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Did your nonprofit organization file a Form 990 after the due date? Are you faced with paying a penalty to the IRS?

If so, you may have heard that the IRS will “waive” or “abate” the penalty if there was a “reasonable cause” for not filing on time. You may be thinking that your reason certainly is not good enough for the IRS to accept. THIS IS A HUGE MISTAKE! Don’t be so hard on yourself.

The IRS tends to be a lot more lenient on nonprofits than on regular for-profit businesses. Especially if the organization is directed and managed by volunteers or part-timers. Here are some very common reasons (simplified) that the IRS will accept as reasonable cause for filing IRS Form 990 late if all the required elements are present in the written request for abatement:

• Our CPA (or other tax return preparer) agreed to file for us but he didn’t.
• We thought the treasurer filed, but she never mailed the return.
• A volunteer agreed to prepare the return but it was too complicated and it didn’t get done.
• We just started our nonprofit last year and didn’t know we had to file anything.
• Our president was sick and there were no other active volunteers to step up.
• We never received any contributions so we thought we didn’t have to file.
• Our return was filed electronically and was rejected by the IRS, but we didn’t know it.
• The board of directors was dysfunctional and let the filings lapse, but we are new directors and want to get back into compliance.
• Our treasurer was confused about the due date.
• We thought no extension form had to be filed because we heard it was “automatic.”

Generally, unless there was a deliberate intent not to file, you almost certainly have reasonable cause. Still, if you don’t have experience writing convincing letters to the government, it can be intimidating. Honestly, even a lot of CPA’s don’t have much experience in convincing the IRS that a nonprofit has reasonable cause for filing IRS Form 990 late. Since not everyone wants to pay an experienced IRS problem resolution specialist $500 to $1,000 to have a penalty removed, I’ve prepared some do-it-yourself materials that can guide most any nonprofit organization to successful IRS penalty relief.

My materials include a letter template, 12 examples of successful letters, a PDF manual explaining the entire process–what to do and what not to do–and several videos explaining reasonable cause. I’ve been providing these materials in various formats since 2007. All totaled I’ve kept over $1 million out of the hands of the IRS and in the bank accounts of the nonprofits where it belongs.

Have a look at my Form 990 Late-Filing penalty example letters, videos, and PDF instruction manual here.

And for those who value the services of an experienced professional, I can write the letter(s) for you. Contact me.

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.

On IRS Form 990, and on Form 1023, the IRS asks each organization to indicate whether it has adopted any of the following three policies:

1. Written Conflict of Interest Policy.
2. Written Whistleblower Policy.
3. Written Document Destruction Policy.

There is currently no law, regulation, or IRS ruling that requires any of these policies. However having such policies in place is generally considered a “best practice.”

The IRS goes so far as to include a sample conflict-of-interest policy in the instructions to Form 1023.

Adopting any of these policies is a serious undertaking, not because it is complicated or difficult, but because having such policies can create liabilities for the officers and directors. Why?

Many organizations, particularly the smaller nonprofits, have a very informal governance structure and a high turnover of directors. Policies are often not enforced or communicated to succeeding board members. A board which is not following its own policies could find itself in breach of its duty of care to the organization. So, in some cases, it may be better not to adopt any of these policies if it seems likely that they will not be carefully followed.

On the other hand, a board that is unable to effectively follow a conflict-of-interest policy, a whistleblower policy, and a document destruction policy, is not a very effective board, and should take a good look at itself and consider changes.

Where does one find samples of these policies? A quick Google search will turn up quite a few sample policies that an organization can customize to fit its needs. Involving an attorney is probably a very good idea, but many small organizations take a DIY approach. Here are some samples of each of the three policies (links take you to the Blue Avocado website for nonprofits and will open in a new window):

Conflict of Interest Policy

Whistleblower Policy

Document Retention/Destruction Policy

Two More Policies Nonprofits Should Consider Adopting.

Another important policy for all sizes of organizations to adopt is a Tax Compliance Policy. It sound boring, but it can be very simple and may save the organization unwanted correspondence from the IRS. I’ll be writing about that in an upcoming article and will link to it from here when it is published.

Additionally, many nonprofit organizations reimburse officers, directors, employees, and volunteers for expenses they pay on behalf of the organization. In order that these reimbursements do not become taxable income to the recipients, a written Accountable Plan should be adopted. More on that soon.

Applies to 2016 Form 990 series returns.

This new law only applies to exempt organization tax returns for years beginning after December 31, 2015.

This means that it will apply to 2016 Form 990 and later years, which will generally be due in 2017  or later (except for certain short-year 2016 returns).

For returns beginning in 2015 or earlier years, the protocol for obtaining extensions still requires that in order to receive a six month extension of time to file, the organization must request a three month extension, then before the first extended due date expires, it must request a second three month extension.

Form 990-T has always had a six month extension of time to file and that will not change.

The new law granting six month extensions of time to file an exempt organization return found in Section 2006 of H.R. 3236, aka Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015

The language in the law states, in relevant part:
(b) MODIFICATION OF DUE DATES BY REGULATION.
—In the case of returns for taxable years beginning after December 31, 2015,
the Secretary of the Treasury, or the Secretary’s designee, shall
modify appropriate regulations to provide as follows:

(4) The maximum extension for the returns of organizations
exempt from income tax filing Form 990 (series) shall be an
automatic 6-month period ending on November 15 for calendar
year filers.
(5) The maximum extension for the returns of organizations
exempt from income tax that are required to file Form 4720
returns of excise taxes shall be an automatic 6-month period
beginning on the due date for filing the return (without regard
to any extensions).

Note that the 6 month extension is considered “automatic,” which means that the organization does not have to provide a reason for requesting an extension of time to file. It does NOT mean that the extension automatically goes into effect without any action by the organization. The organization or its representative must file with the IRS, either electronically or on paper, a request on the designated form (currently Form 8868), on or before the due date of the return. Filing an extension request even one day late will normally result in an invalid extension.

This revision in the extension provision is great news and will reduce the filing burden on exempt organizations and their representatives. Many organizations currently find themselves in penalty situations either because the thought the first extension for six months and failed to file a second extension, or they simply forgot to file a second extension request.

Preparers of Form 990 should take care not to disclose information which might compromise the safety or privacy of an individual.

In years past, the IRS asked exempt organizations to disclose the names and addresses of officers and directors. Most professional preparers sensitive to the privacy of their clients declined to use personal addresses, and instead listed the organization’s address for each officer, director or key employee.  With the increase in identity theft today, the IRS no longer requests addresses for officers, directors and key employees. Instead, it simply asks (Part VI, Section A, Line 9) whether there are any officers, directors, or key employees that cannot be reached at the organization’s mailing address. If “yes,” the IRS asks that the person’s name and address be provided in Schedule O.  It is hard to imagine a scenario where an organization would need to answer “yes” to that question.

Another common place where personally identifying information of individuals might be improperly disclosed is on Schedule O or Schedule I of Form 990 regarding grants, scholarships, or financial assistance paid to individuals. The IRS requires that grants and scholarship awards be disclosed on the Form 990. However, the phone numbers, addresses and social security numbers of the recipients do not have to be disclosed and should not be disclosed on Form 990 since it is a publicly available document.

An article in The Courier, a newspaper in Findlay, Ohio, reported in March 2016 an alarming story of a charitable organization printing hundreds of social security numbers of grant recipients on its Form 990 over a number of years. The Courier found that Associated Charities of Findlay disclosed the social security number of at least 1,000 charitable beneficiaries on its 2012 Form 990.

According to the article in the Courier:

Associated Charities, headquartered in the Family Center, 1800 N. Blanchard St., has helped needy individuals and families in Findlay and Hancock County for 102 years. It typically provides cash vouchers to pay for emergency shelter, utilities, clothing, repairs, medicine, and doctor or dental visits. Since its founding, Associated Charities has provided over $4 million in aid to over 100,000 individuals and families, it said.

If you did the math on that, you’d find it works out to an average donation of $40 per individual or family, or about $40,000 per year in total given away over the 102 years the charity has been in existence. So, we’re not talking about big donations. Nevertheless, someone made the decision to disclose the social security numbers of the needy individuals who received small amounts of cash assistance from Associated Charities, as though these poor folks don’t already have enough problems.

Instead of admitting their error and lack of judgment, and perhaps an ethical failure as well, both the organization and its CPA firm doubled down on their violations of privacy of thousands of individuals, asserting that they broke no laws, while promising that they will stop publishing social security numbers on future returns.

Rather than being a malicious act, this violation of privacy most likely resulted from a desire to comply with the IRS’s extensive documentation and disclosure requirements related to grant-making and scholarships. The IRS has devoted an entire schedule to the disclosure of recipients of grants, scholarships and other financial assistance. The instructions that come with Form 990 and Schedule I are lengthy. Nevertheless, the IRS makes it abundantly clear that names, addresses and social security numbers of individual recipients of assistance must not be disclosed on Form 990.

Form 990-EZ instructions indicate that grants only need be disclosed if a grant to a particular individual, family, or organization exceeds $5,000. Even then, personal identifying information such as names, addresses and social security numbers for individuals should not be disclosed.

Form 990 requires more extensive disclosures. All grants, scholarships and assistance to individuals must be disclosed if the total awards to all recipients exceed $5,000. Still, no personally identifying information should be disclosed with regard to individuals. Grants and scholarships and other financial assistance can be sub-totaled according to type of assistance.

Form 990-PF does not require that an individual recipient’s address be disclosed. Nor does it require that an individual recipient’s name be disclosed unless the recipient is a disqualified person with respect to the foundation making the donation, or has received assistance from the foundation totaling more than $1,000 during the year.

Before disclosing information on Form 990-EZ, Form 990, or Form 990-PF, be sure to read the form instructions carefully and when it comes to disclosing personal information, ask: Am I required to disclose this on the return? Is this sensitive information?

For purposes of IRS Form 990-N filing, a tax-exempt organization’s gross receipts are considered to be $50,000 or less if the organization:

• Has been in existence for 1 year or less and received, or donors have pledged to give, $75,000 or less during its first taxable year;
• Has been in existence between 1 and 3 years and averaged $60,000 or less in gross receipts during each of its first two tax years; and
• Is at least 3 years old and averaged $50,000 or less in gross receipts for the immediately preceding 3 tax years (including the year for which calculations are being made).

Note that for the first year of existence, donor pledges (promises to give) are counted as gross receipts (even though the donation has not actually been received yet). For the subsequent years, the IRS makes no mention of including pledges.

Form 990-N is an IRS form which serves as an annual notice for small tax-exempt organizations in lieu of filing Form 990-EZ or Form 990-N.

Form 990-N is not available as a paper form; it can only be filed electronically.

Recently the IRS has announced a transition. Beginning February 29, 2016, the Form 990-N should be filled out and submitted through the IRS.gov website, rather than through the Urban Institute’s website. Prior to February 29, 2016, the Urban Institute provided the official free online filing of Form 990-N. The IRS has noted that some bugs in the new system are possible, so it urges organizations to file at the Urban Institute’s website by February 28, 2016. It is evident that even the government has little confidence in its ability to implement a relatively simple website.

Beginning February 29, 2016, to electronically submit Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990EZ, use the Form 990-N Electronic Filing system (e-Postcard).

• All organizations are required to register at IRS.gov prior to filing Form 990-N. You won’t be asked to register again the next time you file.
• Form 990-N must be completed and filed electronically. There is no paper form.
• Form 990-N filers may choose to file a complete Form 990 or Form 990-EZ instead.

If you are concerned about using the IRS e-file feature, never fear–private industry has stepped in to help nonprofits submit their Form 990-N with a minimum of inconvenience. The following services offer free or low-cost submissions of Form 990-N:

www.file990.org $39.95

www.aplos.com Free if filed before the due date.

www.expresstaxexempt.com Advertised as free for current year.

WARNING: Filing a Form 990-N online is a simple matter and anyone can do it. However, filing Form 990-EZ or Form 990 online, or through a low-priced online service provider is NOT recommended. These forms require considerable expertise and should be prepared by an expert CPA or Enrolled Agent with specific training and experience in nonprofit tax law. The largest part of my practice is fixing returns that were prepared for free or low-cost by preparers who knew just enough to be dangerous. IRS penalties for improperly prepared return start at $20 per day, and the IRS may not notify an organization of a problem with the return for more than a year after it was filed. Twenty dollars per day X 365 days is $7,300. It adds up fast.

Other fun facts about Form 990-N:

• Form 990-N is not considered a “return.” It is an electronic “notice.”
• Form 990-N is not “filed”; it is “submitted.” These distinctions are important.
• Generally an organization may be eligible to submit Form 990-N if it normally has annual gross receipts of $50,000 or less.
• The Form 990-N is due four and one-half months after the organization’s year end. That’s May 15th for an organization that uses the calendar year for its annual accounting period.
• There are no extensions of time to file available, however there is no monetary penalty for submitting Form 990-N after the due date.
• Failure to either submit Form 990-N, or to file Form 990-EZ, or Form 990 for three consecutive years results in the automatic revocation of the organization’s tax-exempt status.
• An organization eligible to submit Form 990-N may instead choose to file Form 990-EZ or Form 990-N.

Compliance tip:

An organization should appoint more than one board member to keep track of the filing due dates and to make sure the 990-N is submitted on time. Assigning the entire responsibility to the treasurer or to a third party preparer is a BIG mistake.