form 990 challenges for tax advisers to nonprofit...
TRANSCRIPT
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Form 990 Challenges for Tax Advisers to Nonprofit Entities Identifying Areas of IRS Scrutiny in Exempt Organization Tax Return and Schedules
MONDAY, NOVEMBER 20, 2017, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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FOR LIVE PROGRAM ONLY
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Nov. 20, 2017
Form 990 Challenges for Tax Advisers
Christopher M. Pekula, CPA, Manager, Tax Strategies
Kreischer Miller, Horsham, Pa.
Katherine Breslin
Laura Solomon, Esq. & Associates, Ardmore, Pa.
Richard Ruvelson, Principal
WithumSmith+Brown, Bethesda, MD
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Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
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IRS FORM 990: TOP 10 REPORTING ISSUES & POTENTIAL
PITFALLS FOR EXEMPT ORGANIZATIONS
November 20, 2017
Copyright 2017 Laura Solomon, Esq. & Associates
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OVERARCHING GOALS
DISCUSS CHANGING ENVIRONMENT
UNDERSTAND FORM 990
OVERVIEW OF PURPOSE, CONTENT, AN
REPORTING OBLIGATIONS
IDENTIFY COMMON ERRORS AND TOP 10
PITFALLS
ADDRESSING KEY AREAS IN REPORTING,
WHAT’S REQUIRED, AND HOW TO AVIOD
THEM
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CHANGING ENVIRONMENT
HIGHLY REGULATED AND INCREASED SCRUTINY
Tax Reform?
Wide implications
U.S. SENATE FINANCE COMMITTEE
• Pension Protection Act
U.S. HOUSE WAYS AND MEANS COMMITTEE
• Focusing on exempt hospitals
INTERNAL REVENUE SERVICE
• Audits, initiatives on politicking, compensation, UBI
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CHANGING ENVIRONMENT
PUSH FOR TRANSPARENCY AND COMPLIANCE
9/11
• Charities used to channel terrorist funds
• Treasury Department Guidelines
ENRON- SARBANES- OXLEY ACT
• Whistleblower, Document Retention Policies
(required)
• Audit Committees, Financial Statement
Certification (recommended)
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CHANGING ENVIRONMENT
EVOLVING BEST PRACTICES
• Panel on Nonprofit Sector “Principles for Good
Governance”
• Independence Sector “Code of Ethics”
PUSH FOR TRANSPARENCY AND COMPLIANCE
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CHANGING ENVIRONMENT
SIGNIFICANT REGULATORY STRUCTURES
FEDERAL
• Pension Protection Act
• Treasury Department – updates to Form 1023, 990
STATE
• Solicitation Act, real estate, sales tax changes
• Lobbying regulation
LOCAL
• Lobbying regulation
• Real estate tax challenges
• Gaming
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UNDERSTANDING FORM 990
PURPOSE OF THE FORM
PROMOTE COMPLIANCE
ENSURE ACCOUNTIBILITY
ENHANCE TRANSPERACY
SERVE AS A PUBLIC RELATIONS TOOL
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UNDERSTANDING FORM 990
CONTENT
SIGNIFICANT AMOUNT OF FINANCIAL AND NONFINACIAL REPORTING
REVENUE – focus on qualification of tax-exempt status
EXPENSES – reporting on a functional basis
FOUR AREAS OF REPORTING IMPACT
• Governance
• Programmatic
• Financial
• Tax Compliance
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UNDERSTANDING FORM 990 CONTENT – CORE FORM
PART I - Summary
PART II – Signature Block
PART III – Statement of Program Service Accomplishments
PART IV – Checklist of Required Schedules
PART V – Statements Regarding Other IRS Filings and
Tax Compliance
PART VI – Governance, Management, and Disclosure
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UNDERSTANDING FORM 990
CONTENT – CORE FORM
PART VII – Compensation of Officers, Directors, Trustees,
Key Employees, Highest Compensated Employees, &
Independent Contractors
PART VIII – Statement of Revenue
PART IX – Statement of Functional Expenses
PART X – Balance Sheet
PART XI – Reconciliation of Net Assets
PART XII - Financial Statements and Reporting
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UNDERSTANDING FORM 990
CONTENT – SUPPORTING SCHEDULES
SCHEDULE A – Public Charity Status and Public Support
SCHEDULE B – Schedule of Contributors
SCHEDULE C – Political Campaign and Lobbying Activities
SCHEDULE D – Supplemental Financial Statements
NOTE: FASB Update 2016-14; Change To Net Assets With And Without
Donor Restrictions
SCHEDULE E – Schools
SCHEDULE F – Statement of Activities Outside the U.S.
SCHEDULE G – Fundraising or Gaming Activities
SCHEDULE H - Hospitals
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UNDERSTANDING FORM 990
CONTENT – SUPPORTING SCHEDULES
SCHEDULE I – Grants and Other Assistance to Orgs,
Govts, & Individuals in the U.S.
SCHEDULE J – Compensation
SCHEDULE K – Tax-Exempt Bonds
SCHEDULE L – Transactions with Interested Persons
SCHEDULE M – Non-Cash Contributions
SCHEDULE N – Significant Disposition of Assets
SCHEDULE O – Supplemental Information
SCHEDULE R – Related Organizations and Unrelated
Partnerships
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UNDERSTANDING FORM 990
REPORTING OBLIGATIONS
ALL TAX-EXEMPT ORGANIZATIONS
ANNUAL FILING
• 990, 990-EZ, 990-T, 990-PF, 990-N,
e-Postcard
REVOCATION FOR FAILURE TO FILE
FOR THREE YEARS
• Reinstatement
SUBJECT TO PUBLIC DISCLOSURE
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UNDERSTANDING FORM 990
PUBLIC DISCLOSURE REQUIREMENTS
WHAT’S REQUIRED
• Form (including all schedules, supporting
documentation, & attachment) is a matter of
public record
• All information reported is made available by the
IRS for public inspection – www.guidestar.org
• Exemption application (Form 1023) is also
subject to public disclosure
WHO’S LOOKING
• Org staff, local media, Board members,
Watchdog groups, State charity regulators,
donors, AND THE IRS….
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UNDERSTANDING FORM 990
IRS 2016 EO COMPLIANCE REVIEW
AREAS OF FOCUS
• Exemption: Non-exempt purpose activity and private
inurement
• Protection of Assets: Self-dealing, excess benefit
transactions, and loans to disqualified persons
• Tax Gap: Employment tax and unrelated business income
tax liability
• International: Oversight on funds spent outside the U.S.,
exempt organizations operating as foreign conduits, and
Report of Foreign Bank and Financial Accounts (FBAR)
requirements
• Emerging Issues: Non-exempt charitable trusts and IRC
501(r)
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COMMON ERRORS ON FORM 990
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COMMON ERRORS ON FORM 990
Instructions:
Glossary:
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COMMON ERRORS ON FORM 990
Instructions:
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COMMON ERRORS ON FORM 990
X
X
X
X
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COMMON ERRORS ON FORM 990
X
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COMMON ERRORS ON FORM 990
Instructions:
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COMMON ERRORS ON FORM 990
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COMMON ERRORS ON FORM 990
Instructions:
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COMMON ERRORS ON FORM 990
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COMMON ERRORS ON FORM 990
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COMMON ERRORS ON FORM 990
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COMMON ERRORS ON FORM 990
Glossary:
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COMMON ERRORS ON FORM 990
X X
X
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COMMON ERRORS ON FORM 990
Instructions:
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IDENTIFYING TOP 10 PITFALLS
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REPORTING ISSUES – KEY AREAS
PITFALL #1 - PUBLIC SUPPORT TEST
COMPLETED ANNUALLY TO MAINTAIN PUBLIC
CHARITY STATUS (SCHEDULE A)
CHARITIES AVOID PRIVATE FOUNDATION
“DEFAULT” …
• 509(a)(1) – Supported by contributed income from
public or governmental sources (1/3 with 2% cap
on individual contributions, or “facts and
circumstances”)
• 509(a)(2) – Supported by program revenue and
investment income (1/3/with 1% cap, or $5,000)
• 509(a)(3) – Related to a public charity (Types I, II,
and III)
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REPORTING ISSUES – KEY AREAS
PITFALL #1 - PUBLIC SUPPORT TEST
CHALLENGES
• “Classification” of income – what counts and
what doesn’t
• Special considerations – “One-time” events
• Unusual grants
• Percentage is status for next year
• Multi-year “failure” of test
• 10% Facts and Circumstances
Under Sections 509(a)(1) and
170(b)(1)(A)(vi)
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REPORTING ISSUES – KEY AREAS
PITFALL #2 - UNRELATED BUSINESS INCOME
INCOME DERIVED
• From a trade or business (profit motive)
• That is regularly carried on, and
• Not substantially related to the organization’s
exempt purpose
SOME EXCEPTIONS
• Passive income – interest, dividends, royalties
• Rental income
• Volunteer labor, donated merchandise
Provided for convenience of members
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REPORTING ISSUES – KEY AREAS
PITFALL #2 - UNRELATED BUSINESS INCOME
WHAT DOES IT MEAN FOR YOUR
ORGANIZATION
• Too much of a good thing
• More may mean less
• Understanding the tax consequences
• Area of IRS focus
• How much is too much?
REPORTING REQUIREMENTS
• Question on “dashboard” of Form 990
• Form 990-T - when gross receipts related to the
activities are $1,000 or more
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REPORTING ISSUES – KEY AREAS
PITFALL #2 - UNRELATED BUSINESS INCOME
CHALLENGES
PROPER IDENTIFICATION
• Unrelated classified as exempt
• Unrelated excluded
EXPENSE ALLOCATIONS
• Improper or unsupported
• Align with activity – not “shared”
• Understanding the tax consequences
• Commerciality
TAX PROPOSALS
• NOL limitations and greater corporate & trust rate differential
• Taxation of name and logo licensing
• Separate calculation for each trade or business
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REPORTING ISSUES – KEY AREAS
PITFALL #3 - BOARD INDEPENDENCE
DEFINED
• Not compensated as an officer or employee
• Not receiving more than $10,000 as
independent contractor
• Neither the member nor a family member was
involved in a transaction or relationship reported
on Schedule L
Treasury Regulations provide guidance on a
“representative governing body” (Treas. Reg.
§1.509(a)-3(d)(3)(i))
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REPORTING ISSUES – KEY AREAS
PITFALL #3 - BOARD INDEPENDENCE
IMPACT TO YOUR ORGANIZATION
• Required? – Yes!
• Duties of care, loyalty, and obedience
• When? – All situations!
• Conflict of Interest Disclosure Policy
CHALLENGES
• Only know what we know
• Need transparency – perception
• Creates governance issues
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REPORTING ISSUES – KEY AREAS
PITFALL #4 - IN-KIND DONATIONS
RECEIVED IN THE FORM OF GOODS, SPACE,
AND/OR SERVICES
IMPACT TO YOUR ORGANIZATION
• Why important to recognize/report
• Public Support Test
• Receipt during start-up period
REPORTING REQUIREMENTS
• Schedule M, Non-Cash Contributions (stuff)
• IRS believes significant tax compliance issues
exist
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REPORTING ISSUES – KEY AREAS
PITFALL #5 - FUNDRAISING
INFORMATION ON FUNDRAISING PRACTICES
IN GENERAL AND SPECIAL EVENTS
(SCHEDULE G)
REPORTING REQUIREMENTS
• Professional fundraisers – Custody/control of
funds raised, and reasonableness of fees paid
• >$15,000 spent on professional fundraisers
• >$15,000 in fundraising income
• Certain level of detail for special events
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REPORTING ISSUES – KEY AREAS
PITFALL #5 - FUNDRAISING
CHALLENGES
• “Non-existent” fundraising expenses
• Inconsistencies in reporting
• State registration(s)
• IRS & State “hot button” – believes
there is significant noncompliance
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REPORTING ISSUES – KEY AREAS
PITFALL #6 - SIGNIFICANT DIVERSION OF ASSETS
INCLUDES ANY UNAUTHORIZED
CONVERSION OR USE OF THE
ORGANIZATION’S ASSETS
MUST DISCLOSE “MATERIAL” DIVERSIONS –
LESSER OF:
• $250,000;
• 5% of gross receipts; OR
• 5% of total assets
REGULATORS SCRUTINIZING HOW WELL
NONPROFITS SAFEGUARD CHARITABLE
ASSESTS
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REPORTING ISSUES – KEY AREAS
PITFALL #6 - SIGNIFICANT DIVERSION OF ASSETS
REPORTING REQUIREMENTS
• Part VI, Section A – Governing Body &
Management
• Diversions from PYs to which you became
aware of in the CY
• Must explain
• Nature and amount of diversion
• Corrective action plan
• Pertinent circumstances
• Schedule L reporting
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REPORTING ISSUES – KEY AREAS
PITFALL #6 - SIGNIFICANT DIVERSION OF ASSETS
CHALLENGES
• Concerns over public disclosure and
perception
• Some organizations choose not to
report
• IRS is reviewing
WASHINGTON POST DATABASE:
http://www.washington post.com/wp-
srv/special/local/nonprofit-div ersions-
database/
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REPORTING ISSUES – KEY AREAS
PITFALL #7 - COMPENSATION
WHAT’S REQUIRED
• Who
• Current and former
• Certain thresholds, certain positions
• What
• Current and deferred
• Other benefits
• Where
• All sources
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REPORTING ISSUES – KEY AREAS
PITFALL #7 - COMPENSATION
REPORTING REQUIREMENTS
• Governance perspective, policy perspective,
key individuals
• Detailed disclosure
• Certain positions, certain thresholds
• “Other” compensation
• Have you informed them?
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REPORTING ISSUES – KEY AREAS
PITFALL #7 - COMPENSATION
CHALLENGES
• Highly visible – users and interested parties
• Not doing your homework
• Scrutiny of key person compared to
compensation
• Private inurement – prohibited for all charitable
organizations
• Proposed intermediate sanctions application to
labor unions and trade associations
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REPORTING ISSUES – KEY AREAS
PITFALL #8 - INVESTMENTS
MORE SOPHISTICATION WITH PORTFOLIOS
SCHEDULE D – REPORTING BY ASSET TYPE
• Donor-advised funds
• Proposed donor-advised fund reporting
• Conservation easements
• Collections of art, historical treasures
• Escrow and custodial accounts
• Endowments
• Investments – Other securities
• Investments – Program-related
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REPORTING ISSUES – KEY AREAS
PITFALL #9 - RESTRICTED FUNDS
CONSIDER ACCOUNTING, TAX RULES, AND
DONOR INTENT
CLASSIFICATIONS
• Unrestricted net assets
• Temporarily restricted net assets
• Permanently restricted net assets
(endowments)
• Board-designated net assets
• Nonprofit Operating Reserve NCCS Wiki –
www.nccs2.org/wiki
ENDOWMENT MANAGEMENT IS GOVERNED
BY STATE LAW
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REPORTING ISSUES – KEY AREAS
PITFALL #10 - TRANSACTIONS WITH RELATED PARTIES
AND “INTERESTED PERSONS”
WHO ARE THE PLAYERS
• Related Party – Parent, Subsidiary,
Brother/Sister, Supporting/Supported
• Interested Persons – Defined by purpose and
context of activity
• Disqualified Person – Any person in a position
to exercise substantial influence over the affairs
of the organization
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REPORTING ISSUES – KEY AREAS
PITFALL #10 - TRANSACTIONS WITH RELATED PARTIES
AND “INTERESTED PERSONS”
WHAT’S REPORTED(SCHEDULE L)
• Excess benefit transactions
• Loans
• Grants or other assistance
• Direct business relationships
• Indirect business relationships
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REPORTING ISSUES – KEY AREAS
PITFALL #10 - TRANSACTIONS WITH RELATED PARTIES
AND “INTERESTED PERSONS”
WHAT’S REPORTED(SCHEDULE R)
• Complex organizational structures
• Ownership of disregarded entities
• Relationships with taxable and tax-exempt
entities
• Relationships with controlled entities
• Significant activities conducted through
unrelated entity taxed as a partnership
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REPORTING ISSUES – KEY AREAS
PITFALL #10 - TRANSACTIONS WITH RELATED PARTIES
AND “INTERESTED PERSONS”
WHY REQUIRED
• Concern over use of related entities for
questionable purposes
• Identification of board independence
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REPORTING ISSUES – KEY AREAS
MORE PITFALLS – IS YOUR ORGANIZATION FILING IN ALL
REQUIRES STATES
Core Form and Schedule G
States to which Form 990 is provided and list of
states in which registered or licensed to solicit
contributions
Gaming
Is the organization properly licensed?
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QUESTIONS?
THANK YOU FOR YOUR PARTICIPATION! T O E N S U R E C O M P L I A N C E W I T H T R E A S U R Y D E P A R T M E N T R E G U L A T I O N S , W E W I S H
T O I N F O R M Y O U T H A T A N Y T A X A D V I C E T H A T M A Y B E C O N T A I N E D I N T H I S
P R E S E N T A T I O N ( I N C L U D I N G A N Y A T T A C H M E N T S ) I S N O T I N T E N D E D O R W R I T T E N T O
B E U S E D , A N D C A N N O T B E U S E D , F O R T H E P U R P O S E O F ( I ) A V O I D I N G T A X R E L A T E D
P E N A L T I E S U N D E R T H E I N T E R N A L R E V E N U E C O D E O R A P P L I C A B L E S T A T E O R
L O C A L T A X L A W P R O V I S I O N S O R ( I I ) P R O M O T I N G , M A R K E T I N G O R R E C O M M E N D I N G
T O A N O T H E R P A R T Y A N Y T A X - R E L A T E D M A T T E R S A D D R E S S E D H E R E I N .
M A T E R I A L D I S C U S S E D I N T H I S T A X P R E S E N T A T I O N I S M E A N T T O P R O V I D E G E N E R A L
I N F O R M A T I O N A N D S H O U L D N O T B E A C T E D O N W I T H O U T P R O F E S S I O N A L A D V I C E
T A I L O R E D T O Y O U R O R G A N I Z A T I O N ’ S I N D I V I D U A L N E E D S .
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RESOURCES
Form 990 – Internal Revenue Service
https://www.irs.gov/pub/irs-pdf/f990.pdf (Form)
https://www.irs.gov/pub/irspdf/i990.pdf(Instructions)
Washington Post
http://www.washingtonpost.com/wp-
srv/special/local/nonprofit-diversions-database/
Guidestar
www.guidestar.org
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RESOURCES
Treasury Regulations
https://www.irs.gov/Tax-Professionals/Tax-Code,--
and-Official-Guidance
FASB’s Nonprofit Financial Reporting Project
http://nonprofitblog.bdo.com/index.php/resources/no
nprofit-financial-reporting-resource-center/
http://www.fasb.org/jsp/FASB/FASBContent_C/Proje
ctUpdatePage%26cid%3D1176159286112%23due
www.Stayexempt.org
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CONTACT
Katherine Morgan Breslin, Esq. Laura Solomon & Associates
610-645-0992
Richard Ruvelson, Principal
Withium
301-272-6070
Let’s connect
on LinkedIn!
Christopher M. Pekula, CPA Kreischer Miller
215-441-4600 x 378
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