Not-For-Profit Advisor, 2005 Summer
This article is an update to an article that appeared in our Fall 2004 newsletter regarding IRS and Senate Finance Committee (SFC) activities focused on not-for-profit organizations. Our last article reviewed IRS announcements regarding increased enforcement efforts to identify and halt abuses by tax-exempt organizations and the SFC Roundtable on Charitable Governance that took place last summer. They are intended for 501(c)(3) entities, but can also be considered as “best practices” for other not-for-profit organizations. Following is an update on these activities.
IRS
In November 2004, the IRS revised Form 1023 (Application for Tax Exempt Status) to streamline the form and help the IRS identify fraud. In addition, the IRS released a statement of priorities for 2005. The IRS is clearly focusing on having a stronger enforcement presence and improving compliance. Targeted areas of scrutiny include abusive tax avoidance schemes and excessive compensation.
In January 2005, the Joint Committee on Taxation released a report requested by the Senate Finance Committee recommending tax-law changes and revenue-raising reforms. Recommendations for changes and areas of focus in the tax-exempt organization area included the following:
- 5 year review of exempt status of public charities and private foundations
- Involvement by exempt organizations in tax-shelter transactions
- Intermediate sanctions reform
- Increase in the amount of excise taxes imposed on public charities and private foundations
- Limit charitable deduction for contributions of clothing and household items
- Reform rules for charitable contributions of property
- Require public disclosure of Form 990-T
Senate Finance Committee
Following the SFC’s Roundtable on Charitable Governance last summer, the Committee requested the Independent Sector, a nonpartisan coalition of approximately 500 charitable organizations, to convene an independent national panel to make recommendations for improving governance and accountability in the not-for-profit sector. The Panel of regional non-profit leaders from around the country was formed last fall and consists of five work groups:
- Governance and Fiduciary Responsibilities
- Legal Framework
- Government Oversight and Self-Regulation
- Small Organizations
- Transparency and Financial Accountability
A Citizen Advisory Group was also formed. The Panel released preliminary recommendations in January, an interim report in March, and a final report on June 22, 2005. The full report can be found on the Panel’s website at Nonprofitpanel.org. Outlined below is a summary of the Panel’s recommendations:
1. Federal and State Enforcement
a. Congress should increase IRS resources for enforcement and oversight.
b. The IRS should share investigative wrongdoing information with state attorneys general.
2. IRS Reporting
a. The Form 990 should be improved for more accurate, timely reporting.
b. The Form 990 should be certified by the highest ranking officer in the tax-exempt organization.
c. Boards of directors should review Forms 990.
3. Periodic Review of Tax-exempt Status
a. Congress should not implement new requirement for IRS periodic review of tax-exempt status. The IRS should focus on review of current returns.
b. Boards of directors should review organization governing documents at least every 5 years.
4. Financial Audits and Reviews
a. Require audits for organizations with >$1M revenue.
b. Require reviews for organizations with $250,000 – $1M revenue.
5. Disclosure of Performance Data
a. Congress should not require additional performance reporting on Forms 990. Charitable organizations should report additional performance information in annual reports, on websites, etc.
6. Donor-Advised Funds
a. Require sponsoring charities to make minimum 5% distributions of aggregate donor-advised assets.
b. Strengthen laws to ensure donors or related parties do not receive inappropriate benefits from these funds.
7. Type III Supporting Organizations
a. Require increased Form 990 reporting.
b. Require minimum distributions.
c. Require increased control by supported organizations.
8. Abusive Tax Shelters
a. Increase penalties for participants and advisors.
b. Increase education for nonprofit organizations regarding reportable transactions.
9. Noncash Contributions:
a. Appreciated Property
i. Increase penalties for appraisers and donors.
ii. Require electronic filing of Forms 8282 and 8283.
b. Conservation Easements
i. Increase reporting and penalties.
c. Clothing and Household Items
i. Congress should not limit amount of deductions without further study.
ii. The IRS should provide a list of allowable deduction amounts based on thrift store sale prices.
10. Board Compensation
a. Compensation to board members is discouraged. Increase Form 990 disclosure for organizations that do pay board members.
b. Prohibit loans from public charities to board members.
c. Increase penalties on board members who approve excessive compensation.
11. Executive Compensation
a. Require more clear disclosure on Form 990.
b. Require full board of directors review of CEO compensation annually and board review of organization’s full staff compensation periodically.
c. No penalties for board members following rebuttable presumption procedures, even if compensation is found to be excessive. If rebuttable presumption procedures are not followed, and compensation is found to be excessive, penalties apply.
12. Travel Expenses
a. Organizations should have clear travel expense reimbursement policies.
b. Organizations should not pay for spouse, dependents, or others accompanying employee on travel.
c. Form 990 should require disclosure of whether organization has a travel policy.
13. Structure, Size, and Composition of Governance Boards
a. Minimum of 3 board members, 1/3 of which are independent and have been independent for the past 12 months. Require Form 990 disclosure of which board members are independent.
b. Federal tax laws or regulations should not set limit on number of board members. Boards should review size of board periodically.
c. Boards should have process in place to ensure they are carrying out oversight responsibilities and that members are aware of legal and ethical responsibilities.
14. Audit Committees
a. Boards should include some members with financial literacy.
b. Organizations that have audits should consider establishing an audit committee.
15. Conflicts of Interest and Misconduct
a. Organizations should adopt conflicts of interest policies and the IRS should require disclosure of whether a policy exists on the Form 990.
b. Organizations should adopt whistle blower policies.
With the recent scrutiny of not-for-profit organizations and focus on ethical conduct, we have seen substantial changes as organizations have improved their policies and procedures. We continue to recommend that all not-for-profit organizations have the following items in place:
• Ethics policy for all staff, board members and volunteers
• Conflict of interest policy for all staff and board members
• Whistleblower policy
• Board approval of all executive compensation and documentation of comparability data or other justification
• Travel expense reimbursement policy for all staff, board members and volunteers
In addition, we recommend that organizations very carefully review the Form 990 prior to filing to be sure all required information is reported clearly and accurately.
Finally, consideration should be given to establishing an audit committee of the board made up of independent (non-staff) board members, at least one of whom has a financial background and/or experience. The size of the board, availability of competent committee members, and the role of the finance committee (if a separate committee) should be considered. In some situations, the finance committee can fulfill the responsibilities of the audit committee so that only one committee is necessary.
We fully expect new legislation and increased reporting requirements in this area. As usual, we will work to keep you informed about new developments and advise you about appropriate action items for your organization.
