Wednesday, January 16, 2013

501c3's: Not for Amatuers

My last post, a light piece on the (tax) implications of picking and winning a Chinese Auction or Raffle prize, received a lot of much more heavy comments than anticipated.  The touch of irony being that I fell off the grid while I was working with clients at year end on bringing them into compliance with various reporting requirements.

There is a common assumption that if a business is a 501c3, or tax-exempt, organization that they therefore not only do not have to pay tax, but they are not subject to "stuff" for-profit businesses are subject to like pesky tax reporting requirements.  There is a lot of confusion regarding the tax-exempt status.  One common area of confusion is why a tax-exempt organization has to pay FICA and/or state unemployment for their employees, report payroll quarterly, and engage in other reporting and withholding requirements.  Another area of confusion is why organizations are subject to tax reporting requirements such as reporting miscellaneous non-employee compensation for all attorneys and medical providers, independent contractors such as accountants, consultants or all types, graphic designers, etc or reporting prize earnings from auctions or report various benefits as compensation or bartering where there is a business relationship is an area of vast confusion (and not just for non-profits).  Another area of confusion is UBIT, or unrelated business income tax.  Yes, not every function or fundraising activity engaged in is in fact tax exempt.  Beyond the tax requirements there are numerous requirements, varying state to state and county to county, regarding gaming and licensing, solicitations, etc.

The idea that an Exempt Organization can do what they want is a fairly commonly held notion I've run into, and nothing could be further from the truth.  The mix of employees and volunteers doing their good work, often with no understanding of legal and tax compliance, is a quick way to end up in a pickle.  What many people fail to understand is that there are serious implications when an organization is found to lack compliance, especially if that compliance is considered a result of negligence or disregard.  A regular business that takes unallowable expenses and lacks compliance at the end of the day will be hit with a tax bill and a large headache and a big bill from their accounting firm.  If $10,000 of expenses are disallowed, there will be a bill for a corresponding amount.  On the other hand, if an organization has the bad luck of having their tax exempt status pulled, the tax bill (potentially) can be calculated based on all revenues ever generated, with no expenses allowed.  Have I heard of that happening?  No, not personally.  However, it underscores the point of my title which is that organizations should engage reasonable professional management, they should not allow volunteers to rule the roost, and they should not assume that because they are tax-exempt they have a free pass.  If anything, they have a larger responsibility to get it right.


Shocked said...

Yes! Having worked in the non-for-profit world for several years, the ignorance of the directors never failed to astound me. One employer went so far as to tell me that "I see no need to have 'books' as there's nothing they can do to me." What happened next I'll leave to your imagination.

A different employer had had virtually no books, got audited and miraculously came through unscathed. Now final decisions are made, oftentimes, solely with these regulations in mind rather than pretending they don't exist.

Great post.

Anonymous said...

Excellent post. While it is true that not every small organization can afford a lawyer or accountant to advise them, there are many jewish lawyers and accountants who will provide their services pro bono. It also is not as expensive to get an accountant that specializes in non-profits. One group I am on the board of - a 1.5 million/year non-profit pays about 12K/year for our accountant. It is just as foolhardy for a non-profit to not have an accountant as it is for them to not get fire insurance on their building or to not buy liability insurance.
At a minimum, in this day and age of the internet there are many good guidebooks that can be downloaded for free, including materials from the IRS and the various state's secretary of state's charities division office.

No one should agree to be on a board of a non-profit or be an officer without accessing and reviewing those materials.

Anonymous said...

Love your post, as an accountant whose whole 20+ year career has been focused on the not-for-profit sector and exempt organizations, I am always amazed at the misconceptions out there.

One thing that really irks me is that many yeshivas do not file a form 990 annually claiming an exemption from reporting by virtue of being related to a church (generic house of worship in tax regulations). This may or may not be legitimate, but even voluntary reporting would go a long way towards good will in the community where many yeshivas are perceived as relying heavily on nepotism, and where tuition increases cause such stress for so many.
I believe the yeshivas do not report because it will cause the many in the community to find fault with how they are spending unnecessarily. However, when I have had to deal with Administrative people telling me they don't know how to attach a paper document to an email, I have to believe that perhaps they could use some community input.

SubWife said...

Couldn't agree more with Anonymous 1:50. I am almost sure that eventually this bubble will burst and the government will find that our yeshivas, particularly girl's yeshivas, are no house of prayer and should've filed all those reports all along. (I am sure they know now, it only takes one over zealous politician to bring this to the attention of the public.) The ignorance of the public on this matter is astounding, but you are right to point out that even the officers of many not for profits are totally ignorant of their reporting/fiscal/legal responsibilities. And if something goes wrong, they and the Board will be held personally liable and accountable.

Orthonomics said...

All organizations should have good books. It pays to have a competent board of directors. Even paying someone independent for a yearly consult to make sure that all forms are filed is worthwhile.

Anonymous said...

Small non-profits (up to some threshold) file what's colloquially called a post card return, should take less than an hour to do. If you spend two hours with a CPA when you set up, and then record transactions as they tell you, and then one hour/quarter reviewing, you'll be totally fine. When you let things go years without input and you have to pull reports is when your costs go through the roof.

If you record transactions and reconcile your bank accounts, you'll be fine. It's when you get audited three years later, have no books, and need to find everything, it's a fortune.

Your online bank will keep bank statements for 6 to 18 months, if you deal with them monthly, it's easy. If you need to pull 4 year old records, you have a problem. You start paying your CPA's hourly rate while they sit on hold with the IRS or Bank for 45 minutes to ask 5 minute questions.

It's also much easier to get a community CPA to donate (or reduce their rate) for basic easy stuff. Coming in with a 20 hour project when you have a deadline is a good way to pay rack rate for your CPA, while they might give you a discount when you need 1-2 hours at setup, quarterly, and annual reviews.

Mistakes happen in the religious and secular worlds. It is unhelpful that in the former, the righteous indignation causes arrogance that causes them to make simple (and costly) mistakes. How many Yeshivot rack up 5 figure IRS fines for not reporting on time or having FICA problems, dealing with IRS liens (which have expensive penalties), etc., as a result of a lack of humility in an area that the Rabbi is NOT an expert on.

Some humility would go a long way, and last I checked, was what the core of Tzinut is, not knee caps.

rosie said...

As I said in the previous thread, will someone please explain how these highly publicized raffles and contests by non-profits are so unregulated or do their lawyers advise them to simply put a tax disclaimer about the winner's responsibility? Also, how is the tax-exempt status of a charity affected if more money is spent on fundraising than the money raised?

Anonymous said...

Religious organizations don't have to file 990s and I am pretty sure that no day school, synagogue, or church does. See for the specific regulations regarding this exemption.

I am pretty sure that the OU doesn't file a 990, either, becaue it doesn't have to.

I think that every single tax-exempt organization, religious or not, should have to file a 990. Any tax-exempt organization has a fiduciary responsibility, since it benefits from its status at the nation's expense. The idea is that this ia good tradeoff, because these organizations are doing a lot of good. They should have to file 990s and make available all the of the basic financial documents that they are required to have. (It differs by state. In New York State, non-profits with annual budgets of less than $500,000 are not required to produce balance sheets and income statements every year. If they have annual budgets above that, they do, and anyone can request to see them. This is ONLY true for non-profits.)

Anonymous said...

[same poster as 10:18 anonymous]

If anyone is curious as to what a 990 looks like, here is Yeshiva University's from 2010:

SubWife said...

Regarding an outside consult, NYS, among many other states, requires not for profit corporations (churches are exempt)with rather modest gross receipts of $100k to have an outside CPA review their books, and with gross receipts of over $250k - an audit. So it's not a luxury, but a requirement for most and a very good idea for the rest.

What schools do and don't do - I do not know. I highly doubt that every raffle is properly documented and evaluated for the need to register with the Attorney General (many games of chance are). Many invitations we receive from our kids' yeshivas don't state how much of the donation is tax deductible. I believe all the raffles are not. It's a very complicated topic with many nuances and potentially could get a lot of not for profits in hot water.

regarding spending more on fundraising than raised - I don't believe it's grounds for losing the tax exempt status, but I would recommend consulting with your CPA.

Anonymous said...

Day schools are considered churches for the purposes of being exempt from filing 990s. I don't know if that's true for the purposes of needing an outside CPA to review their books. Most small non-profits that I work with hire an outside CPA to come in once a month for an hour or two to take care of business, and then for a bit longer at the end of the year to do their IRS reporting.

JLan said...
This comment has been removed by the author.
JLan said...

Let's try that again: in reference to organizations filing 990s:

I'm not sure if the OU does. But the RCA does, Agudath Israel does, YU does, YU high schools do, and Frisch does (from my limited searching on Guidestar). It's possible that others do too, but I don't know.

rosie said...

To Subwife:
I would think that non-profits don't dwell on the tax liability in their ads for raffles because it lessens the thrill of winning. I have also read that these contests can make millions of dollars but also are very costly to run. My big question is, how do so many organizations fly under the radar? I have not heard of any hot water. We get the same catalogs from the same organizations year after year and I don't live in NY or NJ. We also have not seen anyone from our community in the list of winners which tells me that possibly the residents of some states are not really entered in the contest, even if they buy tickets. I don't have proof of this, however, because it may be that out-of-towners don't buy enough chances to win anything. Winners from out-of-state could trigger more of an investigation from the IRS. The charities don't want anyone to know this and they want everyone to think that buying raffles is a big mitzvah. Personally I don't like Chinese auctions but then I don't give big to every cause that comes my way and possibly those who like auctions give much more.

SubWife said...

To Rosie,

It is easy to guess why not for profits do what they do and don't abide by the guidelines. I just don't think it's right or the risk justifies the potential problems. The big question is do their officers and Board members know that they are liable in case something goes wrong or these practices are discovered? Do people who put all those Chinese auction tickets as their tax deductions know that they are taking the risk and that these donations are not real deductions? No one is in hot water now. But the government is in crisis and they are looking for any source of revenue they can get their hands on. What could be better than busting the whole sector of not for profits who have been disregarding the laws and regulation for years and saddling them with huge fines? The not for profit sector has been under extra scrutiny for the last few years, with more regulations and more detailed forms. About a year ago many not for profits were under the threat of losing their tax exempt status if they didn't catch up with their IRS filings. I could be wrong, but this disregard for regulations is a ticking time bomb.

Tomim T said...

help the shidduch crisis

Avi Greengart said...


The reason people in your area aren't among the winners could be:
a) the people in your area don't participate in raffles for NY/NJ are instititions, even if you happen to be on their mailing list
b) there are so many more people in the NY/NJ area that participation by people in your area is dwarfed numerically, which skews raffle results
c) the people in the NY/NJ area are wealthier and buy more tickets that the people in your area, which skews raffle results
d) there's a conspiracy against people from out of town and the organizations are not entering tickets to ensure that only NY/NJ people win.

I don't believe that every tzedaka is run honestly, but I still wouldn't jump directly to "d." Why did you?

rosie said...

Avi, I figured that since the laws are different in different states, that allowing a person in a different state to win could cause problems with taxes.

rosie said...

TPV, I read your article about the shidduch crisis but I am not sure what you want people to do to help. Try inviting some single friends over of both genders and see if anything clicks. You can make a non-profit organization out of it with the advice on this blog.

Anonymous said...

Off topic but not sure where to opost...I have an opportunity to start a 403 b plan through the real non profit I work for, however it will not be matched by the employer. I'm debating whether to start that plan or a Roth IRA. The amounts I'd be contributing would be in the 50$ range. Thoughts?

Tomim T said...

roshei yeshiva issue letter against ads guaranteeing a shidduch