Losing Your Non-Profit Status Sends the Wrong Message

I have written previously about the importance of non-profits staying abreast of IRS regulations. My thesis is simple, yet powerful: donors expect and appreciate an organization that excels – not just in its programming or service delivery, but in its Sad Shayari Hindi ability to perform the business functions as well. By paying close attention to issues of governance and accountability, I believe that a non-profit can gain an advantage in the growing competition for donors and grantors.

I just learned of an organization that lost its non-profit status due to its failure to file its annual reports. Much has been written about the change in the IRS regulations that can lead to the loss of non-profit status, so I will not repeat it here. Google it if you are not familiar with what I am talking about. Trust me, it is important.

The executive director posted a notice on the organization’s website to announce the revocation. It was sad to read. The organization was notified of its non-profit revocation – retroactive to last year – which has tax implications for its donors (for the previous tax year and future tax years). While I was impressed that the organization owned up to the error – it admitted it had grown negligent in filing the necessary paperwork (its words) within the required deadline by the IRS – the real issue is why did it happen and what is being done to correct what is a systems issue in the administration of the organization? The organization was both apologetic to its donors and explained that it was working hard with the IRS through its CPA to get its non-profit status restored.

How would you feel if you were a donor? A board member? An officer?

The statement advises that your contributions are not tax deductible within the revocation period and into the future and invites you to consult with your tax professional.

Wow. Doesn’t that give you a lot of confidence? How likely are you to make another donation to that organization? Would you make a donation even if you knew in advance it may not be deductible? Would you re-file your tax returns to eliminate the ineligible charitable deduction?

There is no reason to discuss the merits of the organization itself. If the IRS had not felt that the organization qualified for tax exempt status, then it would not have granted it in the first place. So, it must be stipulated that the organization serves a charitable purpose. Again, the value of the organization to the community is not in question.

What is in question is its ability to perform required administrative duties and, perhaps most importantly, what effects its negligence will bring in the future due to donors being inconvenienced. From an accountability standpoint – as I have written about in the past – the buck stops with the board of directors. This is simply basic non-profit governance that every board member should know. Likely, the board relied on an executive director to handle such duties (or, maybe, even appointed one of the board members to handle IRS filings) but, point being, the board is ultimately held accountable. This is what I mean when I talk about the importance of governance in a non-profit.

Who loses when something like this happens? Well, arguably, the community loses (first and foremost) because the organization was only tax exempt because it was providing a charitable purpose under the tax code. In fact, the organization’s notice even says that the community will not likely see any change in the quality of its programming. I would question that statement because most all non-profits are really struggling as the Great Recession has dampened donations. I believe that to assume no changes will be seen by the public gives the wrong impression at this time. Does the organization not need contributions from donors or grants from grantors?

The IRS is not a difficult organization to work with, particularly when you play by the rules and/or are willing to admit oversights and mistakes when they occur (as they inevitably do). However, the reinstatement process is time-consuming and costly – to the taxpayers who must fund the operations of the IRS – and should not be thought of as merely an exercise to gain reinstatement. Sure, the changes in the filing guidelines were done for a reason (the IRS figures that if an organization doesn’t file for several years then maybe it does not exist). Let’s face it, a decrease in the number of organizations granted tax-exempt status helps the coffers of the U.S. Treasury and the country is still in a down economy. I mention these factors to point out, once again, that it is a privilege to receive tax-exempt status. Like everything else, when the privilege is abused, it is taken away. Although I mentioned earlier in the article that I would not delve into the changes in the IRS filing requirements, let me just point out that missing one filing deadline does not immediately lead to revocation of the tax-exempt status.

It would be surprising to me if the organization does not ultimately get its status restored. However, I do believe it will cause more consternation among its donors that it anticipates. In the end, I think the most beneficial outcome of this unfortunate situation would be for other community non-profits to take note, get their administrative act together, learn more about governance and accountability, and demonstrate to the public that non-profits are to be taken seriously because they excel at everything they are supposed to do, including business and administrative issues.

I would suggest the following steps be taken:

    1. Better communications with the donors are needed – and quickly. A posting on the web site is not good enough. The local newspaper picked up on the issue and printed it. This means it is likely that the organization’s patrons and donors found out about the problem by reading it in the newspaper, which is never a good thing. The organization failed to be proactive and thorough once the problem was known.

 

    1. Recognition that there are large donors/grantors whose names are reported to the IRS on the Form 990 (again, check the IRS rules) is especially important, for it is those donors who are (a) most likely to have sensitive tax issues; and (b) most likely to be reluctant to make large gifts to the organization in the future. These donors should be contacted personally.

 

    1. The board needs to establish policy and guidelines – no doubt, part of the reinstatement plea to the IRS – to make sure nothing falls through the cracks in the future. It is not hard to keep up with deadlines – just note the deadline in your PC calendar and set up an automated notification. And, for back-up, make sure that at least one additional person in the organization is tracking the same deadline.

 

    1. The board should consider naming a Treasurer if it does not have one – preferably a CPA (if one would agree to serve) – to oversee the financial and regulatory affairs of the organization – not just in name, but in reality. Is there an audit policy in effect?

 

  1. The board should take this opportunity to review all of its policies and procedures to see what else is missing and take corrective steps before something else happens. Is there a conflict of interest policy in place? Are personnel policies up to date? Do new board members receive an orientation by a knowledgeable professional. Etc.

Whenever something bad happens, like losing your tax-exempt status, move quickly to identify issues and fix them. Proactivity is the surest way to regain trust and confidence. I am hopeful that this organization can improve its administrative functions and see its tax-exempt status restored. After all, the community deserves to benefit from a well-run organization that is held in high esteem among its peer organizations.

 

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