Staying in Step with the GovernmentEmerging Trends in Government Regulation & Filing

South Dakota Community FoundationJune & July, 2010

Topics

• Introduction – How Did We Get Here?• US Congressional Oversight & Scrutiny• Federal (IRS) Issues

– Form 990– Intermediate Sanctions

• State regulation & filing requirements

How Did We Get Here?

• Nonprofit sector is big and influential• Nonprofit sector is very splintered• Perception of eroding confidence in charity• Trends toward more public scrutiny• IRS changing role – reluctantly - from pure

financial regulation to broader governance oversight

• Form 990 & other information readily accessible

Regulatory Trends and Influences

• IRS Intermediate Sanctions• Sarbanes-Oxley (SOX)• Senate Finance Committee• House Joint Tax Committee (hospitals)• Panel on the Nonprofit Sector• IRS Governance Best Practices (now included in

2008 Form 990 questions)• IRS Inquiry Letters (hospitals & universities)

Enforcement risk

P Disgruntled/former employees/donors/clients

P MediaP "Public Advocates"

"Your 990 is showing!"

New 990 – Who Must File

Generally speaking, all 501(c) organizations must file – exceptions are limited and specific

Churches are generally exempt from filing

990 Filing Thresholds

New 990 – Governance Policies to Have in Place

• Written conflict of interest policy?• The IRS includes a sample conflict of interest policy in Appendix A of the Form 1023

(application for nonprofit recognition).  It was originally written for nonprofit hospitals, but it can be adapted to other charities and nonprofits: http://www.irs.gov/instructions/i1023/ar03.html

• Written whistle-blower policy?

• Written document retention/destruction policies?

• Joint Venture policy?– Act exclusively in furtherance of tax exempt

purpose

New 990: Governance Practices to have in place

• Contemporaneous Minutes of Board and Committees

• Review of Form 990 by Board before Filing

• Public Disclosure of Tax Return (990)

• Compensation Committee – Review executive and director compensation

• Audit committee

New 990– Reporting Requirements

• Many other new and expanded reporting requirements that don’t involve governance policy

– Lobbying

– Fundraising

– Tax-exempt bonds

Public Disclosure

At your principal, regional, and district place of business, you must make available for inspection upon request:

• Form 1023 – Includes – Articles of Incorporation, Trust Indenture, or Association; – Financial information for the preceding 3 years of operation; – By-Laws

• Form 990 – last three years• IRS Correspondence• Documents must be mailed within 30 days upon request

Public Disclosure – Conditions and Exceptions

• Reasonable postage & printing costs• Harassment• Privacy (e.g., donor names in public

charities)• Older documents (e.g., Form 1023 prior to

1987)

“Intermediate Sanctions”

The penalties imposed under Internal Revenue Code Section 4958 on persons involved in excess benefit transactions.

Intermediate sanctions are an alternative to the revocation of an organization’s tax-exempt status when private individuals receive an excess benefit.

Change in approach -- causes

• Perception by IRS & Congress that nonprofits are getting away with abuses of their tax-exempt recognition

• Traditional approach punishes the organization (and its beneficiaries) for bad acts of individuals

• Individuals not held properly accountable for bad acts

Individuals covered under IS

< All voting board members and their family members< All CEOs/Executive Directors and their family members< All treasurers and CFOs and their family members< “Persons with a material financial interest in certain healthcare provider-sponsored organizations if a hospital that participates in the provider-sponsored organization is an applicable tax-exempt organization.” (And their family members)< Generally, donors of more than $5,000 if their contribution exceeds 2% of the nonprofit’s revenue for any period of time, and their family members.

Organizations Covered Under IS

• 501(c)3 and 501(c)4 organizations• Note: private foundations are not covered under

new Intermediate Sanctions regulations because they have similar regulations to follow already

• Churches are covered under Intermediate Sanctions even if they haven’t filed for exempt recognition

Excess benefit transactions -- general

Any transaction between an exempt organization (nonprofit) and a

disqualified person where the value of the benefit to the individual exceeds

that provided to the exempt organization

Penalties for excess benefit transactions

• First tier penalties• Individual benefiting B 25% excise tax on the

amount of the excess benefit, plus "making the nonprofit whole"

• Organization manager B 10% excise tax on the amount of the excess benefit (up to $10,000 per transaction)

• Second tier penalties• Individual benefiting B 200% excise tax on the

amount of the excess benefit• “Managers” who “knowingly” approve an excess benefit

transaction are subject to a penalty tax equal to 20% of the excess up to $20,000

Excess benefit transactions -- employees

• Compensation• Includes all salary, commissions, fringe benefits (except for certain exclusions), reimbursed expenses, etc.

• “Highly compensated employee” B anyone with reportable compensation exceeding $150,000 in 2009, regardless of title/position

• Revenue-sharing transactions B includes percentage compensation and compensation tied to nonprofit revenue

"Safe harbor" -- "rebuttable presumption of reasonableness"

P Written bids for products, independent land appraisals, etc. Consultation with legal counsel, accountants, etc. (NOT BOARD MEMBERS)P Boards and managers who rely on independent counsel are generally safe from IS penalties

Demonstrate reasonableness through documentation --

document, document, document!

P Conflict of interest policy for organization B The IRS includes a sample conflict of interest policy in Appendix A of the Form 1023 (application for nonprofit recognition:http://www.irs.gov/instructions/i1023/ar03.html

P Board minutes documenting action on transactions including conflicts, recusal of board members, etc.P Written board recruitment program including questionnaires documenting conflictsP Document managers’ conflicts

South Dakota Registration

• File Articles of Incorporation

with SD Secretary of State• File IRS Form 1023 or 1024• Apply for SD Sales Tax Exemption

if eligible – most SD nonprofits are not eligible

• File Annual Report

with SD Secretary of State

Thank You!

818 S. Hawthorne Avenue

Sioux Falls, South Dakota 57104-4537

(605) 336-0244 or (888) 4-SUMPTION

www.sumptionandwyland.com