Nonprofits Need to Heed New Regulations to Remain Compliant
By Boyd Fisher
With the nonprofit sector having to navigate its way through waves of change, including funding cuts and regulatory changes, many organizations are at increased risk of being non-compliant -- even with the best of intentions.
Between federal cutbacks due to sequestration, potential changes in the tax status of charitable deductions, a proposed cap on charitable deductions, ever-changing rules and regulations, and calls for greater oversight, tax-exempt organization, nonprofits need to make an extra effort to remain compliant, or risk losing their tax-exempt status.
The penalty for being non-compliant can be harsh. In 2012, the IRS levied $5,564,568 in fees on 536,159 penalties for a wide range of noncompliant behaviors, such as noncompliance related to tax return preparers and to information returns (e.g., Forms 1099, W2, 3520A, 8027, and 8300), according to its Data Book for 2012
Here are five steps to consider to help your organization prepare for new regulations.
- Make sure you have the latest federal and state guidelines. You cant rely on your accountant alone and you should get advice from a knowledgeable attorney. Some regulations are so complexlike those covering raffles or bazaars, for examplethat some nonprofits outsource their events to specialized vendors for handling and advice on how to be in compliance. The latest Massachusetts statutes and regulations are available here.
- The more complex your organization, the more regulations you may need to comply with, creating more complications. For example, if your organization runs a for-profit social enterprise as part of a fundraising initiative, the for-profit subsidiary may have different obligations and liabilities. Unrelated business income (UBI) is taxable, so you need to make sure you understand what qualifies as UBI. Furthermore, self-declaring tax-exempt status is not enough. The IRS recently announced it is asking more than 1,000 self-declared section 501(c)(4) and (c)(6) organizations to complete the Self-Declarers Questionnaire.
- Help your board members understand their responsibilities. The Massachusetts attorney generals office has developed a 16-page Guide for Board Members of a Charitable Organization, which has some good information about providing oversight.
- Make sure your nonprofit management software is flexible enough to handle new regulations. After all, the IRS is constantly refining and proposing new regulations. You dont want to be in a situation that takes a couple of years to adjust your software because by that time, the regulation is likely to have changed yet again.
- Conduct regular audits to identify risks and to identify ways to reduce those risks. Whether dealing with restricted grants, HR compliance, etc., nonprofits cannot rely on what worked last year. They need to continually identify new best practices through sites such as www.massnonprofit.org and by attending key conferences. Or look to associations, like the Council of Nonprofits, which offers its Checklist for Basic Governance Practices for IRS Form 990.
Some of the five steps may seem obvious, but a lot of nonprofits fail at maintaining compliance. According to an article published in the nonprofit Law Prof Blog, Last year, the IRS reported a decrease of 18 percent in the number of tax-exempt organizations..., a result of the IRS revoking tax-exempt status of an estimated 385,000 organizations after they failed to file tax returns for three consecutive years, beginning in 2007.
If hundreds of thousands of organizations cant handle their tax forms, which are generally understood, imagine the challenges of maintaining compliance with less-well-known regulations.
Boyd Fisher, director of Public Sector at UNIT4 Business Software, which makes ERP systems used by nonprofits around the world, has more than 30 years of experience in the nonprofit sector. Call him at 888-247-3776 or email to firstname.lastname@example.org.