In January 2010, Carl Ho, CPA posted an article on Blue Avocado (http://www.blueavocado.org) titled “Five Internal Controls for the Very Small Nonprofit” that gives some insight as to what the most important controls are for small organizations. The most important controls relate to checks and balances. Establishing a “tone at the top” so that policies are in place and all employees including management follow them. Other importants considerations include clearly defined responsibilities, locking up checks, using protected passwords on computers, having two people count cash together, reconciling bank statements timely, review of reconciliations or bank statements by someone other than the bookkeeper or preparer, requiring two signatures on checks, and not allowing the bookkeeper to be a check signer. Even with these procedures in place, fraud can occur if there is collusion or if management circumvents the policies or controls. For the full article visit, http://www.blueavocado.org/content/five-internal-controls-very-small-nonprofit.

Governance plays a significant part in the control environment. Listed below are a few links from the IRS website regarding governance practices for non-profit organizations.

Governance and Tax-Exempt Organizations – Examination Materials

http://www.irs.gov/charities/article/0,,id=216068,00.html

http://www.irs.gov/pub/irs-tege/governance_check_sheet.pdf

Governance of Charitable Organizations and Related Topics

http://www.irs.gov/charities/article/0,,id=178221,00.html

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.

So how does an organization receive exempt status?

There are two requirements for exemption - organized and operated exclusively for one or more exempt purposes (see the list above). Churches including synagogues, temples, mosques, integrates auxiliaries of churches, conventions/associations of churches and organizations that have less than $5,000 in gross receipts do not have to file the application with the IRS. This application is referred to as Form 1023 and it is due within 27 months after the end of the month in which the organization was legally formed.

Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, requests alot of information about the operations (planned income; fundraising, grantmaking, political, lobbying and foreign activities) and organizational structure (board composition/related businesses; compensation and conflict of interest policies). You will be required to file a copy of the organization’s certificate of formation, bylaws and conflict of interest policy, if applicable, with the form.

Based on the planned operations, the organization will either be classified as a public charity or a private foundation. As a public charity, the organization has a broad support base and is predominately supported by public contributions. As a private foundation, the operations are supported predominately from the investment earnings and a small number of donors. There are different reporting requirements depending upon the classification. The IRS will determine the classification.

Depending on the complexity of your organization’s application, the IRS may have additional questions and require clarification. So be prepared to respond and be patient. For more information on Form 1023, see the IRS website or Form 1023 instructions.

• 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.