Operating as a non-profit organization in an overly competitive and capitalism-first economy means that there is no shortage of obstacles. Non-profits are bound by unending public scrutiny coupled with strict government regulations because of the special financial privileges they enjoy. The tax-exempt status combined with access to public funding is two very good reasons why compliance, on all fronts, can’t be ignored.
Yet, an increasing number of non-profits underestimate their exposure to risks and fail to employ the required risk-assessment and prevention safeguards.
The data suggests that 3 key factors drive this negligence among non-profits:
Naturally, none of these validate or even pardon noncompliance, which is why it is extremely important for non-profits to comply with regulations. For greater insight into the matter, here are 5 compliance risks that non-profit organizations face and guidance on remedying them.
While it is known that non-profit organizations are exempt from all federal corporate taxes, they still have a responsibility to the IRS. To remain compliant and retain their tax-exempt status, non-profit organizations in the US must file Form 990 with the required tax information on a yearly basis. Additionally, non-profit organizations with staff are required to maintain a W-4 for each employee, and file Form 941 on a quarterly basis unless the IRS requests otherwise.
Failure in meeting this requirement has serious consequences, for which a steep fine is just the precursor of what’s to come. These fines accrue daily, meaning the longer this information goes undisclosed, the more money it costs. To make matters worse, it doesn’t stop revoking the 501(c)(3) tax exempt status. Continual negligence in this regard can also lead to the administrative dissolution of the corporation. Naturally, managing this risk requires these organizations to have an internal control or risk management system to help mitigate these issues on time.
Non-profit and for-profit organizations share some similarities when comparing the compliance protocols for making money. In both cases, compliance is stringent, even if the purpose of raising money, via an instrument like an auction, is for a good cause. For such undertaking, the non-profit organizations must follow IRS regulations to the tee or face a penalty, in the form of a fine. Some states even require non-profits to apply for a special fundraising license before hosting auctions.
With auctions, potential compliance issues could arise in 2 ways:
In the case of quid pro quo contributions, where the donor exchanges money for goods or services, the non-profit organization must provide donors with a letter containing a disclosure. This letter’s contents are the good-faith estimate of the market value of the goods or services the donor has received with their contribution. Failing to provide this acknowledgment letter can result in a fine of up to $5,000 per auction.
On the other hand, when someone donates goods to an auction, the non-profit organization must submit tax-related information about the exchange. This includes:
Managing this data is important as the regulatory bodies require it and doing it manually is asking for trouble. A neat solution would be a cloud-based software that gives non-profits seamless access to data caches, so that this type of crucial information is always up to date.
Given the good that non-profits set out to achieve, it is no surprise that any political candidate would want the endorsement or backing of one. However, under the Internal Revenue Code, it is clearly stated that all section 501(c)(3) organizations are prohibited from participating in any form of political campaigning or lobbying. This includes any direct or indirect intervention of any sort.
Violating this tax code results in revoking the tax-exempt status applicable to the non-profit organization and may even lead to the imposition of additional excise taxes. Having a clear understanding of this compliance risk and ensuring that all organization members are aware of it is a good way forward.
Non-profit organizations are known to suffer from a lack of finances, but there is an excess of profits in some instances, and this is a problem. As per regulation, non-profits aren’t allowed to earn sizable amounts of profit and doing so goes against compliance norms. Even though the money is meant to serve a good purpose, it is illegal as per the compliance regulations for the collection of tax on sale.
However, there may be instances where a non-profit underestimates the profits earned and in such cases, experts suggest that any excess must remain within the organization. This surplus may be used to pay off debt or finance the non-profit’s mission in the future.
The Board, employees and volunteers of non-profits need to be aware of this fact to comply with regulations.
Complete transparency is a mainstay of any non-profit organization, which is why maintaining records is crucial. Unfortunately, this is an area that many have been lacking, which brings about a plethora of compliance issues. Without proper records, the annual Form 990 will be incomplete and have discrepancies, leading to problems. Moreover, the IRS and other governing bodies quite frequently request information from non-profits, and botched record-keeping will stand in the way of this.
Experts believe that a failure to maintain records efficiently is a good way to break laws and is among the easiest ways to risk non-compliance. Thankfully, digitized solutions help solve this problem with cloud-computing and customizable control systems, thus ensuring records are maintained and secure.
Considering the role that non-profits play in the economy, it is incredibly vital that they do not abuse their economic privilege. For this reason, non-profits need to implement internal controls and there’s no better way to safeguard the organization than to do it pre-emptively. This is where VComply can be of great assistance to non-profits by providing fully integrated GRC Management Software. It gives organizations the option to establish controls and reminders to ensure that compliance obligations are the first priority. VComply helps non-profits with real-time data tracking, risk management, and compliance management without complications.
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