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Wednesday, December 17, 2014

Risk Assessment: How Nonprofits Get in Trouble


In the nonprofit world, it isn’t hyperbole to say that risk is lurking around every corner.

Forget to properly register your fundraising activities, and you could be hearing from some State Attorney’s office. Fail to monitor social media posts, and a disgruntled staffer could land you in the middle of a defamation lawsuit.

In reality, the risks are everywhere, and unwary nonprofits can be blind-sided. Consider these key areas of exposure and ways you can protect your nonprofit:

Executive compensation: Paying excessive compensation to directors and key employees can be grounds for the IRS to revoke your organization’s tax-exempt status. This typically happens when nonprofits set salaries and provide raises to senior employees without regard to the salaries paid at comparable organizations.

Tip #1: Don’t overlook your peers. In general, the IRS presumes that executive compensation is reasonable if comparable salary data is used in making the compensation decision, the decision is made by “disinterested persons” and the compensation decision is documented.

Financial reporting: Overstating program expenses or misrepresenting program accomplishments can lead to big trouble. Likewise, understating fundraising and administrative expenses can invite unwelcome scrutiny, because the public is often skeptical of an organization that raises thousands of dollars while reporting zero fundraising expenses.

Tip #2: Be sure to use your IRS Form 990 to explain your finances in detail. For example, take time to demonstrate that your fundraising expenses are reasonable in light of various factors, including your organization’s size, funding sources and the “popularity” of its cause.

Retirement plan compliance: Many nonprofits mistakenly assume that they have outsourced liability for managing their 403(b) plan when they bring in outside vendors and third party administrators. The truth is, plan sponsors are always responsible for complying with the myriad retirement plan rules and regulations.

Tip #3: Start with the IRS’s comprehensive 403(b) Fix-It Guide, which delves into common compliance errors and solutions.

Contracting issues: Under the legal concept of “apparent authority,” a vendor who reasonably perceives that a volunteer or staffer has the authority to act on behalf of the organization may enter into a contract with your organization, even if that volunteer or staff member didn’t have such authority.

Tip #4: Develop a simple policy that spells out who has authority to enter into legal contracts, and run contracts by your attorney, especially complex agreements, like those for technology purchases and software development.

Fundraising registration: Organizations that fail to register with the appropriate state, county and municipal authorities can be subject to fines and civil suits. They can even have their right to solicit contributions revoked.

Tip #5: Consider using the Unified Registration Statement, a standardized registration form that allows you to register with 36 cooperating states and the District of Columbia. Visit multistatefiling.org to use the form. For detailed guidance on best practices for online solicitations, consult the Charleston Principles established by the National Association of State Charity Officials (NASCO) at nasconet.org.

Think Big Picture
Understanding, and mitigating, your organization’s risk exposure is essential, but so is a commitment to sound governance. Consider these additional best practices that can help keep your nonprofit on the straight and narrow:

  1. Operate programs only if they are within the authorized purposes of the organization
  2. Make board decisions in a manner consistent with the organization's bylaws
  3. Comply with established standards for fundraising
  4. File annual financial reports with the IRS or applicable state regulators

The IRS has become increasingly proactive in helping nonprofits avoid losing their exempt status. For a variety of informative online training tools, visit stayexempt.org and become proactive about assessing your nonprofit’s risk exposure.

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