How Nonprofits Can Win Maximum IRS and Donor Confidence

 

Updated May 15, 2010

Thousands of nonprofits are set to lose nonprofit status because they have not filed form 990-N. The deadline is Monday, May 17. This means problems with the IRS and a loss in donor confidence.

As anticipated, the recession has had a profound impact on corporate charitable donations. A study released in August, 2009 showed 52 percent of surveyed companies decreased their donations to charities.

A business publication, www.crainsnewyork.com, reported the LBG Research Institute study revealed the big decrease in the face of a 72 percent increase in pleas for donations.

Effects from the recession combined with possible lingering  individual-donor mistrust of charities following a wave of nonprofit scandals underscore the need for intensified governance bynonprofit boards of directors.

Yes, the Internal Revenue Service wants nonprofits to be more transparent, which is why the agency altered Form 990. That’s the reporting form used by all but the smallest of charities.

There is more scrutiny on executive compensation, which includes incentives, deferred pay, fringe benefits and expense allowances. The IRS is also closely examining governance of charities, such as board structure, conflict-of-interest and whistleblower policies. Relationships with other organizations, joint ventures and other third parties are also scrutinized.

So, how can nonprofits win maximum IRS and donor confidence?

Aside from providing efficient services and using best practices in fundraising and board teamwork, the keys to success include: Streamlining of financial management to reduce costs and increases in efficiency leading to performance, and insuring transparency in GAAP, generally accepted accounting principles.

In order to avoid the birth of a crisis with the IRS or donors, here’s an overview of best-practices you should consider:

Give your nonprofit a SWOT. That is a SWOT analysis, which is a vital process to conduct an insightful evaluation of your strengths, weaknesses, opportunities and threats in order to develop a strategic plan.

For SWOTs in most organizations, 100 percent objectivity and clarity are impossible because charities’ shortcomings are difficult for to swallow. Board members and staff often take shortcuts to the detriment of their organizations. Even the mere appearances of negligent behavior are enough to dissuade donors and the IRS. For many organizations, a sound SWOT analysis should be conducted by an outside participant. It should include input from stakeholders.

The resulting strategic plan should include an implementation schedule with short-term and long-term anticipated outcomes. An annual update is recommended.

Avoid mental accounting. Mental accounting has huge consequences for charitable organizations. Mental accounting is the imagined process of accounting. Individuals often interpret trends differently than others. Guard against pipe dreams by documenting every detail.

Develop realistic pro forma income statements on spreadsheets, which are important tools for planning, and project the future instead of tracking the past. They provide a benchmarking budget for operating the nonprofit for the year. Carefully consider how each item is likely to change so you can make operational changes.

However, in reality, pro formas are only your best guesses. Continually update projections – preferably each month.

Board structure and focus. The board, with the executive director, should annually review the mission and purpose. The board should formally set policy for goals and safeguards for specific results. Members should seek training in accounting, team building, communication, marketing, leadership and succession. Some should be skilled in management best practices.

The executive director should not be installed as chair of the board.

Board attendance should be maximized. Effective board committees and outside advisors should have a clear purpose outlined well in advance.

Board members should be mindful of these issues: Potential conflicts of interest, legal requirements and responsibilities.

In addition to fundraising, responsibilities include sound risk management: Liability, insurance and health benefits for the staff of the organization. With executive director and staff input, the annual budget should be tied to outcomes and should be aligned with available financial resources.

A nominating committee should develop a timeline and process for recruitment. The board should recruit CPAs to provide financial oversight, either as directors or pro bono advisors. Direct and indirect costs should be monitored and controlled.

Both the executive director and board should develop an outreach process to elicit input from the community and stakeholders. Salient information about the organization should be written coherently and be available for public review.

The board recruits, hires, establishes salary, and evaluates the performance of key staff. In addition, the board should strategize for a succession plan in leadership and new members.

All human resources policies should comply with federal and state laws while meeting the needs of the nonprofit. Everyone needs to understand the benefits of a good review process and clearly written job descriptions.

There should be an appraisal-review process that measures employee performance against desired outcomes, and promotes self-evaluation as well as interfacing between the employee and the supervisor or executive director.

The executive director and board leadership need to ensure that an outside audit is conducted and then should approve it when it’s completed. You should also have an audit committee that meets regularly to closely monitor financials.

The board treasurer, executive director and financial management staff review and fine-tune, if necessary, financial policies regularly. The staff must adhere to financial controls – checks and balances – each day. Management regularly needs to review reports on both planned and actual expenditures, and follows the board-approved budget.

A diverse source of funding is recommended. All plans are approved by the board, which should have 100 percent participation of members.

A comprehensive data-collection system should be in place for timely, accurate donor data. Appreciation and donor acknowledgment, according to IRS guidelines, should be conveyed immediately. Depending on the preference of the donors, there should either be public acknowledgment or confidentiality. In any case, donors should receive regular communication about your organization’s activities, performance, programs and documentation of gratitude.

The executive director should maintain effective relationships across all community agencies for an accurate assessment of what is needed in order to improve the working relationships and to achieve the desired outcomes of service to the community.

This means the results of your nonprofits’ services are regularly reviewed with employees and the recipients in order to identify the needs for quality improvement.

Remember there is a correlation between donor loyalty and the gratitude nonprofits give to donors. Aside from the economy and just like the private sector – when the donations wane – 70 percent of the time it is because the donors feel taken for granted.

Finally, if you need free assistance, the federal government maintains a site with helpful information: www.usa.gov/Business/Nonprofit.shtml.

From the Coach’s Corner, here are a couple of accounting-system tips:

QuickBooks Pro small business accounting software is adequate as for small nonprofits. You’ll be able to perform routine tasks, such as payroll, expenses, credit card transactions, record donations and revenue, and make forecasts.

For larger nonprofits and municipal agencies that don’t want to install software or manage a Windows server, consider AccuFund Hosted, www.accufund.com. It provides hosted services in reporting and accounting software, but supports local printing of documents.