What to expect when the IRS comes a-knocking Refining your nonprofit as it grows
Shape the future of your organization in its middle years
Are your procurement procedures up to snuff? News for Nonprofits
NONPROFIT AGENDAS AUGUST/SEPTEMBER 2017
Sechler CPA, P.C. Carolyn Sechler
carolyn@azcpa.com 921 East Orange Drive, Phoenix, AZ 85014 Tel: 602.230.2700/Fax: 602.230.2705 www.azcpa.com
What to expect when the IRS comes a-knocking
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othing can strike fear in the heart of a nonprofit like receiving the news that it’s been selected for an IRS audit — an audit can be intimidating, not to mention costly and time-consuming. That’s why you need to know about the IRS’s recently released internal guidance for requesting audit information from tax-exempt organizations.
selected for audit. The auditor will then wait at least 10 business days before making phone contact.
The guidance explains how auditors in the Tax Exempt and Government Entities Division should issue an Information Documentation Request (IDR) to gather information. The guidance, which took effect April 1, 2017, sets a timeline and certain requirements for its auditors to follow to ensure that all taxpayers are treated in a fair and consistent manner.
The phone call will include discussion of the issue being examined and the items that will be requested on the IDR. The discussion may lead the IRS auditor to modify the IDR before sending it to you. If the request seeks more than one item, the auditor will group the items on a single IDR.
The initial contact The IRS auditor will mail your nonprofit — and, if applicable, anyone with a power of attorney — initial contact letters when your tax return is
Your organization may not have filed a power of attorney form with the IRS unless your CPA or attorney has needed to deal with the IRS in the past.
The IDR discussion
Before the auditor sends the IDR, you and the auditor should agree on the deadline for your response. If you can’t agree on a date, the auditor will assign one. The IDR also will identify the date that the auditor plans to review your responses for completeness. Interestingly, while you’re required to commit to a response date, the auditor commits only to a date by which he or she plans to review it. The guidance further indicates that the auditor “should make his or her best efforts to review the response” by the agreed date.
The follow-up If your response is deemed complete, the auditor must inform you by phone. If the auditor decides your response wasn’t complete — or if you didn’t respond — you might be granted an extension. This decision must be made within five business days, and you could get two extensions.
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How your IRS auditor might — or might not — lighten your load When the IRS published its new guidance on how auditors in its Tax Exempt and Government Entities Division should handle Information Document Requests (IDRs), it also outlined some nonmandatory best practices intended to make the overall process more effective for auditors — which could, in turn, save nonprofits time and resources. For example, the IRS suggests that, during the initial contact phase, its auditor mail the draft IDR along with the contact letter. That would allow the nonprofit to better prepare for the phone discussion with the auditor, potentially expediting it and even narrowing the eventual request. The agency also recommends that its auditors reach out to not-for-profits two or three business days before their IDR response due dates, instead of waiting until that date has passed. Such a reminder would be helpful for an organization juggling deadlines. But remember, this step is just a recommendation — you’d need to set up your own tickler, because you can’t count on an IRS reminder.
The auditor will grant the first extension if, after talking to you about the missing or incomplete items, he or she determines an extension is warranted. Such an extension may run as long as 15 business days. If you don’t respond to the extension approval letter or your response is still incomplete, you might get a second extension of up to 15 business days. In this case, though, the auditor must first consult with his or her manager and obtain approval. If you don’t provide the missing information after this second extension, the auditor will start the enforcement process. In the past, the IRS has been willing to grant extensions when it believed a not-for-profit was acting in good faith. Some extensions had been for several months. That discretion is no longer available — at most, you’ll get two 15-day extensions before the IRS begins enforcement.
The enforcement process The auditor will prepare a delinquency notice, call you to determine an appropriate due date for
your response and mail the notice with the due date noted. The auditor must obtain a manager’s approval if providing you more than 10 business days to respond.
The IRS has been willing to grant extensions when it believed a not-for-profit was acting in good faith. The auditor will review your response within 10 business days. If it’s complete, the auditor will notify you, and the enforcement process ends. If you didn’t respond or your response was incomplete, you’ll receive a proposal of tax adjustment, summons or proposal of revocation of tax-exempt status.
Be prepared The new guidance firms up the IDR timelines for contact between the IRS and not-for-profits. You should have corresponding processes in place to ensure prompt and complete responses. n
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Refining your nonprofit as it grows Shape the future of your organization in its middle years
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our nonprofit isn’t a baby anymore. It’s gone through the initial growing pains of a start-up. You’ve mobilized supporters, formalized governance and centralized management by forming a board of directors and hiring an executive director. You’ve launched some programs and brought in some volunteers. So what’s next?
Does your mission need tweaking? The growth stage — beginning two or three years after formation and continuing until maturity at around age 7 — isn’t without challenges. But this period also comes with a sense of accomplishment and the opportunity to refine and expand your organization.
It may have seemed impossible when your organization was in its earliest stages, but it might adjust its mission during the growth stage in the face of new circumstances. Changed demographics, economic developments or simply greater knowledge could make it appropriate to revise the organization’s purpose.
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Your organization can home in more intensely on a subset of the original mission or it may shift its focus to another area. For example, a literacy organization that started out helping underprivileged U.S. citizens improve their reading skills might expand to include teaching English as a second language to immigrants. The organization may then develop a strategic plan to incorporate the changes to its mission.
Does your board’s focus include the future? Perhaps the most common marker of a not-forprofit in the growth stage is the change in the focus of its board of directors, from day-to-day operations to governance. While the board will usually continue to be active in operations to some degree, it also must begin to work on strategic matters — the policies, planning and evaluations necessary to pave the path to sustainability. The board’s composition is likely to change during this time, as founding board members move on. The result could be a larger and more inclusive group of individuals, preferably with a wider range of skills, talents and backgrounds. Former or current volunteers or clients may ascend to board positions, propelled by their passion for the cause. Boards also can establish committees at this time. Some organizations implement a three-committee structure, with committees for only internal affairs (for example, finance, HR and facilities), external affairs (for example, fundraising, PR and marketing) and governance.
Are you expanding your staff? As the demand for services builds and the board expands programming, staffing will naturally progress as well. Adding to staff in the growth stage will help avoid burnout. Your nonprofit should design a clear organizational structure and hire experienced managers. At this juncture, the not-for-profit also should develop formal job descriptions, with greater job specialization. Employees will now be expected to work under formal systems, following policies and procedures and in a more efficient manner than seen during and after the organization’s launch. The executive director is still the primary decision maker, although he or she may not have time to be as involved in every area of the organization.
Are you augmenting your funding base? Growth-stage organizations are generally in a more comfortable financial position, with less
uncertainty. But, for nonprofits, that uncertainty never completely evaporates. Although nonprofits in the growth stage already have developed good relations with their key funders, there are still challenges in securing the necessary funding (and cash flow) to support current programming. Thus, nonprofits in this stage should look into ways of maintaining growth. These could include diversifying revenue sources, managing cash flow and developing solid budgets. You should work with your financial advisor to identify, monitor and respond to appropriate financial metrics, such as cost per primary outcome, cash reserves and working capital.
Unfinished business Other goals will need to be accomplished in the growth stage. For instance, formalizing your organization’s administrative and operational systems, including those in accounting and finance, should be a priority. Contact your CPA if you could use some professional help with this endeavor. n
Are your procurement procedures up to snuff?
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he new federal procurement standards significantly alter the way nonprofits handle purchasing. And while most organizations have already changed their written policies to comply with the new standards, you may find it easier to follow the rules on paper than in practice.
Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” which takes effect for fiscal years starting in 2017, can be found at federalregister.gov. Enter “78 FR 78589” in the search box. The procurement portion of the standards is effective for years starting after December 26, 2016.
Summing up the standards
According to the standards, the amount of the purchase determines the procurement methods an organization must employ. “Micro-purchases” of supplies or services up to $3,500 generally can
The standards, included in the new Uniform Guidance, impose strict requirements on not-for-profits receiving federal funds. The guidance, “Uniform
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be awarded without soliciting competitive quotes. “Small purchases” of services, supplies or other property that don’t cost more than $150,000 require price or rate quotes from several qualified sources. For purchases exceeding $150,000, you must select vendors or suppliers based on publicly solicited sealed bids or competitive proposals. (Sealed bids are preferred for construction contracts.) You must select the lowest bid or the proposal most advantageous to the relevant program based on price and other factors that impact the program performance. You also must perform a cost or price analysis for every purchase over $150,000, to make independent estimates before receiving bids or proposals.
Noncompetitive proposals solicited from a single source are permissible in only limited circumstances — for example, when a public emergency won’t allow the delay associated with competitive solicitation. The new standards require procurement procedures documented in writing. Conflict of interest policies must be included covering employees involved in procurement as well as all entities owned by or considered “related” to the organization. You also must keep records detailing each procurement, including bids solicited, selection criteria, quotes from vendors and the final contract price. Designing a checklist that outlines the decisions needed at each price level
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will make the process more manageable, as will keeping the required documentation.
Clearing hurdles to compliance By now, most nonprofits are already into their 2017 fiscal years and should already be in compliance with the new standards, although some have found it to be a struggle. Significant barriers to full compliance include: Culture shock. Not-for-profit organizations, like for-profit companies, often have selected their suppliers and contractors based on historical performance and personal relationships. But the new standards don’t consider those to be good reasons. As a result, not-for-profits must adopt an entirely new mindset — no small task for any organization! It calls for multiple rounds of staff training and visible buy-in from the highest levels of management. Staff resistance. It can take longer for the frontline staff to adapt to a new approach than management. Even if they’re willing to change, they may need some time to break old habits. You might consider including compliance with the new procedures as part of their performance evaluations. Documentation overload. The new standards come with a boatload of documentation requirements that few organizations previously met. New policies and even checklists won’t ensure compliance with these demands.
Better safe than sorry While real, these barriers can — and must — be overcome. Failure to comply with the procurement standards could result in your nonprofit’s loss of federal funding. You can reduce that risk, though, by auditing your new procedures and processes to confirm that they’re getting the job done. If you need assistance, your CPA can help. n
NEWS FOR NONPROFITS PayPal faces lawsuit over diverted donations Payment processing company PayPal faces a class action lawsuit over its “Giving Fund” platform. The lawsuit claims the platform lists charities that aren’t registered to receive donations and doesn’t inform donors that unregistered charities won’t receive their donations. The suit also alleges that PayPal redirects donations intended for unregistered charities to other organizations of its own choosing. The case was filed on behalf of donors whose donations weren’t delivered as intended, as well as registered and unregistered nonprofits listed on the platform who didn’t receive their donations, either. n
Funding impedes nonprofit HR’s top priorities A Nonprofit Talent Management Priorities Survey by consulting firm Nonprofit HR uncovered the talent management priorities of nearly 300 nonprofit leaders and HR professionals from organizations nationwide (representing a diverse range of budgets, staff sizes and missions). The top talent acquisition priority cited was attracting diverse talent. But many respondents indicated they lack the funding to accomplish that and other goals. The study also looked into areas such as culture and engagement,
performance management, and learning and development as they relate to managing talent. The full results are available at nonprofithr.com. Click on “Education & Insights” / “Data.” n
Report sheds light on state charity regulators The Urban Institute, an economics and social policy think tank, has released a free, downloadable primer that looks at the regulatory and enforcement activities of state charity officials’ offices. The regulators vary greatly (in resources and staffing, for example) and the information can provide organizations with valuable information on how to work with their state regulators. The primer, State Regulation and Enforcement in the Charitable Sector, includes an analysis of laws for charities in 56 U.S. jurisdictions and a survey of all state and territory offices about their enforcement strategies. Included are interviews with officials in about two-thirds of those offices. You can find the report at urban.org by entering “state regulation” in the search box. n
Peer-to-peer fundraising takes a hit Revenues dropped by 2.8% in 2016 for the nation’s largest peer-to-peer fundraising campaigns, according to the 2016 Peer-to-Peer Fundraising Thirty Survey from the Peer-to-Peer Professional Forum, which offers support for charitable fundraising events. It was the fourth consecutive year in which the total revenues for the 30 biggest campaigns declined. The survey found that these campaigns raised about $1.53 billion in 2016, down from $1.57 billion in 2015. Researchers attribute the drop-off to the rise of so-called do-it-yourself campaigns in which supporters use online tools to raise funds for their favorite causes. n
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2017 NPAas17
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The support you need. The service you’re looking for. Succeeding in the not-for-profit sector today requires more than a strong commitment to your mission. It takes shrewd fiscal management, careful regulatory compliance, skillful use of technology and the assistance of advisors who know the issues nonprofit organizations face and how to address them. This is where Sechler CPA comes in. Our team of experienced professionals cherishes the opportunity to support nonprofit organizations, meet their management challenges and fulfill their missions. We offer a variety of specialized accounting, tax and consulting services including:
k Audit intermediary services
k Tax form preparation (990, etc.)
k Budget and policy design
k Strategic and management consulting
k Financial statement preparation
k Speaking on financial literacy and other topics
k Outsourced accounting/bookkeeping
k Technology and virtual system design
RESPONSIVE QUALITY We are committed to providing responsive, personalized service to the highest quality. We take time to truly understand your Organization so that we can customize our recommendations to your specific situation. Our goal is to make your processes easier, streamline your operations and ensure your success in reaching your goals. We welcome the opportunity to discuss your mission and vision so that we may assist you with our expertise. Please call us at 602-230-2700 or e-mail carolyn@azcpa.com and let us know how we may support you. Be sure to visit our website at www.azcpa.com for additional tools and information, as well as our archive of this newsletter.
Sechler CPA, P.C. 921 East Orange Drive Phoenix, AZ 85014 www.azcpa.com