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Non-Profit Organizations Feeling the Pain of Sarbanes-Oxley Compliance

Posted on by Adrienne Gonzalez

You’ve already seen me rail on SOX and I’m not the only one.

Skeptical CPA, Accounting Onion, Business Insider’s John Carney, Re: The Auditors (and Francine here on Going Concern). Need I point you to more?

I am not classically trained in recognizing Service threats but this certainly feels like one.

Accounting and Tax Tips:

The Internal Revenue Service today reminded tax-exempt organizations to make sure they file their annual information form on time. In 2010 the tax-exempt status of any non-profit that has not filed the required form in the last three years will be revoked.

The Pension Protection Act of 2006 requires that non-profit organizations that do not file a required information form for three consecutive years automatically lose their Federal tax-exempt status. This requirement has been in effect since the beginning of 2007.


The costs of compliance begin to add up and suddenly it starts to reek of 404(b); compliance for the sake of compliance does not equal nor even assist transparency.

I spoke to Chris Leach, a former not-for-profit auditor who has served on several NFP boards, who gave some insight into the problem with the 990. Let me tick off just a few “concerns”:

• Some of the smaller non-profits don’t have anyone on their board qualified to do the 990. It’s not a 1040 and problems are numerous.

• NFP board members are exposed to liability, being forced to “sign off” on 990s. That should sound familiar to any auditor who has been at the job for longer than ten years or so.

• Increased regulatory pressure has been proven to distort true financial condition, not necessarily make it any more transparent.

Any of this sound eerily familiar?

Many boards do not have members equipped to adequately review and sign Form 990, so they are still exposing themselves to liability as a result of improperly filed forms. “Bad publicity is the largest implication in my view, especially for organizations facing financial stress, and even more so in this economic environment,” Chris told me. “Beyond that, from a board member’s perspective, the biggest problem would be misstatements on the Form 990, which could potentially lead to personal liability for the board.”

Chris is slightly more reasonable than yours truly, saying “Just the simple day-to-day administration of tax issues puts pressure on smaller not-for-profit organizations. [However], when a not-for-profit organization isn’t a worthy steward of its donors’ trust, donors feel betrayed, so they want more transparency.”

Fair enough. Bring on the transparency (and the headaches?)!

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Dear Small Nonprofits, the IRS Still Wants Your 990s

In a show of understanding for nonprofits who may have been completely unaware of the Form 990 requirement in place for the last three years, IRS commissioner Doug Shulman sent out a really sweet letter encouraging smaller NFPs to go ahead and file anyway even though the deadline has come and gone.

Now that the May 17 filing deadline has passed, it appears that many small tax-exempt organizations have not filed the required information return in time. These organizations are vital to communities across the United States, and I understand their concerns about possibly losing their tax-exempt status.

The IRS has conducted an unprecedented outreach effort in the tax-exempt sector on the 2006 law’s new filing requirements, but many of these smaller organizations are just now learning of the May 17 deadline. I want to reassure these small organizations that the IRS will do what it can to help them avoid losing their tax-exempt status.

The IRS will be providing additional guidance in the near future on how it will help these organizations maintain their important tax-exempt status — even if they missed the May 17 deadline. The guidance will offer relief to these small organizations and provide them with the opportunity to keep their critical tax-exempt status intact.

So I urge these organizations to go ahead and file — even though the May 17 deadline has passed.

The Service assures us that the 990 e-Postcard is simple and easy to fill out, no need to drag your CPA into this mess.

Though the IRS sent friendly reminders to 600,000 charities over the 3 years this new rule has been effect, up to 215,000 charities may have missed the May 17th deadline. Seriously, it isn’t too late. Someone get on that.

There were complaints that the IRS was swamped with last-minute 990 filers (go figure) rushing to meet last week’s deadline so we’re going to guess that when Shulman says it’s okay to send those forms in anyway, he kind of means it. And perhaps that will teach everyone to file on time next year.

Adrienne Gonzalez is the founder of Jr. Deputy Accountant, a former CPA wrangler and a Going Concern contributor . You can see more of her posts here.

Is Kansas Squeezing Non-profits to Close Its Budget Gap?

Kansas has a bit of problem with its tax code, or perhaps the issue at hand is not necessarily Kansas’ broken tax system but the suspicious absence of those all-important tax revenues. Seeking to fill a $416 million budget gap for the FY beginning July 1, it has begun looking at simplifying complicated exemptions but the change could hit already struggling non-profits in the state hard.


NYT:

Lori McMillan, an associate professor of tax law at Washburn University, said the proposal to not grant exemptions to specifically named organizations but rather categories, such as nonprofit and charitable organizations, was a better policy for the state.

”Sometimes it seems that the criterion for an exemption is one’s ability to find a parking place and the committee room,” said Mark Desetti, a lobbyist for the Kansas National Education Association.

Emily Compton, president and CEO of Goodwill Industries of Kansas, said removing the exemption would increase her operating expenses by $40,000. She said the organization also must come up with $125,000 in unemployment tax contributions this spring and the combined increase in expenditures could result in fewer services and employees.

The change would mostly mean Goodwill sacrificing its sales tax exemption but that’s not all that’s on the chopping block.

Also up for debate, a program that would reduce seldom-used tax credits for low-income individuals to buy a home, fund education, or start a business:

John Scott, president of the Interfaith Housing Services Inc. which administers the program in Hutchinson, said the IDA program is budgeted to receive $500,000 worth of 50 percent tax credits each year. For example, if someone invests $100,000 in the program, they receive a $50,000 tax credit.

He said that if the program has to be changed, reducing the amount to $250,000 would be acceptable and still allow it to receive matching grants from other sources.

“We feel this is a win-win compromise. It helps you cut the budget without losing outside revenue, and it does not force us to close the program and possibly cause loss of jobs,” Scott said.

As is, the state exempts $4.2 billion in sales taxes and proposals currently under review by the House Taxation Committee could bring in an additional $196 million – still leaving a $220 million budget gap.

Is Kansas penalizing non-profits is the way to make up the gap? Goodwill Industries claims 83 cents of every dollar generated in its retail stores goes to serving its mission of providing work to individuals in need. Can the government of Kansas claim that level of efficiency when it comes to tax revenues?

Why Lazy Accounting Does Not Work for Churches (Or Anyone for That Matter)

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Just because you’re a church doesn’t mean you shouldn’t have a remedial understanding of payroll, GAAP, taxable income, and right/wrong.

Anthony and Harriet Jinwright, husband and wife pastors from Charlotte-based Greater Salem City of Good church, were warned repeatedly that their lazy accounting could get them in trouble, including by a former consultant in 2001.


Some issues brought up by the consultant include (but aited to and are, of course, alleged violations at this point):

• Church donations going directly to Pastor Jinwright but not subsequently appearing on his tax forms

• Blatant violation of the sanctity of GAAP.

• Expense reimbursements to Pastor Jinwright without benefit of receipts nor an expense plan at the church.

• Mismatched deposit envelopes that did not contain the actual amounts reflected on the outside when deposited.

For the love of sweet baby Jesus, what sort of operation were they running over there?!

It appears to be one part run-of-the-mill scam, one part complicated church theft, although Jinwright refused to acknowledge that any of this could be considered suspicious or, worse, fraudulent. The couple deposited $7 million into their bank account from 2002 to 2007 while only reporting $3.3 million for the tax returns for those years.

The US District Court thinks otherwise and “can I get a witness?” has just taken on a whole new meaning as Jinwright’s former assistant and business administrator – as well as the former consultant – have appeared on the witness stand to discuss Greater Salem’s, uh, holier-than-thou accounting tricks:

Anthony Jinwright was not only pastor of Greater Salem Church but also chairman of the church’s board or directors, with sway over the “business and financial dealings of the church.”

Although the church paid the bishop a regular salary, which it reported on his regular W-2 form, Greater Salem also cut checks directly to the bishop and his wife for: vehicle and housing allowances, retirement income, “tax liabilities,” personal vacation and travel, their daughter’s college tuition and at least two types of bonuses – a bonus at Christmas and a “pastoral anniversary” every February.

Both the Jinwrights also collected separate fees for speaking at other churches around the country.

Now listen, I’m sure Jesus wanted little baby Jinwright to go to college but the problem is that the meeting minutes that supposedly contain an authorization from church board members to pay for said college education have, um, disappeared. Funny, didn’t that happen at Arthur Andersen when Enron blew up?

What’s the lesson here? Churches are no less responsible for their financial affairs than publicly-traded companies and in many ways should operate with greater transparency as they are not only partially-funded by members of the congregation but supposedly on some sort of divine mission.

Do you really want to have to explain to the Almighty why you faked his financials at the pearly gates? Didn’t think so.

Jinwrights: Did they hide millions? Or miss details? [Carolina Weekly]
Other Holy Men:
Former Pastor Figures Eighth Commandment Is Overrated, Steals from Nonprofit