IRS Announces First Round of Revocations for Nonprofits that Failed to File Form 990

The IRS is conducting the biggest crack-down on nonprofits in my memory.  I believe part of this is an attempt to make up sluggish revenues due to our recession.  The implication for nonprofits is great and the burden falls greater on small nonprofits.  Think garden club or the local Kiwanis Club.  Those with revenues below $25,000 per year are now required to file a 990 (pick the form).

According to Nonprofit Times, "In 2008, nonprofits known as “nonprofit institutions serving households,” a broad subset of the sector, generated 5.2 percent of U.S. GDP, representing $751.2 billion worth of output. Nonprofits’ share of GDP grew 0.4 percentage points from 1998 to 2008."

As a friend pointed out the other day, nonprofits are domestic because most work to benefit their local communities.  That means nonprofits typically are not shipping jobs off shore, but instead keeping them local, very local.

I get it...we need revenue, but cracking down on the small nonprofits may not be exactly the most efficient way to get there.  Thanks to the folks at Venable for another great article on trends in the nonprofit sector.  Bunnie

Audra J. Heagney

Kristalyn J. Loson

 

IRS Announces First Round of Revocations for Nonprofits that Failed to File Form 990 

by Audra J. Heagney and Kristalyn J. Loson 

On June 10, 2011, the Internal Revenue Service ("IRS") released the complete list of approximately 275,000 nonprofit organizations that have lost their tax-exempt status for failure to file Form 990, Form 990-N, Form 990-EZ, or Form 990-PF for three consecutive years. The list of revoked entities is available on the IRS website.

The list includes the organization’s name, Employer Identification Number, last known address, and effective date of revocation of exempt status; it will be updated monthly. In its announcement, the IRS indicated that it believes most of these organizations are likely defunct, however, it has issued guidance regarding the steps such organizations must take to apply for reinstatement of their tax-exempt status.

This is the first group of revocations resulting from the passage and implementation of the Federal Pension Protection Act (the "Act"), passed by Congress in 2006. The Act mandated annual filing requirements for virtually all tax-exempt organizations, including tax-exempt organizations with gross receipts of $25,000 or less that were not previously required to file an annual return with the IRS. The Act also provided for the automatic revocation of any tax-exempt organization that does not file the required returns or notices for three consecutive years, and requires the IRS to publish and maintain a list of all such organizations that are so revoked.

In conjunction with its recent publication of the names of the first wave of organizations with revoked tax-exempt status, the IRS also issued guidance regarding the impact that the revocations have on charitable contributions to revoked organizations, and the manner in which organizations may seek reinstatement of tax-exempt status, including retroactive reinstatement. The IRS also announced transition relief for certain small tax-exempt organizations.

In connection with the announcement and publication of revocations of exempt status, the IRS issued the following guidance:

Revenue Procedure 2011-33 (Contributions to Revoked Organizations) states that where an organization listed in Publication 78 ceases to qualify as an organization to which contributions are deductible under Section 170 of the Internal Revenue Code (the “Code”), as a result of loss of exempt status due to failure to file annual reports for three consecutive years, grants and contributions made to the organization by persons unaware of the change in the status of the organization generally will be considered allowable if made on or before the date of publication of the list of revoked organizations. The IRS may disallow a deduction for any contribution made after revocation of exempt status but prior to the published notice of the revocation where the grantor had knowledge of the revocation prior to publication, was aware that revocation was imminent, or was, in part, responsible for the revocation. Publication on the list of organizations whose tax-exempt status has been revoked is intended to serve as a notice to donors and others that they may no longer rely on a prior listing in Publication 78.

Revenue Procedure 2011-36 (Reduced Fee for Reinstatement) reduces to $100 the user fee charged for the reinstatement of exempt status of small exempt organizations that normally have annual gross receipts of not more than $50,000 whose exemption was automatically revoked pursuant to Code Section 6033(j).

Notice 2011-43 (Transitional Relief) provides transitional relief for small organizations that had their exempt status revoked because they failed to file a required annual electronic notice for the last three consecutive years. An organization with annual gross receipts of less than $50,000 that qualifies for transitional relief pursuant to the criteria set forth in this Notice, and applies for reinstatement of exempt status by December 31, 2012, will be treated as having established reasonable cause for failure to file annual returns and exempt status will be reinstated retroactive to the date it was revoked.

Notice 2011-44 (Process for Reinstatement) sets forth the steps that an organization must take to apply for reinstatement of exempt status and request retroactive reinstatement after an organization's tax-exempt status was automatically revoked under Code Section 6033(j). An organization must use the same form filed by other applications for recognition of tax exemption to seek reinstatement, and must pay the applicable user fee. If an organization is seeking retroactive reinstatement, it must submit information demonstrating reasonable cause for failure to file an annual report, among other supporting materials.

The Treasury Department and the IRS intend to issue regulations under Section 6033(j) of the Internal Revenue Code, implementing rules regarding the application for reinstatement of tax-exempt status and the request for retroactive reinstatement. Comments are currently being solicited on the materials and issues addressed in Notice 2011-44. Comments are due August 19, 2011. 

You can contact the folks at Venable, LLP at http://www.venable.com.

Protection of Charitable Assets Act: What the New Uniform Law Would Mean for Nonprofits

We hear a lot in the news media about laws affecting business.  Are existing laws or tax code restricting business?  Encouraging business?  Affecting the ability of business to get the economy growing?  

According to a 2007 report from Johns Hopkins, nonprofits generate a significant amount of our gross domestic product, or GDP.  "' Private, not-for-profit hospitals, schools, social service agencies, symphonies, environmental groups and many other organizations — accounts on average for 5 percent of the GDP in the countries covered, and exceeds 7 percent in some countries, such as Canada and the United States. By comparison, the utilities industry — including gas, water, and electricity — in these same countries accounts on average for only 2.3 percent of GDP, the construction industry for 5.1 percent, and the financial intermediation industry embracing banks, insurance companies, and financial services firms, for 5.6 percent."  

For that reason and many others, I find myself becoming weary of lawmakers (many of whom have no idea of what goes into running a nonprofit) formulating regulations that ultimately are harmful to small nonprofits.  

Here in the U.S. we had a law called Sarbanes-Oxley that was supposed to regulate large business and prevent another mega melt-down like Enron.  But the end result was a series of regulations that none but the largest nonprofits could comply with adequately.

The IRS has recently begun a crack down on Girl Scout troops, church auxiliaries, garden clubs and a multitude of small nonprofits whose combined assets don't amount to a hill of beans.  

Now this.

A proposed new uniform law that seeks to establish reporting requirements for nonprofits with $5,000 or more in assets.  So if you have a couple computers, a copy machine and a few desks, you are now required to file an annual report with the Attorney General of your state?

Will someone please find out what drugs these regulators are taking?

This is beyond the pale and has serious consequences for nonprofit entities.  Never mind the amount of money required to enforce such ridiculousness.  

Thank goodness for the folks at Venable who keep an eye on these things.  Jeff Tenenbaum, Robert Waldman and Alexandra Megaris provide us with a glimpse of what this new law might mean.  Pay special attention and in the meanwhile, I will try to find out how you can weigh in on this knuckle-headed process and report back to you when I do.  Bunnie

Protection of Charitable Assets Act: What the New Uniform Law Would Mean for Nonprofits

By Jeffrey S. Tenenbaum, Robert L. Waldman, and Alexandra Megaris 

Jeff Tenenbaum

Alexandra Megaris

Robert Waldman

The committee tasked with drafting a new uniform law that regulates charities and charitable assets has released the newest version of the proposed law, renamed the Protection of Charitable Assets Act, which is currently under consideration by the drafting committee. If ultimately approved, the uniform act could become law in many states.

What is a uniform law? The Uniform Law Commission (“ULC”)—the same body that recently drafted and ushered through the Uniform Prudent Management of Institutional Funds Act—is an organization comprised of state commissions on uniform laws from each state, the District of Columbia, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands. Once the ULC determines that a specific area of law should be uniform, it appoints a committee to draft the model legislation. The final uniform law is then submitted to a vote by the entire Commission. Once the ULC approves a proposed Model Act, the states then vote. A majority of the states present, and no less than 20 states, must approve an act before it can be officially adopted as a Uniform or Model Act.

At that point, a Uniform or Model Act is officially promulgated for consideration by the states. The state legislatures are urged to adopt Uniform Acts exactly as written, to “promote uniformity in the law among the states.” 

What would the Protection of Charitable Assets Act do? The proposed act would do four main things: 

(1) define the authority of the state Attorney General over the protection of charitable assets in that state; 

(2) impose a registration requirement; 

(3) oblige charities with assets above a minimum amount to file an annual report; and 

(4) require a charity to notify the state in advance of certain specified “life events.”

1. Authority of the State Attorney General. The model act authorizes the Attorney General of each state:

• to enforce the use of charitable assets by a charity for the purposes for which the asset was given;
• to “act to prevent or remedy” a breach of a legal duty by the charity; and
• to seek declaratory or injunctive relief to determine that an asset is a charitable asset.

In addition, the law would give the state Attorney General the power to commence or intervene in an action filed by another party to prevent or obtain damages for a violation of the law. The state Attorneys General would have the ability to initiate investigations and issue administrative subpoenas to charities in order to determine whether charitable assets are being used for the purposes for which the asset was given. While many state Attorneys General already exercise significant regulatory oversight over nonprofit organizations operating in their states, other state Attorneys General take a less active role. The proposed model law, if adopted by the states, would establish uniform standards in this area. 

2. Registration and Reporting Requirements. The Model Act, as currently drafted, would require each charity that holds or administers charitable assets above $5,000 and that meets one of the following five criteria to register with the state: is organized (e.g., incorporated) under the state’s law, has its principal place of business in the state, holds charitable assets in the state other than assets held for investment purposes, conducts activities in the state, or holds assets that are given for the benefit of a person in the state. The registration provision includes limited exemptions for governmental, political, religious and financial entities and certain individuals holding charitable assets.

3. Annual Reports. Charities with assets above $5,000 also would be required to file an annual report with the state Attorney General. The report would require basic accounting and financial information and require the charity to attach its IRS filing (e.g., Form 990).

4. Notice to State Attorney General of Reportable Events. Charities required to register under the proposed statute also would be required to notify the state Attorney General if any of the following events occur:

• dissolution or termination of the charity;
• disposition of all or substantially all of its charitable assets;
• a merger, conversion or domestication; or
• removal of the charity or of a significant charitable asset from the state.

This proposed uniform law would impose significant registration and reporting requirements on many charitable organizations across the country, especially on those that operate in multiple states. We will continue to monitor the status of the proposed model statute. A final draft of the statute is expected to be introduced and voted on at the annual meeting of the Uniform Law Commission commissioners in July 2011.

Mr. Tenenbaum is a partner with Venable and chairs the firm's Nonprofit Organizations Practice Group, as well as its Credit Counseling and Debt Services Industry Practice Group. Mr. Waldman, a tax partner, chairs Venable's Business Division. He also leads Venable's national representation of tax-exempt organizations. Ms. Megaris is an attorney in Venable's Regulatory Practice who works regularly with the firm's nonprofit organization clients. She is resident in Venable's New York office.

 

Decline and Fall of the Vanguard Public Foundation

Richard Cohen is an excellent, thoughtful writer and I am always pleased to feature his work here.  This is a long article, however, it is very instructive.  Often we think of "ponzi schemes" only happening in "for-profit" enterprise, when the truth is, nonprofits are ripe for this kind of use and abuse, maybe even more so since nonprofits are not measured by money earned but by services provided.  Additionally, boards of directors of nonprofits may not conduct the due diligence of boards of directors of for-profit corporations.  Whatever the cause and effect, the real pay off in this article are Richard's conclusions at the end.  Bunnie

(This article is reprinted with permission from Blue Avocado, a practical fast-read magazine for community nonprofits. Subscribe free by sending an email to editor@blueavocado.org or at www.blueavocado.org.)

Decline and Fall of the Vanguard Public Foundation 
by Richard Cohen

Once acclaimed as a pioneer in philanthropy and an important force for social justice, the Vanguard Foundation is no more. The full story will take years to emerge, but we report here in Part I on some of the clues to its sorry demise. A link to Part II is at the end of the article.

In San Francisco, the Vanguard Public Foundation is out of business, its nonprofit status suspended by the California Secretary of State, its website down, its assets apparently gone. Federal and state court lawsuits involving donors, investors, staff, and trustees question what happened to millions of dollars that flowed through the foundation to progressive causes.

But nonprofits and foundations go out of business all the time, particularly in this nonprofit-devouring recession. What makes the Vanguard Public Foundation worth special inquiries? Is it because of the celebrities associated with Vanguard -- Danny Glover, Harry Belafonte, and United Farm Workers co-founder Dolores Huerta, among others? But the glam factor is not the story.

The Vanguard Public Foundation (not to be confused with the Vanguard Charitable Fund related to the for-profit Vanguard), was lauded in its heyday as a new wave of philanthropy, a generational shift, an exemplar, and a model.

The famous people associated with the foundation are neither the story nor the cause of the foundation's demise. Rather the story may be one of organizational hubris, board narcolepsy, and the disease of our time: the siren song of the get-rich investment plan which, like Bernie Madoff's ponzi scheme, was just too good to be true.

A new generation of philanthropy

Established in 1972, the Vanguard Public Foundation was among the first of the social justice foundations established by the young scions of wealthy families, inheritors of corporate fortunes who were devoted to supporting a progressive, very liberal social and political agenda. One of the first of the "rich kid foundations," Vanguard was heralded as an inspiring model of a new generation's remaking of philanthropy.

Vanguard rose as a leader among some two dozen new progressive public grantmakers that became members of a network called the Funding Exchange. Largely modeled on Vanguard are the Haymarket People's Fund in Boston and the Liberty Hill Foundation in Santa Monica. In 1977, Vanguard produced the bible for these funds, Robin Hood Was Right: A Guide to Giving Your Money for Social Change, re-issued by the Funding Exchange 25 years later.

Vanguard's grantmaking role remained distinctive, putting money into social movement causes, often before they became politically acceptable and often to organizations and actions that were never going to generate mainstream support. Among the often controversial groups that benefitted from Vanguard grants:

• Act Now to Stop War and End Racism (ANSWER)
• Astraea National Lesbian Action Foundation
• Center for Third World Organizing
• Emilio Zapata Oakland Street Academy
• Free Mumia Abu-Jamal
• KPFA (Pacifica Network Free Speech Radio)
• National Immigration Project of the National Lawyers Guild
• Rainforest Action Network
• School of Unity and Liberation (SOUL)
• Solidarity Info Services
• Southern Poverty Law Center
• Young Worker Project

Vanguard was a friend to emerging causes which often went on to become more accepted by the public and more fundable by mainstream foundations. Donors also gave funds to such causes through Vanguard, enabling unincorporated groups to receive donations.

These are the kinds of grants that cause heartburn for the likes of Glenn Beck ("Marxist foundations of the 'social justice' movement") and Bill O'Reilly ("pinheads!").

Are progressive foundations in general suffering?

Is Vanguard's demise reflective of a downturn in these foundations of young (and in many cases, now no longer young) progressive rich people? While just about every public foundation has experienced the downturn while raising money from wealthy donors, the members of the Funding Exchange look healthier than one might expect, even in many cases increasing their grantmaking over a period of many peaks and troughs in the economy. For example, grantmaking grew between 1998 and 2008/9 at Liberty Hill, the Appalachian Community Foundation, Bread and Roses Community Fund (Philadelphia), the Headwaters Foundation for Justice (Twin Cities), and the McKenzie River Gathering (Oregon).

Others have shrunk over the years, perhaps as the big community foundations offered themselves as social justice competitors for donor-advised funds, others perhaps simply due to changes in leadership and management. The Southern Partners Fund in Georgia, Haymarket, and even the North Star Fund in New York City are significantly smaller than they were a dozen years ago, but they still exercise influence in their communities and within the philanthropic sector.

Unlike many of its peer progressive foundations, the Vanguard Public Foundation dissolved into nothing -- other than litigation. Why?

Mouli makes the world go 'round

In 2002, Vanguard leadership met an exceptionally intriguing entrepreneur named Samuel "Mouli" Cohen. In addition to his glamorous background, Cohen reportedly promised to achieve astonishing financial returns using Vanguard's funds as investments.

The Israeli-born Cohen (no relation to this author) and his wife Stacy lived the lifestyle of the rich and famous in a mansion in Belvedere, California. A master of self-promotion, Cohen's multiple personal websites, Facebook page, and press releases reveal him to be anything but modest; he describes himself as a "brilliant visionary," "business tycoon and magnate," "world renowned philanthropist," and "super entrepreneur."

Given the charges and countercharges now swirling around Mouli's relationship with the foundation and its leaders, some of his self-promotion is unintentionally humorous and ironic, particularly this from his Mouli Cohen on Business webpage: "(I)ntegrity is one of the most important characteristics for any investor. Investors, customers, employees and partners will reward you endlessly if you always act with complete integrity, according to Mouli Cohen."

It's hard not to give him one-name celebrity status, like Cher, Bono, Usher, or Madonna; his over-the-top persona demands it. As a philanthropist, Mouli's exploits, mostly known from press releases and philanthropic blog posts that he seems to have generated, didn't sync with Vanguard's values, mission, or funding priorities.

For instance, representative of Mouli's philanthropic activities were support for the European Center for Jewish Students, which works to increase the Jewish population of Europe against the threat of intermarriage and assimilation; a Jewish orphanage in Odessa; facilities development at the Ukraine tomb of a Lubavitcher Hasidic rabbi; and a library and museum in Israel affiliated with the Lubavitcher Hasids. In addition, he claims to be a leader and donor to several organizations which mention him nowhere on their websites, including Camp Okizu, Seva Foundation, and Soroko Medical Center.

Regardless of these differences in philanthropic goals, Vanguard became interested in Mouli for his investment acumen. A self-described technology entrepreneur, he claims to have founded or led business ventures which have generated some $3 billion in shareholder value. One of his more recent activities was a digital entertainment firm called Ecast, which provides services to bars and nightclubs.

The picture blurs

Now the story gets murky with a mix of charges and countercharges, and of course, litigation. Apparently, in 2002, Mouli met Vanguard CEO Hari Dillon and actor/activist Danny Glover. According to complaints filed in state and federal courts, Mouli said he would help the foundation by allowing Vanguard and its individual donors to buy shares in the privately owned Ecast. Dillon and Glover formed general partnerships through which they purchased several million dollars worth of Ecast -- or thought they did. The Contra Costa Times reported that Vanguard donors ultimately put in over $20 million more in philanthropic money and personal investment cash. How much of this was Vanguard money repurposed through Mouli is unclear.

The story gets even murkier. The investors -- now plaintiffs -- say Mouli stated that Ecast was to be acquired by Microsoft, which would generate a return on investment, according to the Times, of 1,000 percent. And according to peHUB Wire, the deal was to buy Ecast stock at $3.50 a share, but get paid off in Microsoft shares after the purchase at $23 per share. But something or other kept putting off the miracle. The Microsoft acquisition reportedly got delayed over EU rules, which generated a need for more fees to cover transaction costs. Then there were reports that Ecast was considering a competing bid from Google, further delaying the deal. Ultimately, there was no Microsoft purchase, no Google bid, and the money disappeared ("stashed" in Cohen's secret accounts and distributed to family members like wife Stacy, according to plaintiffs), and the investors were, one might say, aggrieved.

Mouli's attorney denies it all.

Even Ecast sounds aggrieved, stating that Mouli Cohen left Ecast in 2002, roughly when these dealings began. An Ecast attorney told Vending Times that the firm has had "ongoing" legal problems with Cohen, including two cases filed in 2003 and 2004 against Cohen about "very similar" charges that were settled out of court. If it was true that Dillon, Glover, and the Vanguard Public Foundation investors thought they were buying Ecast stock, they were doing so with a guy who had been out of Ecast's picture for years.

Transforming a social justice foundation into what?

But questions of questionable management and governance decisions at the foundation do not seem to have been limited to this speculative multi-million dollar investment with someone of dubious provenance. Why didn't someone notice the following?

• Annual operating deficits: $427,000 deficit in 2003, $1.33 million deficit in 2009 and $1.37 million deficit the subsequent year
• Deficit of $1.95 million in 2006, nearly equal to the $1.99 million received in contributions, gifts and grants
• In its last publicly accessible Form 990 in March 2007, Vanguard had total assets of $453,000 and total liabilities of $3.59 million
• That same 990 showed $1.25 million in loans from officers and directors and $1.8 million in mortgages and other notes

The operating deficit dropped to "only" $1.2 million on its final Form 990, but by then the foundation was living on fumes -- or loans.

By 2007, loans from officers and directors included $5,000 from Danny Glover, $100,000 from board member Susanne Moore, and $600,800 from CEO Hari Dillon. In Vanguard's 990 for the fiscal year ending in 2008, Dillon's loan to the foundation had grown to $1,172,511.

The Vanguard Public Foundation was living on borrowed funds largely from the CEO, whose salary and benefits at the foundation combined do not appear to have ever topped $90,000 annually. But the foundation didn't appear to be thinking about belt-tightening during this period of financial stress. Travel expenses skyrocketed and salaries grew as significant funds were used to send CEO Dillon, senior staff member Gus Newport, and others on "projects."

A grantmaking foundation was turning into an operating foundation, running its own programs instead of making grants to nonprofits. In its last available 990, the foundation lists $3.35 million in total expenses, including the following:

• $600,000 from Vanguard's donor-advised funds to the Peninsula Community Foundation
• $103,000 from non-donor-advised funds to Gathering for Justice c/o Belafonte Enterprises (singer Harry Belafonte is one of Vanguard's founders)
• Only $129,000 in other non-donor-advised grants

In the fiscal year ending March 2007, Vanguard's total expenses were almost exactly what it owed in loans. The foundation was investing, borrowing, and spending itself out of existence.

Oddly, the partnerships established by Dillon to invest money in Mouli Cohen's Ecast scheme made him personally fully liable for the funds. Typically, a general partner would never expose himself to such risk, unless perhaps the deal was a sure thing with a big upside. But the foundation's investments and the donors' additional funds didn't yield a nickel, at least perhaps to anyone other than Mouli Cohen. This left Dillon on the hook. In 2010, Dillon filed for personal bankruptcy, listing assets of $836,000, primarily from the value of his home, secured claims of $721,000 (probably a home mortgage), and unsecured claims totaling a whopping $21.6 million.

Lessons from Vanguard's demise

These are all clues to a story for which we have neither an end nor a satisfactory answer about motivations and choices. More of the Vanguard Public Foundation story will emerge in the months ahead as lawsuits wend their ways through the courts, but some lessons are discernable now:

1.      Too good to be true: The lesson of Mouli Cohen, like the lesson of Bernie Madoff, is to be careful about schemes that will make your nonprofit or foundation rich. Mouli's deal was better than anything Bernie Madoff ever pitched. It should have been obvious.

2. Character counts: Dillon and many of the Vanguard people are hard to find now or won't speak on the record, but Mouli continues to issue self-congratulatory pronouncements on his website. It's hard to imagine that the philanthropic values of Mouli Cohen (or his wife, the author of the Kosher Billionaire's Secret Recipe) were any kind of comfortable match with those of the foundation.

3. Non-attentive trust in the CEO is not a healthy governing model: With warning signals in abundance, observers suggest that the board was even a little mesmerized by the CEO and his celebrity friends. And board meetings were reportedly very rare.

4. Give the grants to nonprofits, not yourself: It's so easy for foundations -- even progressive foundations -- to decide they should run their own programs rather than give grants. Whether one agrees with Vanguard's agenda or not, a legacy of giving grants to causes it believed in would have been one to be proud of . . . rather than one dirtied by using the funds on its own activities.

5. Are progressive groups especially vulnerable to disengagement? Some have suggested that Vanguard's moves to turn over some decision making to community leaders left donors disengaged, and resulted in board members who were less attentive to grantmaking decisions and governance responsibilities.

6. Sleepy press, sleepy government: How does a public grantmaker disappear and garner so little attention from the press -- including the nonprofit press -- and no attention from the government? The Internal Revenue Service? The Attorney General?

There are many stories to be found in the rise, decline, fall, and aftermath of the Vanguard Public Foundation, and this article only touches on one of them. Tragic stories have at least as much to teach us as the rosy, jargon-filled stories about themselves that foundations pump out by the thousands. The Vanguard story is one from which we will be learning for a long, long time.

Note: Part 2 of this story was published in the October 5, 2010, issue of Blue Avocado: Here

Preparing for Stricter 990 Filing Requirements

For those of us here in the U.S., it's tax time!  Tax time causes a certain amount of angst, whether it's business, personal or nonprofit filings.  But new rules at the Internal Revenue Service regarding small nonprofits will potentially derail nonprofit efforts.  Whether it's the local Kiwanis Club or the Boy Scout troop, leadership and board members need to know the new rules regarding fundraising and reporting.  Lynne Leavitt lays out what you need to know simply and easily.  In my own experience, I have found the IRS fairly helpful and easy to work with as long as you are straightforward and honest.  It's okay to tell an IRS agent that you don't know the rules or how to do something.  Really, if you have a question, pick up the phone and call.  Bunnie


Preparing for Stricter 990 Filing Requirements

by Lynne Leavitt, CPA with Brakensiek Leavitt Pleger LLP

From neighborhood baseball leagues to local senior centers, thousands of small nonprofits across the country are at risk for stiff penalties or even loss of their federal tax-exempt status. 

Such organizations may not be aware of the recent IRS changes that are responsible for this situation. 

A critical redesign of the IRS form known as the 990 now requires nonprofits to reexamine their tax reporting procedures to make certain that anyone filing forms on the organization's behalf is aware of the new tax provisions.

The new 990 filing requirements went into effect at the beginning of 2008 for tax-exempt organizations with gross revenues of $1 million or more. 

A 990-EZ, or short form, was required of all other nonprofits with revenues over $25,000. 

A progressive lowering of the gross revenue threshold over the past three years has caused significant concern among nonprofit personnel and their financial advisors. 

In 2009, the threshold for filing the new 990 long form dropped to $500,000 in nonprofit gross revenues. In 2010, the 990 form is required from nonprofits earning $200,000 or more. 

Fees for simply preparing the revised 990 form can easily reach $6,000, a cost that could represent a significant expense to a small nonprofit. 

The 990-EZ form, which costs substantially less and saves a considerable amount of time, can only be used by nonprofits under the standard form 990 gross income threshold. Nonprofits with gross revenues under $25,000 are required to file an electronic Form 990-N (e-Postcard) online. 

On July 26, 2010 the IRS announced that it is providing a one-time relief for organizations grossing less than $1 million that have tax filing dates before October 15, 2010 and that have failed to correctly file in the past three years, allowing them to retain their tax-exempt status.  

This one-time exemption only applies to organizations required to file Form 990-N and Form 990-EZ.
Adding to the challenges now faced by nonprofits, the IRS has hired an additional 100 tax examiners whose job is to audit nonprofit returns in order to ensure compliance with the new requirements. 

Clearly, the IRS is not taking the new filing requirements lightly - it has already revoked the tax-exempt status of many nonprofits for non-compliance. When such organizations lose their tax-exempt status, they must shoulder the time and expenses of reapplying. 

In the interim, any income earned during that process could be taxed, and donations to the group would not be tax deductible to the donor.

The IRS rationale for imposing these strict new requirements on nonprofits is simple: Past abuses, such as inflated salaries and unsound conflicts-of-interest have raised public concern over governance of these organizations. 

On the other hand, a nonprofit with gross revenues under $500,000 may have a volunteer board and the staff may not have the necessary expertise to keep up with esoteric tax-filing requirements, and their accountants may not possess the necessary skills and expertise required. 

The new Form 990 is designed to promote transparency and disclosure, thus making the nonprofit's operations open to public scrutiny. 

The questions posed are extremely detailed, and will require organizations to draft new disclosure policies and procedures in order to meet filing requirements.

For most nonprofits, the key to staying in compliance and retaining the trust of watchful donors is to become familiar with IRS requirements and to take appropriate measures to ensure that IRS filings are as accurate and detailed as possible. 

This may mean seeking out a tax accounting firm with extensive nonprofit experience.  In view of the implications for nonprofits who fail to meet the IRS expectations, such action may be the best investment that organizations could make.

Lynne Leavitt, CPA with Brakensiek Leavitt Pleger LLP, has more than 25 years of accounting and tax knowledge with extensive experience assisting nonprofit organizations with all of their financial-service needs.

Common Myths Concerning Nonprofits

There are thousands of nonprofits that are started in the United States every year.  Most are started for excellent reasons, someone finds a need and establishes a nonprofit to meet that need.  The nonprofit or civil society sector accounts for between 5% to 7% of the Gross Domestic Product of eight countries studied by John Hopkins University.  This is as much (or in some cases more) than the banking, insurance, financial services, construction and utilities industries individual share of GDP.  However, as well meaning as founders of nonprofits can be, there are persistent mythologies surrounding nonprofit management.  Greg McRay of the Foundation Group takes on a few.  I would love for people to send me their favorite myths!  Bunnie

Common Myths Concerning Nonprofits
by Greg McRay, EA

Just yesterday, I was interviewing a new student intern candidate in my office. During the course of our wide ranging discussion, the conversation turned to some of the interesting misconceptions we encounter with clients. I made the comment that we often feel like the crew of the Discovery Channel show, Mythbusters. There is a never-ending supply of well-entrenched myths and misconceptions in the nonprofit world…and dispelling them is part of our job! In this article, let’s take a look at a few of the more common ones.

MYTH: Build it and the grants will come.

FACT: Uh, good luck with that.

We get to burst this balloon a lot. Many who are starting nonprofits for the first time are convinced the government is waiting with bated breath for them to get going so they can cut them a check. Given the drunken sailor spending spree in Washington, it’s certainly understandable, isn’t it? Jokes aside, this is too often the by-product of a less-than-ethical fringe of the fundraising profession. Whether it is over-hyping the latest grant writing workshop or selling books on late night infomercials, this mindset doesn’t just come by accident. Here’s a newsflash: Startups are rarely grant funding recipients! The typical startup is much better served by focusing its efforts on building a fanbase of committed donors and only later looking to grants to help them expand what they have proven they can do.

MYTH: Nonprofit means you must zero-out at the end of the year.

FACT: Great plan…assuming you’ve got a pot of money waiting for you New Year’s Day!

Just a couple of weeks ago, a good friend approached me at church. She was recently elected to serve on the board of a small charity and at her first meeting, several of the existing board members were discussing their dilemma: The organization was quickly approaching the end of the fiscal year, but still had money left over. The conversation revolved around how they could spend down this money before the clock ran out. Well, her instincts told her this didn’t sound right. Good for her! And even better that she asked me about it.

I suspect the origins of this myth might be in the corporate world where departmental budgets are often use-it-or-lose-it. Anyone who has worked for a large corporation may be familiar with the race to spend down the budget in years of surplus. Combine that mindset with the notion of nonprofit, and you’ve got a myth in the making. I certainly hope your nonprofit is not sitting on $0 when the ball drops in Times Square!

MYTH: If our nonprofit’s purpose is not panning out, we’ll just shift gears and go in another direction.

FACT: Not so fast. You might want to make sure Uncle Sam is OK with that.

This sort of thing happens all the time. For example, ABC Charity was formed to raise money for cancer research. After a couple of years of disappointing results, the board sees the devastation from the latest disaster and decides to retool their organization as a disaster-relief charity. They make plans to travel to Haiti/New Orleans/Wherever and provide shelter and hot meals to those impacted.

Don’t get me wrong…there is nothing wrong with that in principle. In practice, it is not so simple. When the IRS granted tax-exempt status to this nonprofit, it was on the basis of its proposed program: fundraising for cancer research, not disaster relief. A serious change in purpose and program requires that the IRS be notified in detail on the next Form 990 that is due. Even then, it is highly probable that your case will be transferred to Cincinnati for further review and questions before approval is granted.

This list could go on and on and on. Sometime soon, we’ll share some more common myths and their corresponding realities. Here’s to facts!

You can contact Greg at the Foundation Group, http://www.501c3.org/

Nonprofits, Lobbying and You

Nonprofits, Lobbying and You
by Bunnie Riedel, Host of Nonprofit Conversation


I cannot tell you how often I speak with people who believe that nonprofit 501 (c)3 organizations are prohibited from direct lobbying at the local, state or federal levels. They fear that if they lobby they will lose their tax-exempt status. While there are limits on the amount of direct lobbying a nonprofit can do, they certainly can and should lobby.

The IRS has two tests for measuring direct lobbying: one is the “substantial part” test and the other is the “expenditure test.” Let me dissect these two.

The “substantial part” test is a highly vague measurement of how much time you and/or your volunteers spend on lobbying. It also takes into account expenditures, but offers no real guidance on what “substantial” really means and can be wide open for interpretation depending on which IRS agent has audited your tax return, seriously, I am not kidding on that. In the past the IRS has said that substantial is 5% to 15%, time and money, and they can come down at the low end or high end or somewhere in between.

This uncertainty has vexed nonprofits for years, and frankly scared the living daylights out of them because nobody wants to lose their hard sought tax exempt status. However, if you are ever in the Washington D.C. area and you take notice of the name plates on many buildings or office spaces, you will notice that D.C. is filled to the gills with nonprofits and associations who have headquarters in D.C. for the very purpose of lobbying. And most of those organizations have a 501 (c)3 designation, not a 501 (c)4.

However, the IRS does provide certainty in the “expenditure” test. I call it the “H” designation and basically what you have to do is fill out a very simple form, form Form 5768 and file it with the IRS. It’s like the IRS is saying to nonprofits “If you will just tell us that you are going to lobby, we will give you the guidelines and take the guess work out of your reporting.”

The following is from the IRS’s website:

Measuring Lobbying Activity: Expenditure Test

Organizations other than churches and private foundations may elect the expenditure test under section 501(h) as an alternative method for measuring lobbying activity. Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in section 4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000, as indicated in the table below.

If the amount of exempt purpose expenditures is: Lobbying nontaxable amount is:

≤ $500,000                                          20% of the exempt purpose expenditures

>$500,00 but ≤ $1,000,000                $100,000 plus 15% of the excess of exempt purpose expenditures
over $500,000

>$1,000,000 but ≤ $1,500,000          $175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000

>$1,500,000                                      $225,000 plus 5% of the exempt purpose expenditures over $1,500,000

Organizations electing to use the expenditure test must file Form 5768, Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the organization. Revocation of the election is effective beginning with the year following the year in which the revocation is filed.


Under the expenditure test, an organization that engages in excessive lobbying activity over a four-year period may lose its tax-exempt status, making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess.

In other words, if you have an organization whose exempt purpose expenditures are less than or equal to $500,000 you can spend 20% of that on direct lobbying. And the amounts go up depending on expenditures and are capped at $1,000,000 for direct lobbying.

This designation gives nonprofits a lot of leeway to do what it is they should be doing and that is advocating for their cause.

Now, having said that, you must note that federal lobbying rules have changed in the past few years. Expenditures used to be counted mainly as the time and money you spent for actual meetings to directly lobby. Under the new lobbying rules, everything gets counted including, but not limited to: the time and money you spent preparing to lobby; the time and money spent by staff preparing your lobbying efforts; overhead incurred by your organization (what percentage of operational and capital expenses could be counted against the lobbying activity?).

This is where the accountant comes in.

Additionally, there are ceilings for lobbying expenditures that require the organization be registered as a lobbying organization, see Lobby Disclosure Guidelines and there are reports that now must be filed once an organization has hit that ceiling.

However, while at first blush it might seem daunting, once your organization is in the system, it is easy to file the necessary reports.

I encourage you to do what it is you need to do and that is educate and advocate for your cause. To a great extent, that is what many nonprofits are for, to provide a voice for their cause.

This article is not meant to be a substitute for getting legal or accounting advice from your lawyer or your accountant.  If you have any questions, you can always call the IRS, I have found them to be quite responsive and helpful.

Time's Up! What You Need to Know about Your 990

I'm a little late on posting this one, the deadlines mentioned in this article have passed.  However, I felt it was important to post if only to remind people to check on their filing status, contact the IRS if necessary and find out what needs to be done.  For many small nonprofits, timely and proper filing can be a struggle.  I am also reminded that nonprofits in every country have to be familiar with their own laws.  Thanks to Nonprofit Quarterly for sending me this article.  Bunnie

Time's Up! What You Need to Know about Your 990

by Jeff Narabrook, Thomas H. Pollak, and Katie L. Roeger

If the number of nonprofits registered with the IRS shrinks by 20 percent this year, don’t blame it on an ailing economy. A simpler explanation is available: thousands of small nonprofits may not meet a new filing deadline, causing revocation of their tax exempt status and removal from the IRS list.


Most nonprofits with fiscal years of January 1–December 31 and revenue under $25,000 had 3 years—or until May 17 of this year—to file form 990-N or lose their federal tax exemption. Active organizations that do not file will face fees and lost time as they reapply for their exemption unless reasonable cause is shown for not filing.

But the true story behind any large drop in registered nonprofits may prove to be that long-defunct organizations are finally being removed from the IRS list. An unknown number of inactive organizations are thought to be on the list because, unlike larger organizations that must annually file Form 990 or Form 990-EZ1, small organizations with receipts under $25,000 never had to file annual documents with the IRS. With no further IRS contact ever required, they would remain on the list indefinitely even after ceasing operation unless someone thought to update their status with the agency.

Consequently, the total number of active nonprofits registered with the IRS was long thought to be misleading. Addressing this blind spot in its regulatory system, a provision in the Pension Protection Act of 2006 gave small organizations a three year window to start annually filing the newly created Form 990-N, commonly known as the e-Postcard.[1] That deadline is now only days away for organizations operating on the calendar year.

The public won’t know exactly how many organizations were removed from the list until the IRS starts releasing the information in January 2011, but to get a sense of the large numbers that may drop off the IRS rolls, begin with over 1.5 million─the total universe of nonprofit organizations of any size registered with the IRS in April 2010. Forty percent of those are small organizations that under the 2006 provision are now required to file 990-N2. Approximately 343,000 of those met the filing deadline as of May 1, leaving over 340,000 or 21 percent of all registered nonprofits that have not filed—and that may need to reapply for tax-exemption. (214,000 of these organizations will lose their tax-exempt status on May 18th, 2010. The remaining organizations operate on different fiscal years and have some additional time.)

How many of those 340,000 groups are still active is an open question. The National Center for Charitable Statistics (NCCS) at the Urban Institute attempted to contact a random sample of 100 organizations that had not filed in the past three years and was only successful in reaching 25 of the organizations. Many organizations have been on the IRS list for decades; 47,000 of them were incorporated before 1950 and over 40 percent were registered sometime before 1980.

While some of the organizations may have ceased to exist long ago, it’s also easy to see how active organizations may have never heard of the requirement. The list of non-filers includes 30,000 sports and recreation clubs, 15,000 student fraternity and sorority groups, 17,000 community service clubs, 17,000 veterans’ organizations, and 8,000 parent teacher groups. Although the IRS used a variety of mediums and outreach methods to publicize the filing deadline, direct communications to these organizations were sent to the last address on file with the IRS. Because most organizations of this size are run by volunteers with addresses at the home of the board president or treasurer, the notices may have never reached the necessary person if no one voluntarily updated their address file with the IRS after a change in leadership.

The cost will be significant for those that lose their exemption and need to reapply. They will have to pay the standard application fee of $400 or $850 depending on anticipated gross receipts. A new IRS Web-based application system in the works would provide a cheaper $200 online application option. But assuming only a quarter of the organizations that have not filed are in fact still operating and will have to reapply before the online application is available, it would drain between $127 million and $272 million dollars from the nonprofit sector just to have their status’ reinstated.

Organizations that missed the deadline will have their status’ revoked immediately and will not be permitted a filing extension. Those that were never notified of the change and missed the deadline may want to make a case for retroactive reinstatement of their tax status, which the law provides if reasonable cause can be shown for failure to file.

While speaking at the Urban Institute’s annual Form 990 Meeting in May of this year, Lois G. Lerner, director of the exempt organizations division of the I.R.S, stated that organizations that had received two or three notification letters, but did not find the time to file the 990-N would not considered a reasonable cause, but each case will be handled individually. Lerner also mentioned that the IRS will be “extremely careful” in notifying the public that an organization has lost its tax-exempt status. In fact, between May 2010 and January 2011, only the IRS will know the organizations whose status has been revoked. Donations to organizations that missed the deadline will remain tax deductible until public notification of the revocation is given on the IRS website.

Time will show just how many inactive nonprofits were lingering on the IRS rolls. The best thing organizations can do is to see if they need to come into compliance by visiting the Urban Institute’s National Center for Charitable Statistics searchable database of organizations that are required to file but have not. If they find they are on the list, an officer from the organization should file Form 990-N through an approved IRS 990-N e-file provider here. Those who know of small nonprofits with receipts under $25,000 in their community are encouraged to notify the organization’s officers of the requirement so that they can take immediate steps to address the situation.

[1] Organizations not required to file a Form 990 include churches, integrated auxiliaries of churches, conventions or associations of churches, 501(c)(1) government organizations, black lung trusts, and instrumentalities of states or political subdivisions.

Jeff Narabrook is the public policy assistant at the Minnesota Council of Nonprofits; Katie L. Roeger is the Assistant Program Director of the National Center for Charitable Statistics at the Urban Institute; Thomas H. Pollak is the Program Director of the National Center for Charitable Statistics at the Urban Institute.