All of you received your tax forms already. The government is on the ball when it comes to its finances, or at least when it comes to getting its finances from us. And a big part of your reporting is going to depend on how well you have maintained your records. The same goes for nonprofits – their record keeping is important to donor tax returns and to their own reporting.
So at tax time let’s look at some of the issues that are important in a functioning nonprofit. First, those donor tax receipts – so important to your donors. That is why financial records management is so important to nonprofits. An agency should have appropriate financial controls in place to receive, record and acknowledge donations. Each donor has the right to expect proper acknowledgment of donations, whether these donations were cash, stock, property or “in-kind” donations. Whether an agency manages this income with computer software or the old fashioned way, the Board has the responsibility to see that a ”fail-safe” process is in place.
The nonprofit has tax responsibilities of its own. All non profits with receipts over $25,000 are required to file an IRS Form 990. Failure to file or omissions in filing may result in penalties. There are also tax liabilities for any nonprofit that runs a business to help support its mission. If the nonprofit has staff, there is the inevitable need for all the record keeping that comes with paying salaries. A nonprofit is like any other business in that respect. Taxes must be paid, money transferred to IRA type accounts and funds directed to medical benefits.
Another financial question that a nonprofit Board must decide is when to have an audit. The audit is a concrete, professional assessment of the financial health and management of an agency. It is certainly appropriate when an agency reaches certain levels of income and activity. An audit is often necessary for agencies that apply for state and federal funds and is a requirement for many grants. For Henderson County nonprofits interested in certification by the Alliance for Human Services, an audit is required for all nonprofits with annual revenues in excess of $300,000 for a Level 1 accreditation, and an audit is required for all agencies seeking a Level 3 accreditation.
Many donors are also interested in reviewing the financial operations of an agency. There are other less costly options in lieu of an audit. They are a Review, looking at the agency but not in detail and does not come with a CPA opinion, and a Compilation, nothing more than putting information in order, somewhat like a financial statement, again with no CPA “blessing.” The decision to engage in an audit is one a board should weigh carefully.
Over the years, nonprofit finance management has gotten more complex. An audit will help a growing agency establish good financial controls. Some of the control issues revolve around who opens the mail, how donations are tracked, how restricted funds are managed and allocated, and how overall reporting is done. After all, a nonprofit is the one place where daily mail often includes checks from donors.
Another issue is check signing. Although the Board members are volunteers, they have the responsibility for fiscal management. In many organizations, the Executive Director may have check signing ability only to a certain dollar amount and then Board policy requires a second signature, usually the Board Chair, Vice-Chair or Treasurer. Because Boards are volunteers, an agency usually needs that many authorized signatures to make sure that at least one member is in town when check signing is necessary. For every financial function there should be two people responsible. The Board should also have an audit committee – a group of Board members who sit down with the auditor to review the audit and discuss the issues that the auditor brings forward. The audit contract should also include the preparation of the Form 990.
Completion of the audit is probably a good time for the Board to review financial policies of the agency and to review the financial articles of the Bylaws to make sure that actual operations are reflected in the agency’s administrative documents. A nonprofit has to be prepared to demonstrate that financial controls are in place. This is a big responsibility for the Board of Directors and has the potential to be a big liability for the Board.
I would like to thank my friends, Peggy Judkins, retired CPA, and Todd Webb, CPA for helping me walk through these issues. Peggy has a P.S. – check out the IRS website, www.irs.gov and click on “Publications” for a good place to start researching taxes and nonprofits.
Note: IRS now requires all nonprofits regardless of size to file an annual 990.
Januay 2004 What ou Audit Know