IRS

Let’s Talk About IRS Form 990

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Do you feel overwhelmed by IRS Form 990?  We want to provide helpful information for newly formed nonprofit organizations that are required to file IRS Form 990 Informational Returns. There will be several parts to this blog entry where we discuss certain aspects of Form 990 and steps that nonprofits can take to cut costs in its preparation. In this first segment, we will discuss the need to maintain proper bookkeeping practices. Yes, maintaining accurate financial data that is properly compiled is essential. Proper bookkeeping practices will result in cost or time savings in the long-run and should be at the top of every organization’s list of priorities when it comes to the financial operation of the organization.   If the organization uses an outside preparer, ask the preparer if they also provide bookkeeping services and whether the organization can receive a reduced fee for its Form 990 preparation if the preparer performs year long bookkeeping.

If the organization properly maintains its financial data within an accounting software program, then the organization will also have the ability to produce financial statements. Of course proper setup of the accounting program along with accurate transaction reporting is necessary to achieve accurate financial statements. For instance, the nonprofit organization’s chart of accounts must be set up properly to generate reports that conform to Generally Accepted Accounting Principles. Hence, seeking accounting or bookkeeping advice in advance of preparation of Form 990 is warranted. Once the accounting software is set up properly and transactions are entered accordingly, then the organization can produce financial records such as a Statement of Activities and a Statement of Financial Position.

The Statement of Activities has several parts that identify the income and expenses of the organization for a specified time period such as an annual period. An organization’s Statement of Activities has strong importance not just for assisting a preparer with Form 990 preparation, but also the statement is extremely useful for budgeting, forecasting and other operational analysis purposes. Again, the organization must enter its transaction details accurately in order to receive ascertainable results.

Other transaction details will be reported on the Statement of Financial Position also known as a Balance Sheet. This information includes details about the organizations fixed asset mix, asset depreciation, liquidity, and stability. If balance sheet information is collected and reviewed overtime, the various data points can will also say something about the organization’s growth and growth potential. Two other financial statements – Statement of Cash Flow and Statement of Net Assets are also essential in providing a complete picture of the health of the nonprofit organization.

One should not take shortcuts when it comes to the financial health and viability of the nonprofit organization. Maintaining accurate financial data throughout the year in an accounting system with proper reporting of transaction history is the first step in potentially cutting the cost of Form 990 preparation. It also in the long run will pay off by yielding financial data necessary to improve efficiencies of the organization.

Private Benefit and Nonprofit Executive Compensation

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We hope to have several segments which address Tax-Exempt Compliance with applicable IRS regulations and the Internal Revenue Code.

A 501(c )(3) public charity receives tax exempt status upon demonstrating that it is organized and operates for a public purpose under 501(c )(3) of the Internal Revenue Code.  To maintain tax exemption, tax-exempt organizations must follow all laws and regulations pertaining to tax-exempt organizations.  The law provides that engaging in certain activities will jeopardize a nonprofit organization’s tax exemption.  The focus of this article is on a salient issue concerning executive compensation.  Can a nonprofit organization lose its tax-exempt status due to unreasonable compensation?  The answer is yes.

Briefly, the law provides that no part of a tax-exempt organization’s net earnings may inure to the benefit of an insider. An insider is a person who has a personal or private interest in the activities of the organization such as an officer, director, or a key employee.  The key here is net earnings of the organization privately benefited a key employee of the nonprofit organization.  Authorizing key employees, such as an Executive Director, Chief Executive or other key officers, to receive unreasonable compensation put the nonprofit’s tax-exemption at risk.  In other words, if compensation is given to any officer, director or key employee it must be reasonable or it can be deemed to be a private inurement jeopardizing the organizations 501(c )(3) status.  What is reasonable compensation depends of the totality of the circumstances.  Comparability data is one means of substantiating the reasonableness of executive compensation.  However, there are caveats with respect to its use, such as whether the data provides an accurate comparison.  The Exempt Organization section of the IRS has two useful articles on its Website on nonprofit compensation.  If you have difficulty finding them, you can e-mail us at info@scottpractice.com and will be happy to assist you.

IRS Automatic Revocation of Nonprofit Tax Exemption

Organizations that are required to file an IRS Form 990, 990-EZ or 990-PF or submit an annual electronic notice on Form 990-N are subject to automatic revocation if the exempt organization fails to file for three consecutive years.  The consequence of automatic revocation can be economically devastating for struggling non-profit organizations since the organization may be required to file a Form 1120 corporate income tax return or Form 1041 Estates & Trusts return and pay applicable taxes on income received.

 

Organizations previously eligible to file Form 990-EZ or Form 990-N for each of the three prior consecutive years that have lost their tax-exempt status may be eligible for retroactive reinstatement by filing for recognition of tax exemption on the required Form 1023 or Form 1024 and paying the appropriate user fee no later than 15 months of the date on the organization’s Revocation Letter (CP-102A) or the date the organization appeared on the Revocation List on the IRS Website, whichever is later.   This process is called the “Streamlined Retroactive Reinstatement Process”. 

 

The IRS will not impose a penalty for failure to file annual returns for the three consecutive taxable years that caused the revocation if the organization is successfully reinstated under the Streamlined Retroactive Reinstatement Process and files paper Forms 990-EZ for all 3 previous taxable years.  For organizations eligible to file Form 990-N, the organization is not required to file a prior year Form 990-N or Form 990-EZ to avoid penalties if reinstated.  

Organizations should contact a qualified attorney as soon as possible if they do not qualify for or need assistance complying with the requirements under the Streamlined Retroactive Reinstatement Process.  

Expanding Your Capacity

SP Consulting, A division of The Scott Practice, LLC provides technical, legal and consulting services all designed to help nonprofit organizations expand capacity and reach while remaining in compliance with federal regulatory requirements. This web ad provides information on our NPO compliance services.