Louis E. Michelson, A Professional Corporation

Providing Legal and Tax Advisory Services to Nonprofit Organizations

New IRS Changes to Form 990

February 26th, 2010 · Charity, Federal Income Taxes

The IRS posted on its website changes to 2009 Form 990, schedules to Form 990, and the instructions to Form 990.   See following link.   The IRS has modified and clarified certain reporting requirements. The Service also posted a table summarizing significant changes to the Form 990, schedules, and instructions for 2009.

Some of the changes include:

–  Instructions to Part III of the main form, Statement of Program Service Accomplishments explain that the filer must report significant changes in program services in Part III, rather than in a letter to the Exempt Organizations Determinations office.

–  Instructions to Part VI, Governance, Management, and Disclosure explain that the filer must report significant changes to its organizational documents on its Form 990, Part VI and in Schedule O, rather than in a letter to EO Determinations.

–  Instructions to Schedule A, Public Charity Status and Public Support explain that the IRS does not update records on a filer’s public charity status based on a change made on Schedule A. The filer may submit a request for a determination letter on its new public charity status to the EO Determinations office.

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New IRS Check Sheet on Tax-Exempt Organizations

December 10th, 2009 · Charity, Federal Income Taxes, Governance

The IRS now released a check sheet that IRS agents are instructed to use to capture data about the governance practices and the related internal controls of organizations under examination.  This check sheet will be used by IRS Exempt Organizations.  The IRS states that data collected will be included in a long-term study to gain a better understanding of the intersection between governance practices and tax compliance.

See the IRS Charities and Nonprofits Web site for the Check Sheet and the Guide Sheet for Completing the Check Sheet and related materials.

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One Size Does Not Fit All: Governance and Management Policies

December 3rd, 2009 · Charity, Federal Income Taxes, Governance

The new Form 990 (Part VI) contains a section on governance. The IRS’s general view is that a “well-governed charity is more likely to obey tax laws, safeguard charitable assets and serve charitable interest than one with poor or lax governance.”

Nonprofit managers and CPA have are increasingly focusing on the questions posed in the Form 990. The section consists of three parts: composition of the organization’s governing body, its governance and management policies, and its disclosure practices. As is typical of an IRS form, there are two boxes, “yes” and “no,”one of which should be checked.

The goal of many is to be able to answer the questions “yes” (i.e. we have the policy) and move on to other matters. Answering “no” (we do not have the policy) can subject a nonprofit or its managers to uncomfortable questions from the auditors, not to overlook the peer-pressure from other nonprofit organizations.

The questions ask about: a conflict of interest policy, a whistle-blower policy, a document retention and destruction policy, policy on participation in joint ventures, financial information review policy, and a compensation policy. This is only a few; there are many more policies.

One approach is to look for “off the shelf” policies. Even the IRS claims that they are not trying to lay down or enforce a”one size fits all” rules about governance. One certainly can agree that there is not only one right answer or way of doing things.

A more deliberate approach should be considered. Charities should consider their own facts and circumstances, including their size, type and culture, when evaluating whether to adopt or revise their policies and practices. Each organization should develop systems of internal controls (otherwise referred to as policies) which are appropriate to the organization. The board of directors should be engaged and informed; after all they have the ultimate responsibility for operation of the organization.

The lesson from the three bears seems apropos: the policies should not be too hot and not too cold: they should be warm and feel just right.

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Changes to Corporations Code for Nonprofit Organizations

October 31st, 2009 · California nonprofit law

Governor Schwarzenegger signed AB 1233, which is based on an Affirmative Legislative Proposal of the Nonprofit Committee. The law makes a number of changes to the California Corporations Code as applied to nonprofit corporations and unincorporated associations. These changes concern the designation of certain persons as directors, the termination of individual approval rights for changes of articles and bylaws on certain events, permissive articles and bylaw provisions on quorum formation, clarification of powers of Board committees including nondirector committees, the applicability of private foundation requirements to non-profit religious corporations, clarification of insurance requirements to qualify for prohibition of causes of action against unpaid directors and officers of a nonprofit corporation or nonprofit medical association and authorization for mergers of unincorporated associations with certain other types of legal entities. To view AB 1233, click here.

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New “Life Cycle” Tools on IRS Website

October 22nd, 2009 · Federal Income Taxes

The IRS website (www.irs.gov/charities) has new information tools to help exempt organizations stay in compliance. At the website, click on the link “Life Cycle” under the Charities and Nonprofit Topics. The website is organized around five points of intersection (“life cycle” stages) between organizations and the IRS.

1. Starting out: creating an organization under state law, including organizing documents and by-laws, charitable solicitation and obtaining an EIN.

2. Applying for exemption. Acquiring, completing and submitting application forms, how the IRS processes applications and obtaining help from the IRS during the process.

3. Required filings. Annual exempt organization returns, tax filings for unrelated business income and other returns and reports.

4. Ongoing compliance. Intermediate sanctions, employment taxes, substantiation and disclosure, including links to other compliance aids.

5. Significant events. These include required notifications, audits and termination of an exempt organization.

There are separate life cycle web pages for charitable organizations (both public charities and private foundations), social welfare organizations, labor organizations, business leagues and agricultural/horticultural organizations.

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New Law for Charity “Poker Night” Fundraisers

October 21st, 2009 · California nonprofit law, Charity

Casino night charity fundraisers can be fun, exciting, and lucrative, but until recently they have been illegal. This changed starting January 1, 2007, when a new California law was enacted that allows certain nonprofit organizations that have been in existence for at least three years to hold “charity poker night” fundraisers.

Before buying your chips, there are numerous constraints to take into consideration. Restrictions on “poker night” fundraisers include: individual prizes may not exceed a value of $500, at least 90 percent of the revenue from the fundraiser must go to the nonprofit, and fees paid to the host of the fundraiser may not exceed 10 percent of the gross revenue from the event.

In addition to those listed, there are other important limitations on charity casino events that can be found in the Gambling Control Act. For assistance in assuring that your upcoming event complies with the new law, please feel free to contact me.

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Los Angeles Business Taxes, Exemption and Refunds for Charities

October 16th, 2009 · Charity, State and Local Taxes, Uncategorized

Is your charitable organization paying the Los Angeles business tax? As a result of state legislation, the City of Los Angeles amended its municipal code to authorize the Director of Finance to issue a Tax Exempt Registration Certificate to charitable, non-profit or religious institutions. If your organization is exempt under Internal Revenue Code Section 501 or under California Revenue and Taxation Code Section 23701d, you should complete the Business Tax and/or Carnival Police Permit Exemption Application (Form 501.1) and include a copy of the tax determination letters. The Application also requires a description of the business or activity for which exemption is requested.

What should be done if your nonprofit organization has been paying taxes but has been recognized as tax-exempt by the IRS and/or FTB? Your organization should apply for a refund under Los Angeles Municipal Code Section 21.07. This section provides for a refund of overpayment when the refund claim has been filed within a period of one year from the date of the claimed overpayment. The refund claim should be filed using the Claim for Refund Application (Form 96.006). Additionally, you need to apply for exemption from business taxes mentioned above.

For more information, look at the website for City of Los Angeles Office of Finance: see the following link where you can find additional information and forms.

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Audit Committees of Nonprofit Organizations

October 16th, 2009 · Charity, Governance

Charities with gross revenue of $2 million or more must now establish an audit committee. This only applies to charitable corporations that must register and file reports with the Attorney General, whenever such organizations accrue the $2 million of revenue in any fiscal year, with certain grants from government entities excluded from the revenue threshold.

The audit committee must be appointed by the board of directors. It may include persons who are not board members, but may not include staff members, the president, the CEO, and the CFO. If the charity has a finance committee, the audit committee may include finance committee members but they may not comprise of more than 50% of the audit committee. Any person who has a material interest in any entity doing business with the charity may not serve on the audit committee. Additionally, audit committee members may not be paid more than the members of the board of directors for their services on the board.

The Nonprofit Integrity Act of 2004 specifies the committee’s responsibilities. Under the board’s supervision, the audit committee makes recommendations on the hiring and firing of the independent auditor and can negotiate the auditor’s compensation. The committee must:

Confer with the auditor to determine that the financial affairs of the charity are in order

Review and decide whether to accept the audit

Approve non-audit services by the CPA firm and ensure that non-audit services performed by the CPA firm conform to standards for auditor independence.

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