Is your tax exempt organization planning an inventive, special event or a fundraising game? Texas lawmakers take a strict view on gambling/gaming laws, which can affect your organization. Consider the following when planning your special event:

• Is there a game of chance?
• Does the game involve cards, dice, or other gambling devices?
• Are the chances of winning equal for all players excluding the effects of skill?

There are certain common events that have been ruled against or could possibly constitute illegal gambling. These include:

• An entry fee to participate in a game of chance.
• A rubber duck race requiring an entry fee.
• A poker run where individuals pay for cards to see who gets the best hand to win a prize.
• Many more possible….

If your organization is still considering certain gaming activities, there are steps you can take to make the event fun and legal. Consider these options:

• No fee to enter or play, with the exception of a food charge (then we recommend you solicit a contribution for the food.)
• Each participant that comes must be in consideration for the prize offered.
• Charge an entry fee but award no prizes for winning or the prizes could be offered as door prizes with everyone having the possibility of winning (This will generally not substitute for casino nights, but may work with other games.) 

For annual gaming revenue that exceed $15,000 the new redesigned Form 990 requires additional disclosure of the event. Remember, this tax form is public record and assessable by state and local taxing authorities.

Illegal gaming for the participant is a Class C Misdemeanor. The host may be charged with a Class A Misdemeanor and face higher fines and possibility of jail time.

For more information on gaming and ramifications see Chapter 47 of the Texas Penal Code.

Your success in everything depends on effective communication. In order to be an effective communicator, it is important to:
1. keep your message simple and clear,
2. focus on the audience,
3. believe in your message, and
4. remember your goal is to motivate the audience to act.

The above is an excerpt from The 21 Indispensable Qualities of a Leader by John Maxwell.

The Pension Protection Act of 2006 includes provisions to encourage sponsors of 401(k) plans to automatically enroll eligible plan participants. This differs from previous requirements in which plan administrators would have to send out multiple requests each year, for eligible plan participants, and wait for them to hopefully respond. 

The automatic enrollment mechanism will allow the plan administrators to take out a specific pretax contribution percentage once the employee becomes eligible, unless the employee opts out. 

The Act also explains that the employee’s initial contributions into the plan will be deposited into certain default investment options, if the employee does not complete the necessary paperwork in the appropriate amount of time.  On October 24, 2007, the DOL published a final rule establishing qualified default investment alternatives, making it easier for employers to automatically enroll workers in their 401(k) and other defined contribution plans. 

Further, the IRS issued proposed regulations in November of 2007 to implement automatic enrollment which described 2 types of automatic enrollment arrangements.  

For more information including a fact sheet detailing the rules, go to the DOL’s Web site at http://www.dol.gov/ebsa/regs, or contact us.

After an organization has been created under state law, acquired an employer identification number and identified the appropriate federal tax classification, the organization is ready to prepare the Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code.

The purpose of the form is to apply for tax exemption under Section 501(c)(3) of the Internal Revenue Code. This application is due within 27 months from the end of the month in which the organization is formed. This form can be cumbersome as the IRS requires specific financial data, organizing documents, and narrative description and details of the organization. The estimated average times to complete the form, including recordkeeping, learning about the law and preparing the form, per the IRS, is over 150 hours. Therefore, I recommend having a tax professional with experience in this area assist in preparation of the form.

Certain organizations are considered tax exempt under Section 501(c)(3) without having to file the Form 1023. These organizations include:

• Churches 
•  Integrated auxiliaries of churches and conventions or associations of churches 
• Any organization that normally has less than $5,000 in gross receipts in each taxable year

The Form 1023 is a public document along with the Form 990 and 990-T. The organization should make this form available for public inspection and is required to provide, upon request, copies without charge.

If you need more information about the Form 1023 and the application process, please contact me.

11/14/08 Posted by Jamie Graham

In today’s world, organizations must consider the strength of their internal controls more than ever. It is important to periodically review your internal controls to ensure that they are well-designed and operating effectively. To determine if your system is well designed, take a particular type of transaction and trace it from its origin to its ultimate conclusion, asking yourself, “What could go wrong with this system?” To evaluate the operating effectiveness, ask the various personnel involved in processing the transaction how they perform the various tasks, and watch them actually do the work. You will be better able to determine if they are following the appropriate procedures.

When going through this review, it is important to take the “person” out of the control and ask yourself, “If I had an unknown person performing this task, would I be concerned?” Because of the very nature of the types of services that most not-for-profits provide, they tend to hire caring, trustworthy individuals to perform various tasks. While trust is certainly a needed attribute to have in an employee, it cannot serve as your only internal control. If you also believe that an employee would never do anything wrong, you are under a false sense of security. We usually suggest to our clients that the internal controls be designed in such a way that it eliminates the opportunity for an employee to commit fraud. This design not only can protect you, but the employee as well.

A key component of a well-designed internal control system is segregation of duties. Proper segregation also helps to eliminate the opportunity to make errors or commit fraud.

To create proper segregation, the tasks of:
(1) authority (approving transactions, writing off bad debt),
(2) custody (ability to write checks, make bank deposits, process cash receipts) and
(3) recordkeeping (posting transactions to the general ledger)
should be performed by different personnel or functions.

How do you, the organization, monitor internal controls? Write a comment…

Nonprofit organizations must meet certain requirements to maintain its tax-exempt status. To protect your tax-exempt status, make sure your organization complies with the following rules:

• The articles of incorporation must limit the corporation’s purposes to one or more of the exempt purposes set forth in IRC section 501(c)(3). If your exempt purpose has changed since inception of the corporation, your tax-exempt status could be at risk. In addition, the corporation must pay taxes on income from activities unrelated to its exempt purpose and cannot make substantial profits from these unrelated activities.

• Upon dissolution, the corporation’s assets must be distributed to another charitable corporation.

• The corporation cannot contribute to or participate in political campaigns directly or indirectly. The corporation also cannot endorse or oppose (either verbally or in writing) a particular candidate.

• The corporation can engage in only limited lobbying activities. Excessive lobbying is prohibited.

• The corporation cannot be organized to financially benefit its members, officers, or directors. A dividend may not be paid to, and no part of the income of the corporation may be distributed to the corporation’s members, directors, or officers. However, reasonable salaries and expense reimbursements are permitted.

For additional information, go to http://www.irs.gov or contact us.

There are many fund-raising activities from which a nonprofit organization may choose to solicit funds.  Depending on the type of fund-raising activity chosen by the organization, the activity may include joint activities that incur costs that would otherwise be associated with program or supporting services.

For organizations that report functional classifications of costs, AICPA Statement of Position (SOP) 98-2 establishes financial accounting standards for accounting for costs of joint activities related to fund-raising in order to provide assurance to external users of financial statements that fund-raising and other functional classifications of costs are stated fairly. If the fund-raising activity is considered a joint activity meeting certain criteria outlined in SOP 98-2, the costs attributable to a particular function should be charged to that function and the remaining joint costs that cannot be attributed to a particular function should be allocated between functional classifications. If the activity does not meet these criteria, all of the costs of the joint activity should be reported as fund-raising, with the exception of costs incurred for exchange transactions. If the joint costs are allocated, the organization should allocate costs using a rational and systematic method that results in a reasonable allocation of costs, applied consistently.

SOP 98-2 also requires financial statement disclosures about the nature of the activities for which joint costs have been allocated and the amounts of joint costs.

See AICPA SOP 98-2, <em>Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising</em> for more information and specific examples related to this topic.

Effective October 3, 2008, the Federal Deposit Insurance Corporation (FDIC) raised their coverage limits from $100,000 to $250,000. The new limits for the most common types of accounts are as follows:
     Single Accounts (owned by one person): $250,000 per owner
     Joint Accounts (owned by two or more persons): $250,000 per co-owner
     IRAs and Certain Other Retirement Accounts: $250,000 per owner

These limits will be in effect until December 31, 2009. On January 1, 2010, the coverage limits will return to $100,000 for all accounts except IRAs and Certain Other Retirement Accounts. These accounts will continue to be covered at $250,000.

To calculate your FDIC insurance coverage, go to www.fdic.gov/edie.

For other information, go to www.fdic.gov or contact us at www.rcosolutions.com.

The redesigned Form 990 asks a number of new questions about policies and procedures. One of the policy questions asks if the organization has a written document retention and destruction policy?

Why is this important to an organization? Maintaining formal documents and records requires space, however these documents substantiate transactions and decisions of organization. Some documents should be retained for the life of the organization and some should be discarded in the short-term.

What should be kept and for how long should be included in the organization’s Retention/Destruction policy. The policy should identify the record retention responsibilities of staff, volunteers, board members and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records.

For additional information from the IRS, see this article.