Ok that is a bunch of tax talk. How can this standard affect tax-exempt organizations? The Financial Accounting Standards Board actually addressed that issue specifically, in a staff position paper issued last year. There are several FIN48 issues that can affect tax exempt agencies, but the most common are (1) performing services that are not consistent with the organization’s tax exempt purpose and (2) unrelated business income.

The first assessment of any tax position is whether or not the position is more likely than not to be upheld during an IRS examination. If the position would be upheld, then it is NOT an uncertain tax position and there is NO liability.  If the position cannot be upheld, then FIN48 requires a liability to be recorded and disclosed. The calculation of the liability is prescribed but allows some judgement. The recorded liability is the difference between the benefit recorded (full amount) and the amount that would be 50% or more likely to be allowed after the examination. The disclosure will identify this as an uncertain tax position, and will raise red flags for an IRS audit. As reported in the Journal of Accountancy, the IRS is currently proposing companies with more than $10 million of assets to disclose uncertain tax positions on their annual returns. 

Need help in determining what is considered an “uncertain tax position”? See our next post.

However, there are circumstances where lobbying is allowed for certain eligible 501(c)(3)s. Under section 501(h), eligible 501(c)(3)s can elect to make lobbying expenses by filling out IRS Form 5768 Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation, which was revised in September 2009. Organizations making this election will have to pay an excise tax and cannot have lobbying expenditures that exceed the permitted amounts by more than 50% over a 4-year period without losing their tax-exempt status.

The extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures related to such activity do not normally exceed an amount specified in section 4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000. For any tax year in which an election under section 501(h) is in effect, an electing organization must report the actual and permitted amounts of its lobbying expenditures and grass roots expenditures (as defined in section 4911(c)) on its annual return required under section 6033. See Part II-A of Schedule C (Form 990 or Form 990-EZ). When an organization that has elected to have 501(h) provisions apply to them no longer wishes to have the provisions apply, the election must be revoked by filing another Form 5768.

Types of 501(c)(3)s that are eligible for this election include the following:

• Section 170(b)(1)(A)(ii) (relating to educational institutions),
• Section 170(b)(1)(A)(iii) (relating to hospitals and medical research organizations),
• Section 170(b)(1)(A)(iv) (relating to organizations supporting government schools),
• Section 170(b)(1)(A)(vi) (relating to organizations publicly supported by charitable contributions),
• Section 509(a)(2) (relating to organizations publicly supported by admissions, sales, etc.), or
• Section 509(a)(3) (relating to organizations supporting certain types of public charities other than those section 509(a)(3) organizations that support section 501(c)(4), (5), or (6) organizations).

The form can be found at http://www.irs.gov/pub/irs-pdf/f5768.pdf and more information can be found in section 501 of the Internal Revenue Code.

The following are a list of helpful controls that limit the ability to perpetrate and conceal theft of cash. The term “independent employee” would be someone who does not handle cash disbursements or the accounting for those disbursements.

• An independent employee (or board member) receives the bank statements directly from the financial institution.
• The independent employee (or board member) reviews the bank statements for unusual transactions including signatures on returned checks.
• An independent employee reviews the bank reconciliation investigating unusual reconciling items.

These controls will help detect issues whether fraudulent or reporting errors, but the organization really would rather not have things slip through to this review stage.  Segregating duties involves not allowing the same person to perform any two of the following duties:

• Authorize transactions
• Maintain custody of the resource
• Record the effect of the transaction on resource
• Reconcile related activity to the general ledger

As an example, if the controller for the organization can print checks (custody and recording), sign checks or print someone else’s signature (authorization), and reviews/reconciles the bank statement (review of recording) these functions are incompatible. If you take away the signature authority and a more effective review process is performed as mentioned previously, can the controller still commit fraud? The unfortunate answer is yes, but it is less likely and it hopefully will be discovered on a timely basis.

Always remember the computer issues at hand as well. Too often the segregated duties are manually implemented where it is “policy” that the controller signs checks but does not print checks. Often we ask the question could an individual print checks if they wanted to and be authorized to sign them. Most accounting software packages allow you to limit access to different functions depending on access rights and passwords. This also brings up the thought of having unique usernames and good password policies in place as well.   

As you can tell, there are many issues to consider when segregating duties. There will be more to come later.

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

What is a raffle? According to www.dictionary.com, a raffle is a form of lottery in which a number of persons buy one or more chances to win a prize.

According to Texas state statutes, Chapter 2002 of the Occupations Code sets the rules for charitable raffles. Some of the notable provisions of the law include:

• No more than two raffles can be conducted per year.
• The two raffles cannot be conducted simultaneously.
• Organization must set a specific date to award the prize.
• Mass communication (via newspaper, radio or television) is not allowed.
• Individuals may not be compensated for conducting/promoting the raffle.
• The tickets must be sold by the organization and its representatives.
• The prize cannot be cash.
• The organization must have possession of the prize in your possession at the time of ticket offering.
• A $50,000 maximum prize value.

Due to these requirements, Organizations must act wisely when scheduling these events. The tickets must also have the following specific information on their face:

• Name and address of the organization
• Ticket price
• Description of prize(s)
• Date the prize will be awarded

How does gaming affect the redesigned Form 990? If you collect more than $15,000 from the gaming event, the information must be disclosed in Schedule G. Need help in determine what is a “game”? Call me.

• Is the candidate self-aware and self regulated- you cannot have a loose cannon who does not understand how to control anger or anxiety.
• Is the candidate able to read others and see others’ reactions to their behavior- this can be defined as a social “radar”.
• Can the candidate learn from mistakes made- this is the best way to judge how a person responds to adversity.

Here is a short list of effective questions to detect the prospect’s emotional intelligence:

• Tell me about a conflict you had with a peer or supervisor, and how it started and became resolved?
• Tell me about a time you said or did something that had a negative impact on a peer, supervisor, or customer. How did you know the impact was negative?
• Tell me about a situation when you discovered that you were on the wrong track.  How did you recognize this, what did you do, and what did you learn?

If this approach interests you, see Adele Lynn’s book The EQ Interview: Finding Employees with High Emotional Intelligence.

• 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.