Purpose of Schedule A, Parts II & III
The purpose of Part II is to determine whether your organization meets the public support test.

Special Issues
Financial information in Parts II and III are now reported on the same basis as the remainder of the return, (in the past, Schedule A was presented on a cash basis even if the rest of the return was on an accrual basis.) This means that all four prior years that are shown (2004 through 2007) must be revised to the accrual basis if your organization reports on an accrual basis. Additionally, you must convert the list of supporters that is reported on line 5 to accrual basis for all prior years (2004 through 2007).

Information You Will Need to Prepare Schedule A, Part II or III
You will need to gather the following information:

• Contribution lists for 2004 – 2008. After 2008, you will only need your current year list since prior years will already have been converted to the accrual basis.
• Tax returns for 2004 – 2008. After 2008, you will only need your current year return since prior years will already have been converted to the accrual basis.
• View the IRS Form 990 Filing Tips: Schedule A (Public Support and Public Charity Classification) for additional help.

How to Prepare Schedule A, Part II
Complete Part II if you selected line 7 in Schedule A, Part I. There are two ways to meet the public support requirements: at least 33 and 1/3% of your support is from contributions and grants or 10% of your support is from contributions and grants and you meet the facts and circumstances test listed in Regulations section 1.170A-9T(f)(3). If you met the support test in the prior year but don’t meet it this year, you will have a grace period for one year, (see lines 16b and 17b in Schedule A). This article will only address the lines that often cause confusion.

Read the rest of this entry »

When I tell folks that I am an auditor, I immediately get that defensive look as they assume that I am a dreaded IRS auditor (which I am not). When I further explain that I audit financial statements, I usually receive a weak smile and a slight head nod, as if to signal that they are glad I am not with the IRS, but they really don’t have an idea what I do and are a little too embarrassed to ask or don’t really care. For those of you employed at non-profit organizations or serve on their Board of Directors, I thought I would take a few moments and explain what an audit of financial statements really entails. In a later post I will address who may need to have an audit.

So what is an audit of financial statements? Usually on a monthly basis, the controller, CFO, or accountant at your organization prepares financial statements, usually consisting of a balance sheet and income statement. These statements are used by staff, management and the Board of Directors to make decisions about the organization. But all of the information is gathered by and reported by people INTERNAL to the organization. A financial statement audit involves someone EXTERNAL to the organization, an independent certified public accountant.

Audits of financial statements are done according to a set of standards that all CPA’s must adhere to, which are referred to as Generally Accepted Auditing Standards (GAAS). These standards have been developed by the American Institute of Certified Public Accountants and are monitored and revised based on financial circumstances, including failures related to fraud.

So how do we perform an audit? See my post, next month.

Purpose of Schedule A
The primary purpose of Schedule A is to assist the IRS in determining if an organization qualifies as tax-exempt.  Public accountability is also promoted by providing certain details of the organization’s finances and operations for public inspection. Only 501(c)(3) organizations and 4947(a)(1) nonexempt charitable trusts complete Schedule A.

Special Issues With Schedule A, Part I
While your IRS determination letter is the first place to look to determine that type of organization you are, your activities may have changed. For your first five tax years as a section 501(c)(3) organization, you must check the box in Part I that corresponds to your public charity status as stated in your exemption determination letter from the IRS. After the first five years, check the box that corresponds to the activity you currently have.

Information You Will Need to Prepare Schedule A, Part I
You will need to gather or prepare the following information:

• IRS exemption determination letter. If you do not have your exemption determination letter, call 1-877-829-5500 to speak to the Exempt Organizations Customer Account Services.
• Information regarding the sources of your income.
• View the IRS Form 990 Filing Tips: Schedule A (Public Support and Public Charity Classification) for additional help.

How to Prepare Schedule A, Part I
Complete Part I by specifying under which part of the Internal Revenue Code (IRC) your organization claims classification as tax-exempt. Look at your determination letter to determine under what section the IRS has determined you fall, then verify that you still meet the qualifications of the section, as detailed on the schedule and shown below. The remainder of this article will only address lines 7, 9, and 11 as they can be a little confusing.

Read the rest of this entry »

Whether your annual audit is approaching or this will be your business’ first audit ever, an audit can seem like a daunting event. But there are ways to make this potentially painful event pass with minimal frustration:

10. Begin working on your schedules weeks before the audit occurs, you might have questions and your auditor is just a phone call or email away.
9. Keep track of issues you struggled with during the year. It will help the auditor key in on important areas at the beginning of the audit.
8. Get the confirmations back to the auditors quickly! The more time there is to send these out the better chance the auditor receives the accurate information. Not getting them back causes more work for all parties involved.
7. Communicate your schedule to the auditors. This helps the auditor work around your normal responsibilities.
6. Make all your adjustments to your trial balance before you provide it to the auditor.
5. Those schedules we talked about earlier make sure they tie to that final trial balance.
4. Make needed documentation easy to access and provide it to the auditors as soon as possible.
3. Be available! Here’s a tip, set aside time on your calendar devoted to auditor questions and audit prepwork.
2. Implement good segregation of duties among your staff. The more checks & balances you have the less likely you are to have errors or issues.
1. Don’t do anything fraudulent or misleading during the year. (Always a plus). Tell the truth.

The key to success is communication and preparedness. If you apply these steps you should see a reduction in the amount of friction an audit can cause.

It’s year-end and tax-exempt (T-E) organizations are preparing budgets for next year. In fact the budget process relating to expenses has probably been completed, however trying to estimate the revenue stream can be difficult. A number of churches utilize a pledge card to estimate contributions.

During the budget process expenses are reviewed and operations are monitored/analyzed, determining the effectiveness to the mission. Remember, all T-E organizations must continue to be organized and operate in accordance with it’s stated exempt purpose, as approved by the IRS (Form 1023).

Before the end of the fiscal year, department managers are usually asked to submit their budget for next year. Reviewing the current year disbursements, estimated costs for significant capital/program projects, revisions for personnel and related costs are just several of the key factors that must be considered.

To help the finance department and ultimately those charged with governance, churches may ask their congregants to complete a pledge card, indicating their intention to give. During this weekend, First United Methodist Church of Mansfield, accepted the annual “estimates of giving”. An estimate or an “intention to give” allows the church to collect and assess the level of contributions for the next year, without recording an unconditional promise to give. Remember conditional promises to give are recorded when collected (or when the condition has been met). Unconditional promises to give as recorded with the promise has been made by the donor.

So as your church prepares it’s annual budget, it’s o.k. to ask congregants for a giving estimate. This estimate allows management to prioritize capital expenditures and program services.

The IRS recognized the need for transition relief related to information included in Form 5500 by some 403(b) plans. It was noted that some of the filings would be rejected under ERISA because the filing would be incomplete due to the administrator’s inability to identify all participant contracts and accounts that should be included in plan assets. The filing would also be rejected if the audited financial statements contained an adverse, qualified or disclaimed opinion (other than disclaimers related to limited scope audit provisions in 29 C.F.R. 2520.103-8 or 103-12).

Administrators of 403(b) plans do not need to treat annuity contracts and custodial accounts as part of the employer’s plan assets for purposes of ERISA’s annual reporting requirements (further, the employer is not required to count the individual as a participant under the plan for Form 5500 reporting purposes) provided that:

1. The contract/account was issued to a current or former employee before 1/1/09
2. The employer ceased to have any obligation to make contributions and has ceased making contributions to the contract/account before 1/1/09
3. All of the rights and benefits under the contract/account are legally enforceable against the insurer or custodian by the individual owner without any involvement by the employer
4. The individual owner of the contract account is fully vested

The Department will not reject a Form 5500 on the basis of qualified, adverse or disclaimed opinion if the accountant expressly states that the sole reason for such an opinion was because such pre-2009 contracts/accounts were not covered by the audit or included in the plan’s financial statements.

The above information obtained from Field Assistance Bulletin 2009-02.

When completing the new Form 990, organizations are required to provide details about related organizations on Schedule R. An organization is a related organization to the filing organization if it stands in one or more of the following relationships to the filing organization:

1. Parent – an organization that controls the filing organization.
2. Subsidiary – an organization controlled by the filing organization.
3. Brother/Sister – an organization controlled by the same person or persons that control the filing organization.
4. Supporting/ Supported – an organization that is (or claims to be) at any time during the organization’s tax year, a supporting or supported organization within the meaning of section 509(a)(3) and 509(f)(3).

According to the IRS – the definition of control is:

1. Power to remove and replace a majority of a nonprofit organization’s directors or trustees,
   or
2. Management or board overlap where a majority of the controlled entity’s directors or trustees are trustees, directors, officers, employees, or agents of the controlling organization.

In the case of stock corporations, and other organizations with owners or persons having beneficial interests, whether such organization is taxable or tax-exempt, any of the following relationships represent control:

1. Ownership of more than 50% of the stock (by voting power or value) of a corporation.
2. Ownership of more than 50% of the profits or capital interest in a partnership.
3. Ownership of more than 50% of the profits or capital in a limited liability company (LLC ) treated as a partnership regardless of the designation under state law of the ownership interests as stock, membership shares or otherwise.
4. Being a managing partner or managing member in a partnership or LLC treated as a partnership which has three or fewer managing partners or managing members (regardless of which partner or member has the most actual control).
5. Being the sole member of a disregarded entity, (an entity wholly owned by the organization that is not a separate entity for Federal tax purposes).
6. Ownership of more than 50% of the beneficial interests in a trust.

What is considered indirect control? If the filing organization controls Entity A, which in turn controls Entity B, the filing organization will be treated as controlling Entity B also.

Sometimes it is difficult to determine “who” owns “what”. If you have questions, call us.

Hopefully those of you with calendar fiscal years are at least in the beginning stages of working on your budget for next year.  It’s probably about time to start thinking about it and making a plan. 

Before you start, I wanted to let you know about a common misconception that the total revenues have to equal total expenses on the budget. This is not true. You can budget for a surplus or a deficit. “But I’m a non-profit”, you say. Well it’s not a requirement of a tax-exempt nonprofit to end up with no money at the end of the year. The requirement is that any surpluses you do finish the year with, don’t go to stockholders or owners, the surpluses stay within the organization to continue its mission. Read the rest of this entry »

Final regulations that were adopted in 2007 take effect on January 1, 2009, for most tax-exempt organizations. 

What changed? How is your T-E organization affected?

The final regulations require all 403(b) providers, including churches, to have a plan document in place no later than 12/31/08. Failure to adopt a written plan before 1/1/09 will render all subsequent contributions to the plan to be fully taxable. The plan document must address several issues, including: Read the rest of this entry »

Anyone…at least that is how one should think when analyzing fraud risks.

Fraud is a hot topic. If you don’t think so ask someone who used to work for Enron or invested in Madoff’s investment company, they might change your mind. But, because of instances like these, people often think of fraud in large terms, and the mention of the words carries a lot of weight; when very often fraud occurs in all sizes and forms.

But, who is likely to commit fraud? Most people use what is commonly known as the fraud triangle to identify areas where one can commit fraud. The three criteria are Pressure/Incentive, Opportunity, and Rationalization.

The pressure/incentive trait is common with performance based jobs where there is motivation for employees to record false sales to meet sales/performance quotas or up their commission, or other incentive pay.

Opportunity rears its ugly head when an individual has too much control over one key process in a business. Let’s say a cashier at a bank did not have to reconcile the cash drawer at the end of the day. The “opportunity” is there for cash to be stolen without any knowledge of it being gone.

A big one in today’s economy is rationalization. This is commonly referred to as the “I deserve this,” mentality. Where an individual develops a frame of mind where they can justify their actions and commit the fraud even though it is outside their typical ethical guidelines. For example, the company is generating large revenue streams, but an employee needs money to pay for his kid’s summer baseball league; this employee could find themselves thinking “They won’t miss this money, and I can’t say no to my child.”

Now let’s not confuse fraud with honest mistakes, errors, or plain ignorance; there is a difference. Fraud is defined as “intentional” deception…intentional being the key word.

Stay tuned as we post methods to address these instances and help you to minimize fraud in your business.