A friend recently called to warn me about an IRS crackdown. They're going after tax-exempt organizations that have failed to satisfy annual filing requirements for three consecutive years, and the penalty is severe: loss of tax-exempt status.
A trip to the IRS website confirmed the danger. Clicking a link, I found that in Michigan alone over 10,000 organizations risk automatic revocation. The most common violation is neglecting to file 990 forms.
Dan Busby, president of the Evangelical Council for Financial Accountability (ECFA), calmed my fears when he explained that most of the at-risk organizations are either very small or very likely to no longer be in existence. The IRS may just be getting their records in order and up-to-date.
Dan wrote about why some organizations may be in this trouble in his blog post, "Understanding the Government's Crackdown on Form 990-N Filers":
Some organizations that believe they are exempt from the Form 990-N filing requirement are really subject to the filing of Form 990-N. Conversely, some who think they are subject to the filing are really exempt. How do you know whether your organization is subject to the filing or exempt from it? Consult your tax adviser.
Our CPA, James H. Quist in Grand Rapids, MI, further clarified the reasons for confusion. "[T]he 990-N is required of all nonprofits that don't have to file a normal 990 return because their receipts are less than $25,000. The 990-N 'e-postcard' requests very basic information about the organization, pretty much simply to let the IRS know that they do still exist and intend to continue to function as a nonprofit organization."
Dan and I agree there's a lesson here for leaders of organizations: we must be aware of all IRS filing requirements and see to it all necessary forms are submitted at the proper time. While the executive director and staff do the actual work of filling out forms and making deposits, the executive board is ultimately responsible. Are your board members aware of this accountability? Do they have a plan to ensure the ministry's full compliance?
Life Matters Worldwide (formerly Baptists for Life) makes the following federal and state filings each year:
Form 990 — An annual information report required by the IRS. (As we've shown, there are several versions of the 990, based on the size of your organization.)
Form 941 — Quarterly payroll tax reports.
Form 1099 — A yearly report of amounts paid to individuals who provide contracted services to the ministry.
The annual audit or financial review of the ministry's financial activities. (A financial review is considerably less expensive than an audit and may be appropriate for ministries below certain income levels — usually $500,000.)
Forms W-2 and W-3 — Employee compensation and withholding reports.
Michigan Department of Energy, Labor, & Economic Growth-Nonprofit Corporation Information Update — $20 Fee for Michigan organizations.
State Renewal Solicitation Application — License to Solicit Donations, required for most charitable organizations seeking donations within Michigan. (Most other states have something similar.)
In addition, as members of ECFA, we submit our Member Annual Evaluation each July, and every other year we provide information for the West Michigan Better Business Bureau's listing of charitable organizations. Both of these submissions demonstrate fiscal trustworthiness to current and potential supporters.
Trust, But Verify
Your center's executive board should know what's required by the government, and when. They should also require proof of compliance. You may wonder, Why, isn't trust enough?
Not long ago, one ministry director learned an expensive lesson. An IRS agent came to his office seeking 941 reports and tax payments going back several years. Come to find out, the staff person charged with that task had embezzled the money he was supposed to have deposited with the IRS, to the tune of thousands of dollars! The director and his board had trusted this person without verifying compliance.
Requiring proof is not distrust! It protects the staff as much as the board. Checks and balances are appropriate no matter how small the organization.
Dan and I suggest directors inform their boards when filing requirements are met throughout the year and create an annual report listing each required report or form, the due date, and the completion date. This report could be submitted at the board meeting following the ministry's fiscal year-end. One more step: all of these reports should be available upon request by the board.
Our activities are under scrutiny as never before. Since we represent the King of kings and Lord of lords, we need to strive for excellence and transparency in every aspect of ministry.
Tom Lothamer is President of Life Matters Worldwide in Grand Rapids, Michigan.
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