Archive | Best Practices

What is the Source of Most IRS Problems for Nonprofits?

What do most nonprofits and/or their CPA’s who run into problems with the IRS have in common?

They simply aren’t taking care of business, that’s what. Ineffective behavior.

Now, they may have a good reason for shirking their duty, or they may not.

I work almost exclusively with nonprofits and CPA’s who are facing penalties or who are in a difficult spot with the IRS. Sometimes the solution to their problem is easy. Or at least it would seem so.

I explain to my client what the solution is, how I can help, and what information I will need to resolve the problem.

The client agrees to provide the information and seems eager to have me resolve the issue. Then the problems begin.

Weeks go by and either the information dribbles in bit by bit via email attachment, or I face complete unresponsiveness.

The same behaviors that got them into the mess in the first place are continuing to prevent the issue from being resolved.

After doing this problem resolution work for almost a decade I see the same pattern of behavior in many of my clients. Not all, to be sure, but many. Delay, ignore, make excuses, lose documents, submit duplicate information, submit irrelevant information.

Even though a client may have already paid me in full up front, they still drag out the process over a period of weeks or months when it could have been resolved in three days.

The IRS HATES delays. They don’t like to be ignored. Of course they’ll ignore YOU as much as they want to and will make you wait for months. There is nothing you can do about that.

How do you stay out of trouble with the IRS:

  • Know what your filing requirements are. It’s not that hard, really. Just do a quick Google search on IRS filing requirements for nonprofit organizations. Anyone can do it. If you are a nonprofit officer, director, or manager, you MUST do it. Don’t just rely on the CPA who is a member of your board of directors unless he/she has a lot of specific experience with nonprofits. Even then, trust, but verify.
  • Assign more than one person the responsibility of meeting the filing requirements. Don’t just leave it to the Treasurer. This is the single biggest mistake nonprofits make that makes them miss filing deadlines.
  • Get the board of directors involved in monitoring the filing of all IRS returns.
  • If you receive an IRS notice and it requires a response, do so within the time period given. If you don’t know what the notice means, call the IRS!
  • Don’t hesitate to get professional help from a CPA or tax attorney with IRS problem resolution experience.

Does Your Charity Give Its Donors What They Need at Tax Time?

Your donors are giving you their hard-earned money. Are you giving them the documentation they need at tax time in order to deduct their contribution on their tax return?

“Yes” you say?  Not so fast.

This is an area where you’ll need to comply exactly with the letter of the law.

A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor “obtains” a contemporaneous acknowledgement of the contribution from the public charity.

These rules also apply to contributions (tithes) made to a Church, which is a type of public charity.

In the eyes of the law, it is not technically the charity’s responsibility to supply the written acknowledgement–it is the responsibility of the donor to “obtain” it from the charity before taking a deduction.

What information is required to be provided in the contemporaneous written acknowledgement?

  • The name of the public charity.
  • The date the contribution was received.
  • The amount of the contribution (if cash).
  • A description of the items contributed (if non-cash). The organization should not indicate in the letter the value of non-cash donations received. It is the donor’s responsibility to assign a value to the items for purposes of a tax deduction. (The organization will value the non-cash item received for internal accounting purposes, but would not communicate that information to the donor).
  • A statement indicating whether any goods or services were provided in return for the contribution (even if none was provided). If any goods or services were provided in return for a contribution, the organization should provide a good faith estimate of the value of goods or services provided.

What does “contemporaneous” mean?

An acknowledgement is contemporaneous if it is obtained by the donor on or before the due date of the return for the year the contribution was made (including extensions) OR if it is obtained on or before the due date the return is actually filed–whichever is earlier. In plain language, it just means that the donor has to have the acknowledgement letter in hand before filing the tax return on which the deduction is claimed.

What’s the Problem?

Most organizations provide acknowledgement letters to their donors as a matter of good donor relations. Unfortunately, not all letters meet the standard set by the Treasury Regulations. This can result in good faith donations being disallowed by the IRS upon examination. It happens–especially with larger donations. This type of failure to comply and its consequences cannot be relieved by reliance on “reasonable cause” provisions.

In Tax Court Memorandum 2012-140 (link opens as pdf), the case of Durden vs. the IRS is a fine example of the harsh application of the regulations.

In 2007, Durden contributed at various times during the year, cash donations to their church (NCC), totaling $22,517. The IRS disallowed the deduction and sent a bill for additional taxes owed.

Durden sent, as proof of the legitimacy of the claimed deduction, copies of canceled checks and a copy of the contemporaneous acknowledgement letter from NCC dated January 10, 2008.

The IRS did not accept the acknowledgement letter because it lacked a statement regarding whether any goods or services were provided in consideration for the contributions.

NCC the provided Durden with a second acknowledgement letter, dated June 21, 2009, with the same information found in the first letter as well as a statement that no goods or services were provided to them in exchange for their contributions.

The IRS rejected the second acknowledgement letter because it was not “contemporaneous.” In other words, Durden did not have the letter with the proper wording in hand on or before the date the tax return was actually filed.

The court ruled in favor of the IRS, noting that the language of code section 170(f)(8)(A) provides that “No deduction shall be allowed…” unless an acknowledgement letter with all the required elements is in hand. There is no wiggle room in the statute. The first letter obtained by taxpayer Darden lacked the proper language, and the second was not contemporaneous.

Darden argued that even though they did not meet the letter of the law, they “substantially complied.” The court was of the opinion that without the timely statement of whether goods and services were provided, the donor could not properly determine the amount of the deduction allowable and could not file an accurate tax return. Substantial compliance was not enough. Ouch!

The Takeaway for Donors and Charities

If you are a charity, make sure you give your donors a contemporaneous acknowledgement letter that complies with the law and regulations.

For more information, refer to IRS publication 4221-PC, Compliance Guide for Public Charities.

If you are a donor, pay attention to the letters of acknowledgement you receive from charities you’ve donated to. If you’ve made any single donations that are $250 or more, make sure the statement indicating that “no goods or services were received in exchange for the contribution” is included on the letter, or if goods and services were received, that a description of and dollar amount of those goods and services is included on the letter. If not, request a new letter right away.

Any charity that refuses to provide a proper acknowledgement letter is not worthy of your donations.



Procrastination Undermines Penalty Abatement Efforts

One of the most frustrating situations I deal with when writing a penalty abatement request on behalf of a nonprofit organization is that they did not deal with their situation in a timely manner.

Missing the Deadline

A typical scenario goes like this: The Do-Gooder organization misses the May 15th filing deadline for its Form 990. Normally the treasurer handles all the tax filings, and no one else is really involved with or knowledgeable about the Form 990 due dates. Unfortunately, the treasurer resigned three months earlier and a replacement has not yet been found.

Discovering the Error

Because no was aware of the deadline, no extension of time to file was requested. One month later, during the preparation of a grant application, it is discovered that no Form 990 has been filed for the recently completed year. It is then that the organization realizes that it has missed a required filing deadline.

Procrastinating Compounds the Problem

It takes the organization until August to hire a new treasurer, who completes and files the delinquent Form 990 by sometime in October.

Do you see the problem here? The organization discovered in June that it was delinquent but did not correct the delinquency until October–a delay of four months. How do you explain that delay to the IRS? It appears to the IRS that the organization does not really take its filing responsibility serious.

Best Practices

What is the take-away from this scenario?

  • There should be more than one person in the organization who knows and tracks the due dates of Form 990 (and all other tax and legal filings as well). The due dates should be on the calendar of the board of directors. The board should see and review the Form 990 before it is signed and filed.
  • As soon as an organization realizes that it has missed a Form 990 filing deadline, it should prepare and file the Form 990 within 30 days if at all possible.
  • If there is no one in the organization with sufficient knowledge to prepare Form 990, hire a professional. In an attempt to avoid paying $800 to $1,500 to a professional tax return preparer, many organizations end up owing $10,000 or more in late filing penalties.
  • If you know the organization will not meet the initial filing deadline, file Form 8868 before the deadline passes to request a 3 month extension of time to file. Remember, the extension request is not valid if filed after the due date of the return.

Penalties for late filing of Form 990 are steep: $20 for each day the return is late for smaller organizations and $100 per day for larger organizations.  Even at $20 per day, you are looking at $600 per month. A return that is 6 months late can incur as much as $3,600 in late filing penalties at the lower rate.

While the IRS does tend to be more lenient with nonprofit organizations in certain situations, abatement of late filing penalties is far from certain. To make matters worse, the IRS is under a directive from Congress to be a lot tougher on non-compliant exempt organizations.

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