Nonprofits provide critical services to communities in need. However, with limited resources and staff, it can be challenging to stay on top of all the regulatory compliance requirements. Even small oversights can put an organization’s tax-exempt status or even its existence at risk.
Our analysis of IRS data on nonprofit revocations show that nearly 20% of revocations happen due to failure to file annual returns and reports. Simple mistakes like missing deadlines or reporting inaccurate financial information seem harmless on the surface. But they can indicate deeper issues with an organization’s governance, finances, and operations.
We compiled the five most common nonprofit compliance pitfalls reported in IRS examination letters over the past five years. We’ll break down each mistake and provide tips to steer clear of problems. With some diligent planning and commitment to sound policies and procedures, your nonprofit can avoid risky missteps.
Clear, consistent financial documentation is essential for accurate reporting. A stunning 65% of small-to-mid-sized nonprofits struggle with inconsistent recordkeeping.
These issues leave nonprofits vulnerable to questions about funding sources, ratios of program expenses to overhead, and other compliance red flags.
In a 2022 survey by NonprofitQuarterly, 39% of respondents said unclear IRS guidance on compensation was their top compliance challenge.
The key factor is ensuring executive and key employee compensation is “reasonable” compared to peers. If compensation appears excessive, it can jeopardize tax exemption or trigger penalties.
Even when no corruption exists, perceived conflicts of interest shake stakeholders’ trust. According to IndependentSector.org, 33% of chief executives say conflicts of interest created compliance issues for their nonprofit.
Conflicts arise when board members or staff stand to gain personally from deals with vendors or other partners. Even small, undisclosed conflicts raise stakes for scrutiny.
Strong boards are vital for oversight. But a 2022 study found only 55% of nonprofit boards conduct self-assessments to identify governance gaps.
Nonprofits tread tricky ground on allowable lobbying and political activities under IRS code. One misstep can trigger scrutiny, fines, or revocation.
By understanding common nonprofit compliance pitfalls, organizations can target policies and procedures to avoid missteps. But with small teams wearing multiple hats, it’s tough to cover all the bases effectively.
That’s where purpose-built platforms like VComply can help. VComply’s integrated governance, risk, and compliance tools simplify tracking, monitoring, and reporting to keep pace with regulations. With customizable assessments, automated workflows, and expert-verified content, VComply has the solutions to bulletproof your compliance foundation.
VComply thus serves as a comprehensive tool for nonprofits, addressing diverse compliance needs while promoting a culture of accountability and transparency within the organization.
Some common nonprofit reporting mistakes include: failing to properly classify donations and grants, reporting incorrect expense ratios due to sloppy recordkeeping, misallocating funds between programs and overhead, and inaccurately categorizing the split between program expenses versus fundraising costs.
Noncompliance puts tax exemption at risk when activities violate IRS guidelines for 501(c)(3) organizations around issues like: accurate reporting, excess benefit transactions, political campaign activities, excessive lobbying, and conflicts of interest. Minor issues can often be remedied, but patterns of misconduct or failure to address problems may result in fines, penalties, or even revocation of tax-exempt status.
Examples of important non-financial information nonprofits must report annually include: compensation details for top officials and key employees, descriptions of organizational activities and accomplishments, governance policies and procedures, conflict of interest policies, documents on any ownership changes or affiliations, and a renewal of the tax exemption application if required by the state.
Great resources to help nonprofits improve compliance practices include: utilizing purpose-built solutions like VComply for automated monitoring and reporting, regularly consulting with attorneys/CPAs that specialize in nonprofit law and taxes, referring to IRS resources such as the Compliance Guide for 501(c)(3) Public Charities, and connecting with nonprofit alliances that offer tools, education, and peer support around governance and compliance.
Schedule a demo today to learn how VComply can strengthen your nonprofit’s governance, risk, and compliance posture. With the right systems in place, you can direct more resources to advancing your critical mission.
Discover the immediate impact VComply can bring to your compliance program. Move beyond the limits of spreadsheets with a system of record designed for complete compliance management.
