Tag Archives: not-for-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.

What You May Have Missed: Cost-Saving Initiatives and Best Practices for Exempt Organizations

democrats vs republicans

On November 9, Aronson LLC, Arent Fox, and Morgan Stanley hosted an executive summit for exempt organizations that featured strategies for making and saving money, and tips on top governance issues. Missed the event? Here is a brief recap. The event kicked-off with keynotes delivered by former United Way CEO and Chair of the Alexandria Chamber of Commerce Joe Haggerty, and former US Senator and Congressman from North Dakota and current Senior Policy Advisor at Arent Fox Senator Byron Dorgan.

“Nonprofits should be providing the appropriate level of information to the public, this includes full disclosure, open conversations, innovate use of required reporting, and tying metrics to outcomes,” said Mr. Haggerty. “For example, instead of trying to hide salary info in an appendix, the United Way included its entire compensation plan in the 990 and added information on who they benchmark against and the overall philosophy of compensation.”

With a new administration and Congress set to take control in January, Senator Dorgan flagged several issues exempt organizations should be focused on. Including:

  • Charitable deductions – whatever happens in tax reform, exempt organizations have to be wary that they do not reduce the tax incentives for charitable deductions.
  • Tax exempt status – Congress could hold oversight hearings and evaluate nonprofit tax exempt organizations. A recent example is the NFL revoking its tax exempt status.
  • A potential increase in the excise tax in investment earnings.
  • Increased scrutiny on the heels of the New York Attorney General’s investigation into the Trump Foundation.
  • Antitrust – President-elect Trump’s picks to lead the Federal Trade Commission and the US Department of Justice will determine the administration’s priorities on enforcement.

The first panel discussion featured Arent Fox Nonprofit Leader Richard Newman, Aronson LLC Nonprofit and Association Industry Services Group Partner Rob Eby, and Vice President and Financial Advisor for Morgan Stanley Matthew Teems. The group focused primarily on strategies for making and saving money. Those guidelines include:

  • 5% may no longer be a reasonable earning expectation.
  • In 2017, real estate may be a tool for exempt organizations looking to reduce expenses and in some cases generate tax exempt income.
  • Not all tax exempt organizations will qualify for the real estate tax exemption, pay careful attention to lease/buy comparisons.
  • Some tax exempt organizations qualify for indirect federal tax subsidy through the use of tax exempt bonds to finance real estate acquired for exempt use.

Good governance was the central theme for the second panel, which included Mr. Teems, Aronson LLC Nonprofit and Association Industry Services Group Partner Gregory Plotts, Arent Fox Nonprofit Partner Sean Glynn, and Vice President of Commercial Insurance at Sahouri Insurance Allen Hudson. The group focused on investment committee responsibilities, audit committee responsibilities, and new accounting standards. Major takeaways include:

  • Investment Committees should draft an Investment Policy Statement (IPS) detailing objectives of the Investment Portfolio.
  • Audit Committees must understand critical accounting policies, key judgments and estimates, and how they affect financial results.
  • Relationships with auditors are important. They should be selected carefully, pay attention to their qualifications, independence, and performance. Don’t forget to hold an executive session with auditors.

Additionally, three new Accounting Standards, which will take effect soon include: Financial Presentation for Exempt Organizations (Effective in 2018); Revenue Recognition (Effective in 2019); and Lease Accounting (Effective in 2020).

For more information on the event, the new accounting standards, or Aronson, please contact Greg Plotts at gplotts@aronsonllc.com.

How Do I Account for Cloud Computing?

frustrationOn April 15, 2015, the FASB issued ASU 2015-05 focusing on customer’s accounting for internal-use software especially fees paid in a Cloud Computing Arrangement (CCA). From time to time, lack of explicit guidance about fees paid in a CCA has caused unnecessary costs to organizations in extra accounting fees.

The major changes in the update include eliminating the analogy to leasing guidance, adding a few more subtopics in defining software license and service contract, and some other amendments. If an organization obtains a software license for cloud computing service, it should account for that license consistently with the acquisition of any other license of an intangible asset. A software license will be accounted for differently based on its type and payment method. If it is a perpetual software license which the organization pays a one-time license fee then the costs should be capitalized. If the organization pays the software license as a subscription then the cost should be expensed.  Otherwise, the organization should account for the cloud computing fees for service contract as either prepaid expenses or operating expenses. The new glossary added definitions for “hosting arrangement” and “without significant penalty”.

In summary, when dealing with accounting issues of cloud services, the organization should disclose them in a way similar to other licenses, under the scope of intangible asset instead of leases.

Fundraising Strategies: How to Reach Millennials

MP900439424Millennials are now the largest age group, and soon will surpass baby boomers in having the largest buying power by 2017. There is a lot of incentive and opportunity for organizations, including non-profits, to engage with this generation. But millennials have changed the face of communication, particularly with those wishing to advertise to them, and the old ways of fundraising have been become less effective. So how can a non-profit organization best engage with millennials, and earn a loyal following among them? See below for a few tips on how to engage millennials better in your organization.

  • Millennials, like most people, like to feel that they are making a real difference with their donation. They care about the mission, not the organization. When communicating your message, emphasize the mission and how it relates to what an ordinary person can provide to help the mission succeed. Use specific facts and numbers to show the impact of a single donation, or better yet, a monthly donation. Be specific and clear about how the money they donate is used – this builds trust in your organization and that you are the organization most suited for the mission.
  • Make it as easy as possible for them to contribute – even just sharing the news about your mission can make a big impact and lead to more donors. The more options you give them, the more likely they are to donate something: money, time, awareness. All are valuable.
  • You can accomplish this is through your website: make your website simple, easy to understand and navigate, and mobile compatible. I cannot stress that enough. If someone is inspired to donate when they are not near a computer – don’t stand in their way! By the time they get home, they may have forgotten or become too busy to log into your computer-only website to donate.
  • Another way to reach mobile donors – team up with mobile payment options like Venmo, Apple pay, Google wallet, Paypal, etc. Don’t make your donors fish out their credit cards and carefully type in the number. A difficult transaction is a lost donor.
  • Don’t talk about the organization, talk about people who have been helped by your mission. People connect with people, not organizations. Start a blog or website, and post plenty of shareable pictures and direct quotes from the people who are helped. Keep people updated frequently on your mission accomplishments – but don’t spam. People want to know how their donation has impacted the people in need they read about on your blog. The more updated your blog is, the bigger the perceived impact of your mission.

 

 

 

What Is a Joint Activity?

checklistA joint activity is the combination of fundraising and another function incorporated into a single activity. When accounting for joint activities, the criteria of purpose, audience, and content must be met to allow for the fundraising and other program to be accounted for separately. If these three criteria are not met, the entire joint activity must be accounted for as a fundraising activity.

To achieve the purpose criteria, the joint activity must accomplish either program or management and general functions. Program functions are those that call for a specific action by the audience that will help accomplish the organization’s mission. Comparatively, management and general functions are those that support the continued operation of the not-for-profit organization, apart from fundraising.

The audience of a joint activity must have a reasonable potential for the use of the specific action established by the joint activity or can assist the organization in achieving the goals of the joint activity. Provided that the audience is not targeted exclusively based on its fundraising potential, the audience criteria should be met.

A joint activity’s content may also be fulfilled through either program or management and general functions. To fulfill the organization’s program function, joint activity must call for specific action that will help accomplish the organization’s mission. Similarly, the fulfill management and general functions may be fulfilled through the joint activity to accomplish the content criteria.

The following is an example of a joint activity to meets all three criteria:

The Clean Street Foundation’s (CSF) mission is to limit the abuse of alcohol within the city of Thornville. CSF’s annual report states that one of its objectives in fulfilling that mission is to assist parents in preventing their children from abusing alcohol. As such, CSF mails brochures to the parents of all high school students in Thornville that explain the dangers associated with alcohol abuse. The brochures encourage parents to speak with their children about the dangers of alcohol abuse but also include a request for contributions.

In this example, asking parents to speak with their children about alcohol abuse is a call to action that satisfies the purpose criteria. Additionally, the parents of high school students are a reasonable audience for CSF. Finally, the content of the brochure helps to accomplish the organization’s specific mission through a specific call for action. CSF is able to classify the brochure program as a joint activity because it fulfills the criteria of purpose, audience, and content, while also soliciting contributions.

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