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:
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.
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.
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.
May 17, 2018