Many nonprofit organizations feel that once they receive that all-important tax-exemption letter from the IRS, they are worry free, mistaking “tax-exempt” for “regulation exempt”. Not so. In fact, there is more and more scrutiny of the tax-exempt sector, and the ever-changing state and federal regulations can catch the unwary by surprise. Older organizations that have not looked at their corporate documents or operations for years may not be compliant with current laws and may not be protecting their Board of Directors. What’s more, their policies or lack of policies may put them at risk of an IRS audit.
While the attorneys at Magill and Rumsey will be glad to give legal assistance in the event of an audit or litigation, we know that is something you would much rather avoid. It may be time to consider a legal audit as a sound investment for your organization.
A legal audit is an overview of nonfinancial compliance. Typically, an attorney will meet with the Executive Director and President of an organization to understand the nature and scope of the nonprofit’s activities, including fundraising, and go through a checklist of documents that should be reviewed. The attorney will review the documents, ask questions about current practices and ultimately write a memo to the client recommending any changes that should be made.
Here are some of the main areas to consider:
The IRS Form 990. It was redesigned in 2008 and is now truly an informational return. Fully seventy-five percent of the form relates to activities rather than finances. Even though some of the questions on the 990 do not have a right or wrong answer, how you answer can raise red flags with the IRS. In fact, in its 2012 Annual Report, the IRS said that “the IRS uses the Form 990 responses to select returns for examination” because, they say, there is a correlation between certain governance practices and tax compliance. Are your governance policies up to date?
State registration and solicitation. Are you registered in every state in which you fundraise or receive donations? Do you have a website, or are you thinking of setting one up? If so, have you examined its effect on state fundraising requirements? This is very important. Some states impose penalties on organizations that fundraise without first registering there. In a few states, board members even risk being charged with a felony if they breach solicitation laws.
Do you need to file an annual report with the state in which you are registered? Are you registered to do business in all the states in which you operate? If your operations in another state are extensive enough, you might have to register with other regulators there. For example, foreign nonprofits operating in Michigan often must obtain a Certificate of Authority to Transact Business or Conduct Affairs in Michigan. Failure to do so can have serious consequences.
Do your articles of incorporation or bylaws need to be updated to give your directors all the protection available under the law? Do your corporate documents correctly describe your current operations? Do your Board meetings comply with your bylaws? Have your documents been updated to take advantages of amendments to state laws to allow for new technologies used in meetings, notices, voting, etc.?
Has your organization lost its tax-exempt status for failure to file informational returns with the IRS, or is it in danger of doing so?
Are you entitled to other tax exemptions that you are not receiving (e.g., sales tax exemptions, exemption from real property taxes)?
Other issues that may need review are:
UBIT (Unrelated Business Income Tax)
These kinds of issues are often ignored until they produce problems. It is better to review documents, policies and procedures before problems arise. Talk to one of the Attorneys at Magill and Rumsey, P.C. about what may be involved in a legal audit, to avoid major headaches later.