are not a church, convention or association of churches,
  11. Are not a school, college or university,
  12. Are not a hospital or medical research organization in conjunction with a hospital,
  13. Are not a cooperative hospital service organization,
  14. Are not a cooperative service organization of operating educational organizations,
  15. Are not a charitable risk pool,
  16. Are not going to be a supporting organization under section 509(a)(3),
  17. Are not going to be providing credit counseling as a substantial part of your activities,
  18. Plan to invest 5% or more of assets in securities or funds that are not publicly traded,
  19. Do not plan to participate in partnerships in which losses would be shared with for profit entities,
  20. Sell carbon credits or carbon offsets,
  21. Are an HMO,
  22. Are an Accountable Care Organization or engage in ACO activities,
  23. Will maintain donor advised funds,
  24. Organized and operated exclusively for testing for public safety,
  25. A private operating foundation,
  26. Applying for retroactive reinstatement of exemption after being automatically revoked.

IRS Issues Guidance on Notification to Operate as a 501(c)(4) Social Welfare Organization

IRS logoThe IRS on July 8, 2016, issued temporary regulations describing how to communicate with the IRS if you are starting a new social welfare organization, also known as a Section 501(c)(4) organization. A new online form, Form 8976, is required to be submitted to the IRS electronically within 60 days after being established.

If you have started or in the process of organizing a social welfare organization, there are other federal and state filings and disclosures that may be necessary, depending on where and how you are operating. This requirement with the IRS has been up in the air for many months now, so this announcement is some solid news for these start-up organizations.

https://www.irs.gov/charities-non-profits/electronically-submit-your-form-8976-notice-of-intent-to-operate-under-section-501c4

The New Overtime Rule and Its Impact on Nonprofits

overtime work“It is highly misleading to suggest that most nonprofits will not need to worry about the revised [overtime] rule. Nonprofit tax status has no bearing on whether an employer is required to pay its employees overtime,” states Michael Eastman, an attorney with NT Lakis in Washington, D.C. Eastman also is counsel to the Society for Human Resource Management (SHRM).

SHRM reports, “Nonprofit organizations that think the overtime rule doesn’t apply to them need to think twice, and may have to either redouble their fundraising efforts or brace for possible cuts in the services they provide. Despite the fact that these businesses engage in charitable activities, which would  exempt them from overtime pay requirements as enterprises, individual employees may still be eligible for overtime pay.”

The Department of Labor released a fact sheet to further clarify when nonprofits are impacted by the Fair Labor Standards Act (FLSA). Under the FLSA there are two types of coverage: enterprise coverage (which is limited for nonprofits) or individual coverage.

Enterprise coverage applies to businesses with annual sales of at least $500,000. For a nonprofit, this applies only to the organization’s activities performed for a business purpose beyond their mission function, such as merchandise sales or other unrelated business income. Income from contributions and membership fees  are not counted toward the $500,000 threshold.

Individual coverage applies to employees engaged in interstate commerce activities. This includes employees that make out-of-state phone calls, receive out-of-state emails or mail, purchase or receive goods from an out-of-state vendor, or handle credit card transactions including the accounting and bookkeeping to record the transactions.

The main impact of the FLSA is the increase in the exempt threshold. The overtime rule increases the exempt salary level from $455 a week ($23,660 a year) to $913 a week ($47,476 a year) which many nonprofits cannot afford that jump in pay or the sudden addition of overtime. SHRM points out the main concern is that the offset will be a reduction in services that a nonprofit can provide.

– See more at: https://www.shrm.org/legalissues/federalresources/pages/nonprofits-overtime-rule.aspx#sthash.A7JpD5rP.dpuf

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