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If Theft or Fraud Happens, Do Not Make It Worse with Silence
It’s hard to find a nonprofit organization that has not been hit by a theft, fraud, or other material diversion of assets. It almost seems inevitable to happen at some point. We must continue to strengthen internal controls and stay vigilant, searching for evolving weaknesses and risk exposures. If a theft or fraud does happen, it is important to be fully transparent with messaging and avoid the tendency to go silent.
Q&A #88 – Does theft or fraud need to be reported on the Form 990?
Whether theft or fraud must be reported on the Form 990 depends on the amount, and also on the role of the individual who committed the offense. Part VI, Line 5 of the Form 990 (on page 6) requires organizations to disclose whether they became aware of a “significant diversion of the organization’s assets.” Also, if assets were stolen by a “disqualified person,” this must be reported as an “excess benefit transaction” on Part IV, Lines 25a and 25b (on page 4) and Schedule L.
Q&A #87 – Who controls the remaining funds when fiscal sponsorship is terminated?
While the specific rights of each party would be determined by the specific fiscal sponsorship agreement at issue, it is very likely that the fiscal sponsor has retained the sole discretion and control (also known as “variance power”) over how to disburse the funds raised in furtherance of the charitable purposes of the project when the fiscal sponsorship is terminated.
The Importance of Operating and Intermediate Cash Management Target Policies
Establishing operating and intermediate cash management target policies will provide many benefits. This simple but often overlooked cash management best practice will augment internal accounting controls, boost cash management awareness, and enhance perceptions that nonprofit organization management systems are significant and robust.
Q&A #86 – Is a private foundation always required to obtain an equivalency determination opinion letter before making a grant to a foreign charity?
In general, a private foundation that wishes to make a grant to a foreign organization is required to either: (1) verify that the foreign organization has been approved by the IRS as a 501(c)(3) public charity; (2) exercise “expenditure responsibility” over the grant; or (3) make a good faith determination that the foreign organization is equivalent to a United States public charity (typically by relying on an opinion letter from a qualified tax practitioner). Thus, it is not always necessary to obtain an equivalency determination, but this is generally the safest option for a private foundation in the event the grantee organization has not received an approval letter by the IRS.
Q&A #85 – Are committees required to keep meeting minutes?
Check your state’s nonprofit corporation statute to be sure, but these laws generally require that Board committees keep minutes of their meetings, or at least records of all official actions taken by these committees. Further, the Form 990 inquires whether organizations contemporaneously document meetings held, or written actions taken by, committees authorized to act on behalf of the Board (see Part VI, Section A, Line 8b). Therefore, it is highly recommended, and may be required by applicable state law, to keep minutes of committee meetings.
Q&A #84 – Can a charitable assistance program be limited to people in a single neighborhood?
It is a long-recognized principle that individuals who receive assistance from a 501(c)(3) charitable organization must be part of a “charitable class” that is sufficiently large or indefinite, such that the assistance program benefits the community as a whole, rather than small, pre-selected group of people. See IRS Pub. 3833. Limiting benefits to residents of a single neighborhood would probably satisfy this requirement so long as this restriction doesn’t function to benefit a blatantly small or self-interested group of people, although the line can be difficult to discern.
![Conferences Provide Unique Professional Developmental Opportunities [SUBSCRIBERS-ONLY]](https://images.squarespace-cdn.com/content/v1/5e6ccadfb4659c1d51df14d5/1709988897758-BZCWO43LPL581Y3A234W/pexels-borta-4331578.jpg)
Conferences Provide Unique Professional Developmental Opportunities [SUBSCRIBERS-ONLY]
Each year there are multiple nonprofit industry conferences that provide unique developmental learning experiences. These multi-day conferences provide interactive learning platforms that together provide enriching learning experiences that are hard to replicate in regular brief stand-alone training and educational sessions. The Nonprofit Symposium (powered by GWSCPA) is one of the best examples of a professional nonprofit industry conference done extremely well and should not be missed.
Q&A #83 – What happens if my organization files Form 1023-EZ and then exceeds $50,000 in revenue?
The decision whether to use the Form 1023-EZ instead of the full Form 1023 is a one-time choice, so it is important to choose wisely. There is neither a requirement nor an opportunity to supplement the Form 1023-EZ later with a full Form 1023 if your organization exceeds $50,000 in revenue in one of the first three years. In the worst-case scenario, it is possible the IRS could audit the organization and retroactively revoke 501(c)(3) status if your initial financial projections are deemed to be a “misstatement of material information.” However, this result is unlikely if you can show that your financial projections were reasonable and made in good faith at the time the application was submitted.
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Improving Pledge Collections Through Active Communication [SUBSCRIBERS-ONLY]
Time can get away from us quickly. This is especially true when it comes to pledges receivable. Nonprofit organizations invest a lot of time and effort in acquiring new pledges. In the rush to bring in new pledges, we sometimes relegate oversight of existing pledges to the back burner. Pledges will be less impactful if collection performance is poor. The key to success is to be thoughtful with management of pledge collections and maintain active and fresh communication with existing pledgors.
Q&A #82 – Should a church file a Form 1023 for recognition of 501(c)(3) status?
It is true that churches, synagogues, temples, mosques, and other places of religious worship are not required to file a Form 1023 with the IRS to be considered tax-exempt under section 501(c)(3) of the Internal Revenue Code, unlike virtually all other types of nonprofit organizations. However, there are good reasons to consider filing a Form 1023 anyway to receive official documentation in the form of an IRS determination letter of 501(c)(3) status.
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Capacity Risks are Real and Need Attention [SUBSCRIBERS-ONLY]
Nonprofit organizations need to wake up to the fact that capacity challenges are real and can lead to increased risk exposure. Capacity risks come from many different sources and affect organizations in different ways and at times that are not predictable. Growth and unexpected disruption are the two biggest factors impacting capacity. Expanding risk management practices to include assessments related to capacity will help your organization to meet these twin challenges safely and effectively.
Q&A #81 – Must a Form 1099 be issued for a need-based grant made to an individual?
In general, amounts granted to an individual solely out of the payor’s “detached and disinterested generosity” are treated as “gifts” that are excluded from tax under section 102 of the Internal Revenue Code. The IRS has confirmed that a payment made by a charity to an individual that responds to the individual's needs (in order words, is motivated by charitable intent rather than any moral or legal duty) qualifies for this exclusion, and consequently is not subject to Form 1099 reporting. See Revenue Ruling 2003-12.
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Optimizing the Use of Restricted Funds Through an Annual Inventory and Assessment [SUBSCRIBERS-ONLY]
Nonprofit organizations can receive restricted funds unexpectedly or they can appear after many years of acquisition efforts. They can be fresh (just arrived) or mature (been sitting around for years). Spending patterns for restricted funds is also constantly changing. Consequently, it is important to periodically pause and take an “inventory” of restricted funds in order to assess the timing and future use of this valuable resource.
Q&A #80 – What’s the difference between a motion and a resolution?
As with many matters of nonprofit governance, opinions vary as to the meaning of terms like “motion” and “resolution,” which are sometimes perceived to be similar. While there is no single universal set of definitions, the term “motion” is generally understood to mean the proposal of a Board action, while a “resolution” refers to a type of formal Board action that is used when careful written language is desired.