How to Protect Your Nonprofit’s Future
In some ways, a nonprofit’s concerns and priorities are like those of any other organization. However, in addition to typical business concerns like financial and operational performance, nonprofits also must worry about whether they are acting in ways that could jeopardize their tax-exempt status. There are numerous activities nonprofits engage in, or actions they might fail to take, that could threaten their organizations.
You can never expect to be completely free from risk. But there are measures you can employ to address your biggest threats.
Fraud
All organizations are susceptible to fraud, but nonprofits are especially common targets. Nonprofit leaders tend to place a high degree of trust in their employees, and nonprofits often have fewer and less stringent internal control requirements than other entities. These issues can create opportunities for employees to redirect incoming payments, alter payroll records, write illicit checks, or adjust expense reimbursements to their own benefit.
Control Measures
There are many ways to prevent fraud, but any risk management must begin and end with the tone at the top. You should consider fraud prevention a priority, and one way to do that is to establish and enforce appropriate internal controls. Each organization is different, but a few internal controls to consider are:
- Performing bank reconciliations monthly
- Segregating financial duties
- Reviewing all credit card activity
- Requiring your employees to take time off
- Closely reviewing all names on payroll
For a more in-depth discussion of how fraud can impact nonprofits, listen to our recorded
Financial Safety and Controls webinar.
Regulatory Compliance
The last decade has seen an upturn in filing requirements for nonprofits. More nonprofits than ever before file informational returns with the IRS, and most are now required to file electronically. Ensuring all federal forms are filed accurately and timely is an easy way to safeguard your tax-exempt status.
Income tax compliance is important, but so is retirement plan compliance. While failing to properly report your 403(b) plans with the IRS may not lose you your tax-exempt status, it can trigger penalties that can cripple your organization. Keep in mind that even if you are able to outsource your retirement plan’s day-to-day responsibilities, you can never outsource the fiduciary duties you owe to the plan’s participants.
Control Measures
Talk to a tax professional to ensure you are filing your annual tax returns accurately and timely. The forms you’ve filed in past years may no longer satisfy IRS requirements. Once your income taxes are squared away, ensure your 403(b) plan compliance is sufficient. A great place to start is with the IRS’s 403(b) Fix-It Guide.
Executive Compensation
The IRS is on the lookout for nonprofits who overpay their directors and key employees. Some nonprofits are so closely held that management is able to set their own salaries, opening up the potential for abuse of funds. To combat this threat, the IRS imposes an excise tax on what they deem to be “excess compensation,” or compensation that is beyond what is reasonable. This excise tax is not imposed upon the organization, but rather upon the directors and key employees themselves.
Control Measures
Work with a CPA with nonprofit experience to determine what compensation is reasonable for your organization’s key jobs. The CPA will do a few things to help you make this determination, such as:
- Compare your organization’s salaries to those of your peers
- Compare the employee’s duties and performance with their level of compensation
- Look to the employee’s qualifications for performing in that role
- Review the bylaws to see if all salary policies are being met
- Consider if the employee’s raises have been reflective of business growth
Legal Mistakes
Nonprofits may be reluctant to spend money on legal services, which can lead to trouble. Without the help of an attorney, nonprofits may enter into contracts that are to the sole benefit of the vendor, or they may rely on agreements that have no formal contracts at all.
Fundraisers also come with legal risks. It is all too common for money raised at third-party fundraisers to never make it into the hands of the charity―something that can be difficult to resolve if the appropriate agreements were never drafted. Nonprofits must also remember they have a legal requirement to register with government agencies before fundraising in a new state.
Control Measures
While it may be unreasonable for all contracts to be reviewed by an attorney, those that entail high dollar amounts should be. If your organization can spend a bit of money upfront, an attorney can draft generic agreements and documents you can use in the future. To help you expand your fundraising efforts, a lawyer can help you file the
Unified Registration Statement (URS). This is a generic form accepted by the majority of U.S. states in lieu of state-specific registration forms that will grant you permission to charitably solicit in their state
Be Proactive
In the nonprofit world, it isn’t hyperbole to say that risk is lurking around every corner. Being proactive about assessing and managing your nonprofit’s risk exposure will help you stay out of trouble and protect your tax-exempt status. And you don’t have to go it alone. The Armanino nonprofit accounting team can help find solutions that will work for you and your organization.