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

Information You Will Need to Prepare Schedule D
You will need to gather or prepare the following information:

• Details regarding your donor advised funds, (Part I).
• Details regarding your conservation easements, (Part II).
• Details regarding your collections of art, historical treasures, and similar assets, (Part III).
• Details regarding your trust, escrow, and custodial arrangements, (Part IV).
• Details regarding your endowment funds, (Part V).
• Details regarding your assets, investments, and liabilities, (Part VI, VII, VIII, IX, and X).
• Your audited financial statements, (Part XI, XII, and XIII).
• View the IRS Website for additional instructions for preparation of Schedule D.

How to Prepare Schedule D

Part I, Organizations Maintaining Donor Advised Funds or Other Similar Funds or Accounts

A donor advised funds allow donors to maintain advisory privileges regarding the distribution or investment of their donated funds. Generally a donor advised fund is a fund or account:

1. That is separately identified by reference to contributions of the donor;
2. That is owned and controlled by your organization; and
3. For which the donor or donor advisor has or reasonably expects to have advisory privileges in the distribution or investment of amounts held in the donor advised funds of accounts because of the donor’s status as a donor.

A donor advised fund does not include any fund or accounts:

1. That only makes distributions to a single organization or governmental unit;
2. In which the donor only provides advice regarding the distribution of grants to individuals on an objective basis for travel, study, or other similar purposes as the member of a committee which is not controlled by the donor.

Line 1 – 6: complete the information for your donor advised funds in column (a) and for you funds that are similar to donor advised funds in column (b).

Part II, Conservation Easements
Line 1: Conservation easements restrict the use of or modifications to real property. They must be granted to a qualified organization in perpetuity exclusively for conservation, such as protection of a habitat, preservation of open space, or the preservation of property for educational, historical, or recreational purposes. To qualify as a certified historic structure, the building must be listed in National Register of Historic Places or be certified as being of historic significance to a registered historic district.

Line 2a – 2d: These numbers should be exact, not estimates, using decimals where necessary, such as for acreage.

Line 3: Because conservations easements are supposed to be granted in perpetuity, the IRS wants to know about any changes. An easement is modified if the terms of the easement are modified, such as increasing or decreasing the amount of land included in the easement. An easement is terminated if it is condemned, extinguished by court order, transferred, or rendered void or unenforceable. If the easement was modified, transferred, or terminated during the year, provide an explanation in Part XIV.

Line 5: Briefly summarize in Part XIV any written policies regarding monitoring, inspection, and enforcement. Monitoring occurs when you investigate the condition or use of the restricted property to verify that the owner is adhering to the terms of the easement. Inspection refers to an onsite visit to the property, while enforcement is an action taken by your organization when a violation of the easement stipulations occurs. This may include communicating with the property owner regarding their obligations under the easement, arbitration, or litigation.

Line 8: In order to comply with IRC Sections 170(h)(4)(B)(i) and 170(h)(4)(B)(ii), the easements must meet the following requirements:

1. Restrictions that preserve the entire exterior of a building, (including the space above it) and prohibit any changes to the exterior that are inconsistent with the historical character.
2. Donor and donee agree in writing under penalties of perjury that the donee’s exempt purpose is environmental protection, land conservation, open space preservation, or historic preservation and the donee has the resources and commitment to enforce the restrictions.
3. There is a qualified appraisal, photographs of the entire building exterior, and a description of all development restrictions relating to it, (such as zoning laws, restrictive covenants, etc.)

Part V, Endowment Funds
Section V is a snap shot of the components of your net assets. Quasi-endowments, (board designated) are established by the board to function as endowments. They must retain their purpose and intent as specified by the donor or source of the original funds. Permanent endowments provide a permanent source of income. The principal must be invested and kept intact in perpetuity. The income can be used by your organization. Term endowments provide a source of income for a specific period of time or until a specific event occurs.

Line 1a: Enter the total sum of your quasi, permanent, and term endowments.

Line 1b: Enter the current year contributions to the endowments. Include gifts, grants, and contributions. Also include additional funds established by your board to function like an endowment, but that may be expended at any time at the discretion of the board.

Line 1c: Enter realized and unrealized gains and losses. If earnings are reported net of transaction costs, enter the net on this line. If earnings are reported gross, enter the transaction costs on line 1f.

Line 1e: Enter distributions for facilities and programs, including amounts withdrawn from quasi-endowments. Do not include scholarships on this line. Instead enter them on line 1d.

For more information, view the IRS instructions at http://www.irs.gov/pub/irs-pdf/i990sd.pdf.

Coming Soon
Schedule G coming March, 2010.

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.

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.

Since the summer of 2004, tax-exempt entities have experienced continued pressure from regulatory and legislative agencies. Consider the following important dates:

1. Spring 2005 – Panel on the Nonprofit Sector issues interim report on charitable reform measures.
2. June 2006 – IRS releases new Form 1023 with new governance questions.
3. August 2006 – Pension Protection Act of 2006 signed into law.
4. February 2007 – IRS publishes a discussion draft of good governance policies
5. Fall 2007 – Commissioner of Exempt Organizations begins giving speeches on governance issues.
6. December 2007 – Redesigned 990 released.
7. December 2008 – Form 990 (core form and related schedules) finalyzed.
8. 2009 – IRS pledges to release a checklist for its agents to use during audits to determine how governance relates to tax compliance.

Why is the IRS interested in governance? The first and prominent answer, according to Steven T. Miller, IRS Comission, Tax Exempt and Government Entities,  a well-governed organization is more likely to be compliant with the tax law, while poor governance can easily lead to trouble. Good governance also allows organizations to self-identify and self-resolve problems. Governance practices influence whether an organization is operated to further exempt purposes, and whether the organization serves public, rather than private, interests.  Good or bad governance dictates whether the organization’s executives are compensated fairly or excessively. It influences whether the organization makes informed and fair decisions regarding its investments or its fundraising practices, or whether it allows others to take unfair advantage.

According to Miller, the IRS has a signicant interest in Governance and has a role to play in this area. With the new Form 990, the IRS will be given selected governance policies and information for the entities required to file the informational return.

For more information on Commissioner Miller’s speech to Tax Exempt Organizations on November 20, 2008, see remarks.

 How does your organization monitor the effectiveness of governance? Post a comment.

The IRS clearly states that, “If a donor received something of value in return for the contribution, a common occurrence with fund-raising efforts, part or all of the contribution may not be deductible.” 

So what is deductible? The amount that is deductible is actually the amount given over and above the fair market value of the event or purchase. This is where the organization should step in and give some assistance to the attendees. Before the event the organization should determine the fair market value of the event and inform the participants how much of their contribution is deductible and how much is for the goods or services provided at the event. 

For instance, if a golf tournament is held, it would be a good idea to include a phrase on the registration form stating, “of the $250 registration fee, $100 is considered to be the value of participation in the tournament” This clearly informs the donor that the participation in the golf tournament is valued at $100 and the remaining registration fee is considered to be a contribution to the organization. Also, when determining the fair market value of the event, the organization should consider all that is offered to each participant at the event, including meals, entertainment, contests, prizes, etc.  These values should be determined in advance, and a conscious effort should be made by the organization to clearly inform the participants of the split between their payment for services and deductible contributions.

Need additional help?  Contact us.

How does an organization make this information available to the public? Does your organization post these documents on:
1. its own website
2. another’s website or
3. is it available upon request.

This requirement is not at the discretion of the board or organization, but it is technically the law, under Section 6104.

Has your organization complied?

According to IRS Commissioner Doug Shulman, “These instructions are the final step in a tremendous effort to bring the Form 990 up to date and to reflect the diversity and complexity of the tax-exempt community. The revised form will give the IRS and the public a much better view of how exempt organizations operate. The improved transparency provided by these changes will also benefit the tax-exempt community.”

To allow organizations time to adjust to the new forms, the IRS is phasing in the filing requirements during a three-year transition period, depending on the org’s financial activity. Click here to review the filing requirements during the transition period.

This redesigned form has a core form with eleven parts, and depending on certain activity, an additional 16 schedules. The IRS believes the new filing requirements:
• provides enhanced transparency,
• promotes tax compliance and
• minimizes the burden on the filer.

For more information on the core form and schedules, go to www.irs.gov