David B. McRee, CPA. The Nonprofit Tax Guy

Should you request an extension of time to file your organization’s Form 990 even if you are able to file by the due date?

People worry that requesting an extension of time to file reflects poorly on their organization, or that it might cause an IRS audit. Neither of these things is true.

Beginning in January 2018, the IRS has a new method of handling Form 990 series returns that it believes are incomplete. The IRS rejects electronically filed returns that are incomplete. An incomplete paper return is sent back to the organization with a demand for corrective action within 10 days.

Most smaller tax-exempt organizations do not have the resources to respond properly to such a demand from the IRS within 10 days. If the rejected return was filed close to the due date, the organization may incur a daily delinquency penalty until it responds in a way that satisfies the IRS.

Buy yourself some time by filing Form 8868 to request an extension even though you plan to file on time. As long as a valid extension is in place, no penalties will accrue while the organization is correcting its errors and responding to the IRS.

Does your kid’s amateur sports organization have measures in place to prevent the theft of its assets? If not, there could be things going on that you don’t know about, being done by the people you trust the most.

A youth amateur sports organization (ASO) is usually managed by parents with little or no background in financial management. Board members who manage the ASO often only need volunteer to take on the responsibility because few are willing to take on the job. In other words, the only qualification is that the parent is willing to do it.

Most parents and coaches are totally honest and are looking out for the kids. But you know how life is. Stuff happens. For various reasons, theft of cash or use of the ASO assets for personal purposes is more common than you might think. This story caught my attention recently http://www.fox13news.com/news/local-news/173265799-story

The parent volunteer president fell on hard times in her personal affairs and “borrowed” some cash from her child’s Little League team with the intention of paying it back. Unfortunately her situation did not improve, so rather than paying it back, she took more money.

How can this be avoided? Simple. Trust, but verify. Here are some basic financial accountability procedures/tips that should be strictly applied in order to limit opportunities for theft:

• Keep track of the organization’s checks and bank deposits in accounting software like Quicken or Quickbooks Online. If cash is the organization’s only asset, Quicken is all you probably need. It’s just an electronic check register. If the ASO owns sports equipment, it should be kept track of and an inventory taken each year.
• At a minimum, the treasurer should reconcile the check register to the bank account every month. The reconciliation should be carefully reviewed and approved by another director who has no check signing authority.
• All expense items should have a paper trail. All checks should have a check request form with an explanation of the purpose of the payment. A copy of any invoice should be stapled to the check request form, which should be signed by the person who approved the expense. Expenses over a certain dollar amount should require two signatures, one by a person with no check signing authority.
• For each bank deposit, there should be a deposit ticket and bank receipt. If payments for multiple activities are included in one deposit, there should be documentation as to what each deposit relates to. For instance, if a $1,000 deposit consists of $300 banner advertising, $100 t-shirt sales, and $600 registration fees, attached paperwork should show this information. This is important for properly recording the transaction.
• There should be two authorized check signers. Any checks written over $500 should require two signatures. It is not OK to have a stack of checks pre-signed simply because it can be inconvenient to get two signatures.
• All bank statements should be kept. None should be missing. Missing bank statements are a bad sign.
• The ASO should have a written reimbursement policy to prevent duplicate reimbursements to volunteers, coaches, and board members who incur expenses on behalf of the ASO and submit receipts for reimbursement. Any reimbursement request that is more than 30 days old should be carefully scrutinized to be sure it has not been previously reimbursed.
• Any items that are purchased with the ASO’s sales tax exemption certificate must be purchased with a check from the ASO’s account. The sales tax exemption certificate should never be used when personal funds are used to purchase an item. Example: The ASO President goes to Walmart to purchase water, snacks and paper goods for an upcoming event and presents the Sales Tax Exemption Certificate so as not to pay sales tax on the purchase. The President should pay with a check drawn on the ASO bank account. The President should not put the expense on his/her credit card and present the receipt for reimbursement later.
• Cash withdrawn from the bank to make change at events should be tracked carefully. At the end of the event the cash must be re-deposited into the bank and documented. The withdrawal is not an expense, and the deposit is not income. Withdrawals of “change bank” cash must equal re-deposits.
• All cash receipts should be deposited in the bank the same day or the next day after receipt.

The list above is not comprehensive, but strictly applying those guidelines will go a long way in preventing theft of cash or other assets.

Addendum:

Just a week after I wrote the above post, a high school sports booster is in the news. The booster president stole $10,000 and spent it on himself. Regrettably, the booster has been shut down and funds transferred to a school account. This definitely takes a toll on booster operation.

Deputies found that [the president] spent club funds on movie tickets, gas, rental cars, personal bills, travel and hotel stays in Orlando and Tampa. Deputies say he overdrew the account which resulted in more than $2,000 in overdraft fees.

[The president] faces fraud and grand theft charges and is now in custody in the Polk County Jail.

A statement released by Kathleen High School said the Kathleen High School Athletic Booster Club is no longer operational. “Coaches from all sports at Kathleen High (with the exception of the football program) used the booster club. However, the school no longer has an outside organization for these sports.”

Instead, they will use an internal account run by the athletic director and finance secretary, the school said.

Executive Summary: No. Attach the briefest possible truthful reason why the return was filed late. Don’t ask that penalties not be assessed and don’t try to establish reasonable cause.

The rest of the story:

This is one of the most frequent questions I hear during my consultations with tax return preparers and exempt organization officers who are faced with having to file a Form 990 after the due date: They want to know if they should attach to the return a reasonable cause statement as to why the return was late and ask that penalties not be assessed.

I’m going to explain why attaching a reasonable cause statement is a waste of time and may not be a great idea.

This question arises, I think, largely because the instructions to Form 990 provide the following instructions:

“If the return is not filed by the due date (including any extension granted), explain in a separate attachment, giving the reasons for not filing on time.”

Instructions from Form 990.

This certainly sounds like the IRS is giving the organization an opportunity to provide reasonable cause and request that penalties not be assessed.

Further, the IRS website has at some point in the last few years, revised their guidance regarding filing a return after the due date. Previously, there was no mention of attaching a reasonable cause letter to Form 990. Now the following language appears on the IRS web site:  https://www.irs.gov/charities-non-profits/exempt-organizations-annual-reporting-requirements-filing-procedures-abatement-of-late-filing-penalties

From the IRS website, June 2016. The highlighted statement was added in a revision of unknown date.

The above guidance seems to reinforce and even clarify the content of the statement that is supposed to be attached to the late-filed Form 990.

However, even clearer, and entirely contradictory guidance more in line with my personal experiences and with the conversations I’ve had with IRS personnel is found, not in the Form 990 instructions or on the IRS web site, but in the instructions to Form 8868, Extension of Time to File an Exempt Organization Return:

“Do not attach an explanation when you file your return. Explanations attached to the return at the time of filing will not be considered.”

Instructions from Form 8868.

The instructions to Form 990 and on the IRS web site seem to be in conflict with the instructions to Form 8868:

“…explain in a separate attachment…” and “…statement should be made as an attachment to the Form 990” vs. “…do not attach an explanation…”

The purpose of attaching an explanation for the late filing seems to be that of public disclosure. Information on the 990 is largely intended to provide accountability to donors. The donors have a right to know why the return was not filed on time. On many occasions over the years I have seen organizations attach to a late-filed return a reasonable cause statement and a request that penalties not be assessed. Never have these attachments resulted in the non-assessment of penalties.

I have spoken to IRS representatives in Exempt Organizations Account Services who have told me that any reasonable cause statements with requests for abatement or non-assessment of penalties that might be attached to the return are not read or processed by the IRS. That’s just not the way it works.

While it may be honorable to disclose to donors the reason a return was filed late, the detail required to make a successful reasonable cause argument may result in the disclosure of information that is unnecessary to be made public. Remember that anything attached to an exempt organization return (except donor names on Schedule B) is made available to the public. My recommendation is that the briefest possible explanation be attached to the return to comply with the IRS requirement that an explanation be attached. Once the organization has been assessed a penalty, it is then time to write a proper and thorough request for abatement of late-filing penalties under the reasonable cause provisions of IRC section 6652. (Note that section 6652 has recently been revised.)

It is helpful to understand that a request for abatement under the reasonable cause provisions must contain the following elements to be considered:

• It must be in writing.
• It must explain the reason that the return was late and explain why “reasonable cause” exists and provide credible information or documentation.
• It must be signed under penalty of perjury, with a statement such as the following: “Under penalty of perjury, I declare that the facts presented here are, to the best of my knowledge and belief, true, correct and complete.”

From the Treasury Regulations under section 301.6652-1(f):

“An affirmative showing of reasonable cause must be made in the form of a written statement, containing a declaration that it is made under the penalties of perjury, setting forth all the facts alleged as a reasonable cause.”

Of course there are many more things that go into a successful letter, which is more art than science. If you need help with a reasonable cause letter, I provide a very helpful “blueprint” in the form of a book and sample letters, all of which were actually used and were successful in having penalties abated. And I’m always available to review your letter, or write it for you if you don’t have the time, or don’t consider yourself a writer.