2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

September 11, 2013

Presented by:Linda Geery, CPACathy Hudak, CPA

Amanda Williams, CPA

Avoiding Form 990 Pitfalls Part I

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Discussion Items

Private Inurement

• Compensation

• Documentation

• Consequences

Recommended Policies

Exempt Status Revocation

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Private Inurement

Organizations seeking tax-exemption under IRC Sec. 501(c)(3), (4), (5), (6), (7), (9), (10), (11), (13), (19), (26), or (29)

Must be organized and operated so that no part of their net earnings inure to the benefit of any private shareholder or individual.

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Private Foundations and Private Inurement

With limited exceptions, private foundations are prohibited from conducting any financial transactions with insiders

Violation of this prohibition may subject certain insiders to the Section 4941 excise tax on self-dealing.

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Who Is Considered An “Insider?”

Private shareholder or individual who has a personal and private interest in the activities of the organization

• Insiders in control of the decisions of the entity and can include trustees, officers, members, founders, and even contributors or other third parties

• These individuals cannot receive a distribution of funds from the organization except as reasonable payment for goods and services

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

What is Reasonable Compensation?

Determining reasonableness of compensation is based on the facts and circumstances

• Includes all fringe benefits

• Includes retirement plan contributions

Standard used to defend compensation agreements is the "rebuttable presumption documentation standard"

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

What Data is Comparable?

Compensation paid by similarly situated organizations (taxable and tax-exempt) for functionally comparable positions

Availability of similar services in the geographical area

Current independent compensation surveys

Written employment offers to the disqualified person from other similar institutions, dealing at arm’s length

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Consider All Cash and Non-Cash

Salary, bonus, fees

Noncash:

• Deferred compensation

• Premiums paid for insurance coverage (life, health, disability)

• Club membership

• Automobile

• Foregone interest on below market loans

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Rebuttable Presumption Documentation Standard

Payments under a compensation arrangement are presumed to be reasonable, if• The arrangement or terms are approved in advance

by an authorized body of the organization, who does not have a conflict of interest with respect to the compensation arrangement

• The authorized body obtained and relied upon appropriate data as to comparability prior to making its determination

• The authorized body adequately documented the basis for its determination concurrently with making that determination.

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

IRS Rebuttals

If those 3 requirements are satisfied, then the IRS may rebut the presumption of reasonableness only if • They develop sufficient contrary evidence to

challenge the appropriateness of the comparability data relied upon by the authorized body.

• Fixed Payments: Rebuttal evidence is limited to evidence relating to facts and circumstances existing on the date the parties enter into the contract (except in the event of substantial nonperformance).

• Other Payments: Rebuttal evidence may include facts and circumstances up to and including the date of payment.

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Unreasonable Compensation

To prevent the assertion of private inurement, transactions with the organization's insiders that appear to unreasonably benefit the insider should be avoided• Does not prohibit an organization from

transacting business with members of its board of directors or paying competitive salaries

• Certain guidelines should be applied, and all transactions should be properly documented before relationships with insiders are formed

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

What Steps Should Be Taken?

Form a Compensation Committee• Members of the governing body, unrelated to & not

controlled by, disqualified person• Reviews the compensation packages of the highest

ranking officers and carefully documents job duties and special skills to help establish proper compensation levels

Actively solicit competitive bids from suppliers of the goods and services needed by the organization

Review every financial relationship with an insider for reasonableness • There is no de minimis rule for

the prohibition against private inurement

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

What Steps Should Be Taken?

Document the price for the sale of property to, or purchase of property from, an insider by an independent appraisal that is properly prepared by an expert

Properly document all transactions

Determine if any applicable state laws are violated by the transaction and correct the transaction if necessary to comply with state law

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Consequences

Intermediate sanctions exist to curb abuses by (or inurement to) disqualified persons

Disqualified Persons: Persons or entities that have substantial influence over the affairs of

501(c)(3) public charities

501(c)(4) organizations

501(c)(29) organizations

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Tax on Disqualified Persons

Disqualified persons who receive economic benefits from an applicable tax-exempt organization in excess of the value of such benefits are subject to:• Excise tax equal to 25% of the excess benefit

received

• Penalty equal to 200% of the excess benefit involved can be imposed if excess benefit transaction (EBT) is not corrected within the prescribed period

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Tax on Organization Manager

If a tax assessed against disqualified person, any organization manager who participated in EBT is subject to tax equal to 10% of the excess benefit.

Participated knowingly, willfully, and without reasonable cause • Not considered "knowingly" if the appropriate

authorized body has met the rebuttable presumption requirements for the transaction

• Willful simply means that participation is voluntary, conscious, and intentional, without regard to motive

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Policies

Tax law generally does not mandate particular management structures, operational policies, or administrative practices

IRS believes that a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance • Clearly articulated purposes that describe its mission

• Knowledgeable and committed governing body and management team

• Sound management practices

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Encouraged Policies

Executive Compensation Policy• A NP organization should not pay more than

reasonable compensation for services rendered

• Process in place by which compensation should be determined by persons who are knowledgeable in compensation matters and who have no financial interest in the determination

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Encouraged Policies

Conflict of Interest Policy• Address potential conflicts of interest involving

their directors, trustees, officers and other employees

• Adoption of a policy and regular evaluation of the policy requiring directors and staff to act solely in the interests of the charity without regard for personal interests

• Include written procedures for determining whether a relationship, financial interest, or business affiliation results in a conflict of interest and should prescribe a course of action in the event a conflict on interest is identified

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Encouraged Policies

Investment Policy• Governing body or other key individuals may be

required to oversee or approve major investments made by the organization

• This could include investments in joint ventures, for-profit entities, and financial products or investments that require financial and investment expertise

• Written policy and procedure to evaluate its participation in these investments and to take steps to safeguard the organization’s assets and exempt status if they could be affected by the investment arrangement

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Encouraged Policies

Fundraising Policy• Adopt and monitor policies to ensure that

fundraising solicitations meet federal and state law requirements and solicitation materials are accurate, truthful and candid

• Charities are encouraged to also keep fundraising costs reasonable and are required to report on these costs and practices on the Form 990

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Encouraged Policies

Governing Body Minutes and Records• IRS encourages governing bodies and sub-

committees to take steps to ensure that minutes of their meetings, actions taken by written action or outside of meetings, are contemporaneously documents

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Encouraged Policies

Document Retention and Destruction Policy

• Adopt a written policy establishing standards for document integrity, retention, and destruction

• Include guidelines for handling electronic files, backup procedures, archiving of documents, and regular check-ups of the reliability of the system

• IRS requires books and records kept that are relevant to its tax exemption and its filings with the IRS

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Encouraged Policies

Ethics and Whistleblower Policy• Board bears responsibility for setting ethical standards

and ensuring they permeate the organization and inform its practices

• Adopt and regularly evaluate a code of ethics that describes behavior it wants to encourage, and discourage

• Communicate and cultivate a strong culture of legal compliance and ethical integrity

• Adopt policy and procedures for handling employee complaints and by which an employee can report in confidence any suspected financial impropriety or misuse of charitable resources

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

How Exempt Status Can Be Revoked

IRS Notice to organization

Legislation

US Supreme Court

Temporary or Final Regulations

A revenue ruling, revenue procedure, or other guidance published in an Internal Revenue Bulletin

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Prospective vs. Retroactive Revocation Prospective: Exempt status is revoked because of

material change in character, purpose, or method of operation that is inconsistent with its exempt purpose

Retroactive: Organization omitted or misstated a material fact, operated in a manner materially different from that described in its application for recognition of exempt status, or engaged in a prohibited transaction, the revocation may be retroactive to the date the organization originally qualified as exempt

Example: Tax-exempt school changing their admissions policy to exclude applicants of a particular national or ethnic origin.

IRS determined the new policy was racially discriminatory and revoked the status of the organization to the date of the policy change.

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Acts for Revocation

Form 990 Non-Filing• If required but failed to file Form 990, 990-PF,

990-EZ or 990-N e-Postcard for three consecutive years, automatically loses its exempt status effective the filing date of the third year return

Private Inurement • Organizations that are tax exempt must be

organized and operated so that no part of their earnings inure (i.e. accrue) to the benefit of any private shareholder or individual

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Acts for Revocation

Substantial Lobbying Activities• For 501(c)(3) organizations that make the 501(h)

election, amounts exceeding the prescribed limitation are subject to a 25% excise tax

• If the electing organization’s lobbying expenditures normally exceed 150% of the prescribed amount, its exempt status will be revoked

• Ineligible and non electing organizations remain subject to the subjective substantial part test of IRC 501(c)(3)

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Acts for Revocation

Participation in political campaigns of candidates for local, state or federal office

• Must absolutely refrain from this activity

Trade or Business

• Must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Acts for Revocation

Commercial-type insurance• May not provide commercial type insurance as a

substantial part of its activities

Illegal Activities• May not have purposes or activities that are

illegal or violate fundamental public policy

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Effect of Revocation

May be required to file a Form 1120 (Corp Return) or Form 1041 (Estates/Trusts return)

Loss of exempt status may impact the organization’s activities or ability to solicit tax deductible contributions• Contributions deductible if made before

announcement in IRS Bulletin stating contributions are no longer deductible, or before date specified in announcement as the date deductibility is terminated

• IRS may disallow any contribution made after the date of revocation by a contributor who had knowledge of revocation, was aware that such revocation was imminent or was in part responsible for, or was aware of, the activities that caused revocation

2013

Nonprofit and

Association

Roundtable

Series

September 11

Avoiding Form

990 Pitfalls

Part I

Presented by:

Linda Geery,

CPA

Cathy Hudak,

CPA

Amanda

Williams, CPA

Questions or Comments?