Mission Accountable is pleased to present another guest author, J. Daniel Beirute, an attorney serving churches and ministries across the U.S.

Internal Revenue Code section 7611, also referred to as the Church Audit Procedures Act, governs attempts by the IRS to audit a church. According to this law, the IRS may only initiate a tax inquiry of a church if the IRS’s Director of Exempt Organizations Examinations reasonably believes that the organization: (a) may not qualify for federal income tax exemption; or (b) may not be paying tax on unrelated business or other taxable activity.

The IRS may arrive at this “reasonable believ” regarding a church’s activities from information found in sources such as a new newspaper or magazine articles or ads, television and radio reports, Internet web pages, voters guides created and/or distributed by the church, tax returns filed by the church, and information provided to the IRS by informants or other agencies.

These rules do not prevent the IRS from requesting information from a church which does not pertain primarily to the church’s tax status or liability; which pertains to criminal investigations or a church’s failure to file a tax return; of which pertains to donors to the church.

Contact Dan Beirute if your organization receives any inquiry from the IRS.

With limited resources and tightening budgets, establishing effective internal controls can become tricky. Controlling the cash flowing into and out of the organization is supremely important and can generally be done effectively with the personnel and board members that are already in place. The single most important tenet of a control structure, especially in cash disbursements, is to limit opportunity by segregating duties. Think about the person that performs the most duties related to cash disbursements in your organization. What happens if that person receives some added motivation such as an ill family member with medical bills or a spouse losing a job? Could they rationalize the need for additional funds and ultimately cause damage to your organization? As honest as you perceive people in your organization to be, segregation of duties helps keep these people honest. 

The following are a list of helpful controls that limit the ability to perpetrate and conceal theft of cash. Read the rest of this entry »

Case law has defined the responsibilities of tax-exempt boards. Normally referred to as the 3D’s (duty of care, duty of loyalty and duty of obedience), the board’s actions primarily are centered on organizational oversight and policy setting. The chief executive is responsbility for managing the organization’s operations and resources. If the board oversteps and becomes too involved in operations, the organization’s executive management may become stiffled or feel threatened. If the chief executive does not openly communicate critical issues to the board, the board becomes apprehensive that resources and mission may be at risk.

So what is the solution?

Each party (board and chief executive) must understand their missional roles and responsibilities. Governance is the exercise and assignment of power and authority. Boards have a unique opportunity to partner with the chief executive in missional objectives.

Think about the following if, then statements: Read the rest of this entry »

Are you considering changing accounting software? It is a daunting task. Your current system has gotten outdated and hardly anyone is supporting it anymore. Maybe you’ve gotten too big or your transactions too complex. Or maybe you are working harder than the system, to generate reports needed by management. I’ve been through a few of these conversions and they are no picnic. They’re brought about by all kinds of different factors and it’s rare that you have someone on staff that has the experience of changing software.

Let’s take a look at some of the things to think about before making that jump. There are times when a change is absolutely necessary, but sometimes you can fall into the “grass is always greener” mentality and make a decision before you’re ready.

Read the rest of this entry »

A client commented that some business dealings are necessary evils; but what makes it so much better is when the people you’re dealing with are nice and care about you and your business. Many of our relationships are formed out of necessity. When we see beyond the need of the transaction and focus on the need of the person (to find direction, to feel special, to be encouraged and to succeed); we can not only have an impact but develop a valuable relationship. 

For more information on leadership qualities, see The 21 Indispensable Qualities of a Leader by John Maxwell.

When an employee is paid for his or her services to a company, an entry must be made to record salary expense. If the gross amount of an employee’s salary was equal to the amount that would ultimately be paid out in cash, the accounting would be simple. An entry would be made to debit payroll expense and credit cash. For example, if an employee’s salary for the pay period was $1,000, the entry would be as follows:
                            DR Payroll Expense         1,000
                            CR Cash                                          1,000

However, the amounts paid to employees will never reflect the gross amount of salary expense, due to payroll taxes and other voluntary withholdings such as taxes, insurance premiums and 401(k) contributions. Amounts withheld from an employees’ paycheck, for their elective deductions and payroll taxes, are never an expense of the company; the amounts would be recorded as a liability when withheld and the liability relieved when paid. The payroll expense will still be recorded gross, however the amount paid out in cash is reduced by the amounts withheld for payroll and income taxes, insurance premiums, 401(k) contributions, or other voluntary withholdings. The difference between the gross payroll expense and the net cash paid out is recorded as a liability. Read the rest of this entry »

In February 2009 Congress approved the American Recovery and Reinvestment Act of 2009. Billions of dollars will be awarded to agencies and organizations in an effort to stimulate our economy. For the first time many organizations will meet the requirements stipulated by the Single Audit Act of 1984. If an organization annually expends more than $500,000 in federal awards, the organization is required to comply with the Single Audit Act of 1984, see this post. 

Is your organization ready for the strict rules of oversight, transparency and accountability? Can your internal control structure prevent and detect fraud? In an effective internal control system, the following five components work to support the achievement of the organization’s mission, strategies and objectives:

1. Control environment – describes the “consciousness” of the individuals within the organization. This element is the foundation for the remaining components and is exhibited by discipline and structure.

2. Risk assessment – describes how management identifies, analyzes and manages the risks relating to preparing financial statements in accordance with GAAP.

3. Control activities – defines the organization’s policies and procedures in accomplishing its objectives.

4. Information and communication – mechanism for transmitting pertinent information timely, so that individuals can fulfill their responsibilities.

5. Monitoring – determines the quality and effectiveness of the system.

Will your internal control structure provide the boundaries necessary to ensure that the federal funds are expended appropriately? If you are uncertain, consider having your system evaluated before you accept and expend the federal funds.  

For more information about the American Recovery and Reinvestment Act of 2009, see www.recovery.gov.