Audit: Denver nonprofit Rocky Mountain Human Services misused $1.8 million in tax payer dollars

 An audit released Thursday reveals that administrators at a Denver-based nonprofit used tax dollars for personal expenses instead of using the money toward helping those who need it the most.

The audit was conducted by Denver’s city auditor Timothy O’Brien after questions were raised regarding spending at Rocky Mountain Human Services, which provides services for developmentally disabled children and adults around Colorado and parts of Wyoming.


The nonprofit receives more than $12 million a year from a city mill levy that comes from property tax revenue.

The contract, managed by the Denver Department of Human Services, specifies that money can only be used for their services specifically in Denver.

The audit shows some $1.8 million were used instead to provide employees with personal Internet services and Costco memberships, among other things. The report also points out the agency used money for an office in Colorado Springs, an international trip, and even almost $50,000 on meetings.

“I think it’s clear that funds that could have been spent on the people in the program were not spent on people in the program,” said O’Brien.

The audit also showed the chief executive director's yearly salary of $500,000; O’Brien said the amount is double the salary of the next highest paid director at a similar nonprofit in the state.

The agency's board of directors have since fired the executive director and chief financial officer, O’Brien said.

“We regret that there was some misspending of tax payer funds,” said Sharri Repinski, who now serves as the agencies’ interim executive director.

She spoke at a public forum held Thursday after the audit was released, but she wouldn’t, however, specify why it took months or event longer for the board of directors to notice the violations.

Instead, Repinski told Denver7 that the organization was in a “financial crisis” with more than $8 million in losses. Some 70 positions were eliminated to make up for the deficit.

“We eliminated those expenses that were not necessary,” she said.

She said employees no longer receive online service or Costco memberships.

Administrators at Rocky Mountain Human Services will renegotiate their contract with the Denver Department of Human Services at the beginning of 2016.

IRS Delays in Acting on Applications for 501(c)(4) Tax Exemption Persist

Five years after the IRS first began identifying “Tea Party cases” for special scrutiny, and almost two years after Lois Lerner’s apology and the Treasury Inspector General’s report detailing the targeting of applications for tax exemption from conservative-sounding groups, Karl Rove’s Crossroads GPS and at least five other groups are still awaiting determination letters from the IRS.

The article quotes both supporters and opponents of the organizations’ missions criticizing the IRS for taking so long to reach a decision on the applications.

“It’s inexcusable. Justice delayed is justice denied,” a former IRS official said. “A disgrace,” according to Paul S. Ryan of the Campaign Legal Center.

The groups cited in the Politico article are 501(c)(4) “social welfare” organizations. Unlike other types of tax-exempt entities, social welfare groups can operate without first seeking IRS approval of their tax-exempt status. However, there are several reasons that make applying for tax-exempt recognition advisable for these groups, including tax implications for donors. The lack of final IRS action on applications has dried up donations and severely restricted operations by many of the groups mentioned in the article. Former IRS official Marvin Friedlander refers to the process as “death by bureaucratic delay.”

Bureaucratic delays were cited prominently in the TIGTA audit report released in May of 2013. The IRS took no action on “Tea Party cases” for more than a year while IRS headquarters staff considered how best to handle the applications. Many groups singled out in this process were sent one or more questionnaires from the IRS asking (according to the inspector general) “inappropriate questions” and requesting items including donor lists, membership lists, Facebook and web site printouts, as well as to state the future intentions of any leaders or members to seek public office.

One of the few errors in the Politico article was its assertion that progressive groups as well as conservative ones were targeted by the IRS. As NPQ reported in July 2013 and included in a September 2013 update on the IRS scandal, the Treasury Inspector General for Tax Administration (TIGTA) found only one of five “be on the lookout” (BOLO) memos that included the term “progressive,” and that BOLO was never made active by the IRS.

The IRS claims that it has fulfilled the TIGTA’s recommendation that long-pending applications in 2013 be expedited, but doesn’t comment on why a few groups, including one of the largest and best-known 501(c)(4) organizations, have not yet received a final determination.

Unlike charities, social welfare groups can’t bring legal action against the IRS if it takes too long to approve their applications for tax exemption. So the groups either remain in limbo or choose to dissolve and, in at least one case, reorganize under a different corporate name and start over. Some have placed money in reserve to pay state and federal taxes should their applications ultimately be denied (in some states, federal tax exemption affects state tax treatment). This is a tough message for both boards and donors, as groups have money on hand but are afraid to spend it, and donors know that a potentially significant part of their gifts may need to be warehoused pending a decision from the IRS.

Regardless how one feels about 501(c)(4) organizations in general or the activities of particular groups, any nonprofit should expect an impartial IRS determination on their tax exemption, to borrow a phrase, with all deliberate speed. The continued delays reported by Politico are yet more evidence that we have a long way to go before the IRS scandal is put behind us.

2014 IRS Form 990-N Now Available to Nonprofits for No Charge Through Aplos Software

Nonprofit organizations are now able to prepare and e-file their 2014 Form 990-N with Aplos Software’s user-friendly online software for no charge. To maintain tax-exempt status, The IRS requires organizations with less than $50,000 in annual receipts to submit this annual informational return.

Aplos Software, a web-based software and authorized IRS e-file provider, announced today that its tax preparation and filing software, Aplos e-File, is now accepting IRS Form 990-N returns for the 2014 fiscal year. Form 990-N (e-Postcard) for the current year can be filed for free and prior years can be filed for $19.99 per return. The web-based tax preparation software can be accessed at https://www.aplos.com/irs-form-990-efile.

Form 990-N is a short electronic return for organizations whose annual receipts are normally $50,000 or less. Aplos e-File takes the tax-exempt organization through the form step-by-step, provides relevant tips and guidance, and ensures that all needed information is included. When complete, Aplos e-File submits the return electronically to the IRS and provides a copy of the return for their records.

“Effectively managing a nonprofit starts with being up-to-date with all the required IRS returns to maintain tax-exempt status,” said Tim Goetz, CEO and co-founder of Aplos Software. “We’ve streamlined the 990-N process for nonprofits by making it simple and free to use. As a result, these organizations can confidently submit their forms and continue to move forward with their mission.”

The deadline for submitting Form 990-N is the 15th of the fifth month after the close of the organization’s tax year. Nonprofits that start a new fiscal year on January 1 are now eligible to submit their 2014 return and their Form 990 filing deadline is May 15, 2015.

If an organization fails to file the form three years in a row, the organization will automatically lose its tax-exempt status with the IRS. There are no penalties if a Form 990-N is submitted late. Visit http://www.irs.gov for more information about annual reporting requirements.

Organizations that do not need to file the IRS form include organizations that are part of a group return, churches and their auxiliaries, conventions or associations, and organizations that are required to file a different return.

Princeton Says Colleges at Risk From Tax Court Ruling

Princeton University lost a bid to dismiss a lawsuit seeking to rescind its New Jersey property-tax exemption for 2014, a ruling that could cost the school millions of dollars and jeopardize the tax status of all nonprofit colleges.

Tax Court Judge Vito Bianco ruled Thursday that a lawsuit by four residents of the town of Princeton will go forward, lawyers said. They sued to revoke the school’s tax exemption, in part because it shares royalties with faculty, mostly from a patent that Eli Lilly & Co. turned into the cancer drug Alimta. The judge didn’t rule on the merits of the case while rejecting the university’s claim that the case should turn on whether its “dominant motive” is to make a profit.

“He’s making it clear that the test for losing tax-exemption status is whether these institutions engage in significant commercial conduct,” Bruce Afran, an attorney for the residents, said in a telephone interview. “This case will ultimately affect the tax-exempt status of many universities.”

Princeton, the fifth-richest U.S. university and among the most selective, said it will immediately appeal. The oral ruling by Bianco wasn’t immediately available in court records.

Arguments by the residents “potentially jeopardize” all nonprofit institutions, including schools, hospitals, charities and houses of worship, the university’s general counsel, Ramona Romero, said in a statement.

Princeton patented a compound by a chemistry professor that Lilly used to create Alimta. The school reaped $524 million in license income from 2005 to 2012, mostly from Lilly, according to court records. It used part of the money to build a new chemistry building and pay $118 million to faculty through 2011 beyond their salaries.

The town of Princeton is also a defendant in the case and has taken no position on the litigation, Afran said.

The case is Fields v. Trustees of Princeton University, 5904-14, Tax Court of New Jersey (Morristown).

No Board? No Tax Filings? No Problem! Connected Nonprofit Makes Hay in the Bronx

Any community-based nonprofit that can convince powerful state legislators to appropriate funding to their programs is in an admirable position. But it’s still the public’s money, and you had better deliver, or your work is just another example of graft and corruption.

The New York Daily News reports that N.Y. Assembly Speaker Carl Heastie steered more than $600,000 to a Bronx nonprofit that had no official board and filed no tax returns for years while receiving public funding and, ultimately, declared bankruptcy.

The Bronx Business Alliance (BBA) stopped filing its 990s after the 2008-09 tax year, when it reported a deficit. However, Heastie kept funding them—his final grant was for $115,000 in 2009-2010, while other politicians provided hundreds of thousands of dollars more in 2010-2011.

The group went out of business in 2012, according to the Alliance’s board chairman during the time Heastie was supporting it; he owns a storefront in one of the neighborhoods the association targeted for improvement.

It gets worse, according to the paper: In 2010, the BBA tried to get a state grant to renovate four Bronx buildings owned by a board member of a nonprofit the association was partnering with. The state awarded the $200,000 grant, but the building owner ultimately had other plans for the property.

Heastie’s grant of $115,000 in 2009-2010 was the last round of money the group received. Other Bronx politicians sponsored money in 2011, but then-Gov. David Paterson stopped the appropriations for the BBA and other similar projects.

Because the group stopped filing tax returns, says the Daily News, it is unclear what happened to all the money or who was overseeing the funds, despite state and federal laws requiring transparency. The Speaker responded to the story, saying that “it wasn’t his responsibility to follow up and see if the public dollars he’d doled out were spent appropriately by the association.”

The group told state funders it would use the money to give “start-up assistance” and “business plan development” advice to local small business owners. Heastie placed the blame for lax oversight on the various state agencies charged with administering the grant funds.

Meanwhile, some individuals listed as board members contacted by the paper said they were not board members in any official capacity

IRS Rules on Domesticated Organization and Tax-Exempt Status

Late last year, the Internal Revenue Service (“IRS”) issued a letter ruling, PLR 201446025, providing that, in certain instances, a nonprofit corporation exempt under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, and incorporated in State A was not required to file a new application for tax-exempt status (IRS Form 1023) when it changed its domicile to State B by filing “Articles of Domestication” in State B and “Articles of Conversion” in State A.

In the ruling, the law of State B stated that the corporation’s filing of “Articles of Domestication” would not affect its original incorporation date. The law of State B also stated that the corporation would be considered the same corporation as the one that existed under the laws of State A, the state in which the corporation was previously domiciled. Similarly, the governing law of State A stated that following the corporation’s filing of “Articles of Conversion,” the corporation would continue to exist without interruption and be able to maintain its same liabilities and obligations.

The change in domicile did not affect the corporation’s charitable purpose or operations.

The following five points were integral to the IRS’s ruling:

the nonprofit corporation was not altering its basic organizational form;

the nonprofit corporation was filing an amendment to its formation document, rather than filing a new one;

both states involved had laws providing that a domesticated nonprofit corporation would be the same corporation that existed under the laws of its original state of incorporation (Indeed, the IRS noted that its ruling would be different if a new corporation were created in State B and the nonprofit corporation merged into it or transferred assets to it);

the nonprofit corporation had the same liabilities to the IRS and others as it had before its change in domicile; and

the nonprofit corporation maintained the same incorporation date.

This ruling does not change the IRS’s position that a nonprofit corporation that reincorporates in a new state is a new entity that must file a new application for tax-exempt status. In fact, the ruling makes clear that if a nonprofit corporation’s submission of “Articles of Domestication” to change its state of domicile causes it to become a new organization, then the corporation may not rely on its prior tax-exemption recognition and must file a new application for tax-exempt status. If such change of domicile does not cause the corporation to become a new organization, however, then the corporation may rely on its previous recognition of tax-exempt status and does not need to file a new application for tax-exempt status.

Although the ruling may not be used or cited as precedent, it seems to suggest that, depending on state law, a nonprofit, tax-exempt corporation can, in fact, reincorporate in a new state without filing a new application for tax-exempt status. If a corporation wants to change its state of domicile without filing a new application for tax-exempt status, it must first ensure that the new state has a domestication statute that provides that the corporation would be the same as the initial corporation.

Organizations seeking to change state of domicile should take great care to understand the relevant state laws and realize that, in many cases, a new application for tax-exempt status may still have to be filed. As always, changes to an organization’s governing documents should be reported on IRS Form 990 as significant changes.

Nonprofit beat: Charities debate extending donation deadline

Should the deadline for charity tax deductions be extended to April 15, so tax filers can make last-minute donations?

Or would it take a bite out of the holiday and year-end giving blitz that nonprofits have come to enjoy?

That’s been a key part of a debate among philanthropy policy wonks in Washington for years. But last year, the provision to extend the donation deadline to April 15 was approved by the House as part of its America Gives More Act. It was not included in Senate legislation, and therefore didn’t have legs.

It’s unclear whether the provision will be part of any congressional action this year. But the notion that tax filers, possibly flush with unexpected tax refunds, could donate to charities retroactively finally has some traction, proponents say.

The idea is not without precedent, wrote Eugene Steuerle, a senior fellow at the Urban Institute in Washington, D.C. President Obama signed a provision allowing donations to be made for Haiti earthquake relief up until March 2010 to be deducted on 2009 tax returns. Likewise, George W. Bush permitted donations for tsunami relief made through Jan. 31, 2005, to be deducted in the previous year.

He called tax filing time a “window of opportunity.’’ Americans know their total annual income, their projected taxes and how charitable donations could both benefit their bottom line and those of charities.

“When filing taxes, they [Americans] can calculate exactly how much tax an additional donation would save,’’ Steuerle wrote.

While endorsed by charities such as the national Meals on Wheels Association, the April 15 deadline was not broadly endorsed by charities. Mega-charities such as United Way of America, for example, didn’t take a position on it.

Some nonprofits feared the effect on the coveted year-end giving. Others worried that it would simply shift the time frame for making donations, creating delays that could clog their cash flow.

The Nascent Nonprofit Organization—What Happens Before a Nonprofit Is Born?

FROM NONPROFIT QUARTERLY:

There is a classic philosophical problem called the “sorites paradox,” or “paradox of the heap”—a version of which goes something like this: A single grain of wheat does not comprise a heap; as a single grain is not a heap, if you add one more grain, you still don’t have a heap; as two grains are not a heap, add a third grain, and you still don’t have a heap; and so on. Following this logic, no amount of wheat added to that first grain can make a heap. While the line reasoning is plausible, it arrives at what appears to be a false conclusion—thus the paradox.

I highlight this philosophical riddle in an article about organizational emergence because it illuminates the difficulty of identifying exactly when enough of something accumulates to allow one to assert that a heap has come into existence. The same applies to new organizations: Is thinking about starting a new nonprofit organization enough to say that a new nonprofit has been created? Is gathering information or talking to people about starting a new nonprofit verification of its existence? How about amassing resources? One could, of course, argue that a nonprofit is born the minute it has been officially registered by the IRS and thus attains formal status—but I would argue that the emergence of a new nonprofit organization is better understood as a process rather than a discrete event or state. Specifically, reducing nonprofit birth to the act of registration is to simplify and ignore critical aspects of the organizing process.

This is not to say that formally registering a new nonprofit is a minor event. Quite the opposite: registration is an important act that establishes boundaries—that is to say, a “barrier condition between the organization and its environment.”1 As these boundaries coalesce, it is possible for the founder(s) of the new organizations to (among other things) establish routines and procedures, and develop capacities within the nonprofit that allows it to take coordinated action. Still, nonprofit founders do not instantaneously register new nonprofits but rather create them through various actions—many of which take place before formal registration of the new agency occurs. And, in the entrepreneurship literature, the portion of the development process transpiring before any formal entity has been established is often referred to as the gestation or nascent stage of organizational development.

Despite its intuitive appeal, however, the gestation of nonprofit organizations remains a relatively underresearched area—in part because it is hard to identify a nascent nonprofit organization. While there appears to be growing scholarly interest in trying to better understand the earliest phases of nonprofit life, to date the only thing we know is that we don’t know much.2 This article is organized around a number of observations of the nascent stage, based on my own research and work with nonprofit start-ups as well as on findings from the entrepreneurship and social entrepreneurship literature. My hope is that these observations will serve as an entry point for discussion and debate, and stimulate further research focusing on nonprofit emergence.

Observation #1: The patterns of emergence are exceptionally heterogeneous.

When examining the nascent stage of organizational development, we find that it is not a linear process. We also find that it is exceptionally heterogeneous. In one of the first empirical studies of firm gestation, Paul Reynolds and Brenda Miller examined the conception-to-birth process of over three thousand ventures. They found that many of the ventures did not engage in all of the presumed key events of gestation; in addition, they were not able to detect any particular sequencing of the various actions the ventures took. They also found significant variance in the types of actions taken. In other words, these ventures differed in terms of what they were doing as well as in what order.3

But while organizational creation is not a linear process, it remains depicted as one. Recently, I visited the “how to start a new business/nonprofit” section in my local bookstore, and the vast majority of books were organized as manuals, providing road maps or step-by-step instructions on what to do and how and when to do it. And perhaps the most common instruction given to would-be-entrepreneurs that comes out of this literature is to begin by generating a business plan.

Given that there are many unknowns when attempting to initiate a new organization, writing a business plan before moving forward seems reasonable and useful. I have nothing against nonprofit business plans, and planning is indeed a powerful and important process for any organization—but nonprofit emergence is so much more than a plan, and creating a business plan, as we know, is not a necessary condition for starting up a new nonprofit (after all, nonprofits came into being as far back as 1793, as de Tocqueville observed in his account of his visit to the United States in 1831—long before the idea that every start-up needs a business plan became a founding principle). Nor is creating a business plan a necessary condition for start-up success. Plenty of research in the for-profit field has examined the link between business plans and organizational performance, but the evidence to date is inconclusive. In addition, it is often noted how highly successful entrepreneurs, including Steve Jobs, Bill Gates, and Michael Dell, did not write formal business plans before starting their ventures, and many entrepreneurs consider producing a business plan a waste of scarce resources and time that ought to be devoted to more-productive activities. Finally, an underlying assumption of the business plan is that the entrepreneur can figure out most of the unknowns of a new organization in advance—but in today’s dynamic and often uncertain nonprofit environment, making plans can be inherently difficult, and relying on a plan can be unwise if the conditions change. Or, as Mike Tyson put it, “Everyone has a plan—until they get punched in the face.”

The point here is that a business plan is just one of many possible actions a nascent nonprofit entrepreneur may or may not undertake. And taken together, the range, timing, and choices of actions to consider and account for illustrate the difficulties and complexities facing scholars, start-up funders, and policy-makers trying to fully comprehend the birth stage of nonprofit organizations. Clearly, there is more than one way to get through the nascent stage and end up with a new nonprofit organization—and, in order to understand such equifinality, we need to view nonprofit organizational birth as the result of an experimentally oriented rather than linear process.4

Observation #2: The length of the nascent stage varies significantly.

In addition to the variability discussed in the previous section, the time it takes for a nascent entrepreneur to move a new organization from inception to birth also differs considerably. The Reynolds and Miller study found that the average nascent stage lasted around three years, yet some of the ventures in their sample took as little as four weeks and others close to a decade to get off the ground.5 That the length of the nascent stage can vary significantly suggests that time may not be a very useful factor in analyzing the birth of new organizations. Some scholars advocate that we may do better to look at capacity, and that what determines the length of the nascent stage is linked to the “maturity” of these capacities.6 The starting point for the capacity approach is that during the nascent stage, an emerging organization is vulnerable, and overcoming this vulnerability is essential for a new organization to progress to the next level. In other words, the length of emergence depends on the ability to develop a sufficient capacity endowment—and the time this process takes can vary considerably from venture to venture.

Observation #3: Many nascent organizations perish before they are “born.”

The notion that nascent organizations are vulnerable is supported by research by Simon Parker and Yacine Belghitar, Howard Aldrich, and Maija Renko, among others.7 Renko noted recently that “the start-up process of a new venture is precarious: most entrepreneurial activities end in ‘near-misses,’ that is, organizations that die while emerging.” Renko’s statement is based on data from the Panel Study of Entrepreneurial Dynamics, which found that six years after entering the nascent stage, two-thirds of entrepreneurs had either abandoned the process or were still trying to start up the new venture.8 This observation is important for two related reasons. First, it illuminates how the common perception of organizational birth as an observable formal start-up results from analysis of two underlying rates: the rate at which nascent organizational activity is instigated, and the success rate of such attempts. So, when we talk about nonprofit organizational “deaths,” we must distinguish and clarify whether or not we are including both nascent-stage deaths and deaths of nonprofits already founded. Clearly, if we include the former, the overall number of deaths significantly increases, and if we study just the latter, we are likely to ignore potentially important insights into how and why organizations live or die. Second, if nascent deaths are not taken into consideration in discussions about and research on nonprofit births, we have a selection-bias issue resulting from only considering nascent activities that led to successfully established organizations. Per Davidsson points out that this approach is “equivalent to studying gambling by exclusively investigating winners.”9 This, in turn, highlights the importance of generating panel rather than crosssectional data that take into account nascent activity, in order to properly analyze how new organizations are born, what allows new organizations to thrive, and why and how they die.

 Ad Sponsorship (Intacct)


Observation #4: We need to know more about the intentions of nonprofit entrepreneurs.

A key concern when trying to analyze the nascent stage is where to begin—in other words, what are the early factors leading to nascent activity? Because new organizations are seldom coerced into being, and because they do not represent a random, passive by-product of environmental circumstances, scholars have long focused on intentionality, which proposes that at inception the fundamental organizational idea resides within the entrepreneur, and therefore the goals of the new organization are reflections of his or her intentions.10 Hence, during the nascent stage it is initially the entrepreneurs’ intentions that help craft the direction and actions taken. Several scholars believe that, given the above, intentionality must precede more tangible features of emerging organizations (for example, looking for resources).11

Notwithstanding the scholarly challenge to capture and assess entrepreneurial intent, the intentionality construct has long been an important puzzle piece in a much-needed conceptual framework for entrepreneurship on which researchers can anchor their studies of new-venture creation. In the nonprofit literature to date, the creation of nonprofits is often framed as a response to market failure, government failure, or contract failure—or in response to various expressive needs.12

Nonprofit entrepreneurs are also frequently described as passionate and ideologically motivated individuals who seek to address problems and/or needs that speak to them on those levels.13 However, while such characteristics as being responsive to problems and needs and being passionate and driven are useful information, this does not tell us much about the nonprofit entrepreneur’s intentions for his or her new organization. What are the aspirations and goals with respect to growth? Will the organization use an innovative approach, or will it replicate what is already in use? Is it a hobby project, or is it going to be the entrepreneur’s source of employment? The answers to these types of questions are key to understanding how a nascent venture gets organized and evolves, and thus should be explored in much more detail by nonprofit scholars.

Observation #5: What transpires during the nascent stage leaves an enduring imprint on the new organization.

In his seminal work “Social Structure and Organizations,” Arthur Stinchcombe highlighted the enduring impact of prior organizational history on subsequent organizational structures and events.14 The idea that important founding conditions are embossed onto new organizations and tend to persist over time is often referred to as “organizational imprinting.” Because of its long-lasting implications, I would argue that understanding the process of imprinting is one of the primary reasons nonprofit scholars and practitioners need to pay more attention to the nascent stage. Therein lie potential answers to very critical questions and facets of organizational development, including how nonprofit organizational identity and/or culture are shaped, and why nonprofits initiated at different times have different forms and follow different strategies. In addition, insights from studies of imprinting during the nascent stage can help bring greater clarity to such issues as the sources and rationales of founder’s syndrome and how emerging nonprofits seek to overcome their liability of newness and increase their legitimacy.

• • •

This article attempts to show that paying attention to the nascent stage of nonprofits is a sound and valuable approach to viewing nonprofit birth as a process, and that it opens up a new and very promising avenue for nonprofit entrepreneurship and organizational research. While there is a growing interest in the earliest phases of nonprofit life, there is still considerable room and need for further research and discussion regarding the nascent stage and how we can better understand it. While the five key observations outlined above are certainly not the complete picture, my hope is that they will facilitate progress in learning about the nascent stage and why it is essential to a comprehensive understanding of organizational development. Research on the nascent stage of nonprofit organizations is, in other words, in its own nascent stage—suggesting that there are innumerable challenges and opportunities to take on moving forward.

Move Over Expense Ratios

Although still important to donors, the expense ratio (what a charity spends on administrative, overhead and fundraising costs vs. program costs) is now sharing the spotlight with other measurements as a way to judge an organization's effectiveness.

The traditional appeal of expense ratios is obvious. They are easy to calculate using data from financial statements or Form 990s and provide a standard metric with which to compare all not-for-profits. Watchdog groups vary somewhat in the expense ratios they advocate, but most agree that "effective" not-for-profits spend at least 65% to 75% of their budgets on program costs.

Many in the not-for-profit community question the benefit of expense rations. Clearly, they do not tell the whole story. In addition, because watchdog groups, donors, foundations and government regulators have placed such a strong emphasis on this single metric, many not-for-profits felt pressure to under-track and under-report actual administrative and fundraising spending. Some not-for-profits have even neglected to make the organizational infrastructure investments that are essential to continued health and future growth. Ironically, pinching pennies to improve the appearance of fiscal responsibility can undermine an organization's long-term effectiveness.

Some influential groups have begun to shift their emphasis on expense ratios to other areas. The Charities Review Council, for example, revised its Use of Funds (essentially, an expense ratio) standard to reflect that no one range is ideal for every charity and to encourage more infrastructure investment. Other groups such as Charity Navigator, GuideStar and GiveWell do not believe that expense ratios or executive salaries provide meaningful data to determine a not-for-profit's impact and utilize other data to rate not-for-profits.

Many not-for-profit professionals have advocated placing less emphasis on "outputs" — such as the percentage of funds spent on programs — in favor of "outcomes" — a program's measurable impact in the community. Not-for-profits need to craft a clear and compelling message to illustrate financial performance. A good starting point is to develop a method of measuring your success appropriate to your mission. Track these results and explain them clearly in the "Summary" section on your Form 990 and in fundraising and marketing materials. Be proactive in telling your story. Not only are real-life examples of program outcomes compelling, but the reporting of the results — not just dollars spent and activities conducted — strengthens an organization's position for fundraising and public trust over time.

IRS rarely audits nonprofits for politicking

FROM PUBLICINTEGRITY.COM

When Republicans won control of the U.S. Senate in November, they could thank dozens of conservative "dark money" nonprofit groups for spending nearly $130 million to boost their preferred candidates or bash their political enemies.

Those nonprofit groups, including many that enjoy a preferred tax status because they purport to be focused on “social welfare,” are barred from engaging in electoral politics as their primary activity.

But the Internal Revenue Service, which is charged with policing the groups, almost never audits them to see if they’re spending too much money on politics, according to new information obtained by the Center for Public Integrity.

The IRS told the Center for Public Integrity that it has only begun auditing 26 organizations specifically for political activity since 2010. That represents a tiny fraction of the more than 1 million nonprofits regulated by the agency.

More than 100 nonprofit groups have directly involved themselves in elections during recent years, some spending into the tens of millions of dollars. The rest — largely charities that are generally prohibited from campaigning for politicians — are seldom monitored to ensure they follow federal law.

The situation leaves the groups largely free to operate like political committees without fear of reprisal.

Their involvement in politics, meanwhile, has accelerated since 2010, when the Supreme Court’s Citizens United v. Federal Election Commission decision ushered in unprecedented election spending by nonprofit organizations that don’t disclose their donors.

Such groups spent more than $336 million during the 2012 cycle alone compared to about $17 million during the 2006 cycle, according to the Center for Responsive Politics.

The lack of IRS oversight and enforcement stems from a confluence of factors — fewer employees are devoted to nonprofits at a time when the number of  “dark money” groups applying for tax exempt status has skyrocketed, and the agency meantime has failed to clarify the rules surrounding political activity.

Internal IRS documents also show declines in the number of IRS employees investigating nonprofit groups and the number of employees who approve organizations’ application for nonprofit status, which allows the groups to avoid paying certain taxes.

“The IRS is not doing its job,” Sen. Bill Nelson, D-Fla., told the Center for Public Integrity. “There have been not only some obvious abuses of the tax exemption by some of these so-called social welfare groups, but I think some pretty flagrant ones.”

Help is not on the way. President Barack Obama last month signed into law a bill that chops the IRS’ annual budget by $345.6 million — reducing agency funding to 2008 levels.

It’s a decision IRS Commissioner John Koskinen says will result in hiring freezes and further job losses.

“The number of taxpayers keeps going up and the resources are down,” he said in an interview. “We are leaving billions of dollars uncollected because we do not have enough” employees.

The new information about the IRS’ internal resources comes in the agency’s response to a Freedom of Information Act request filed in December 2013 by the Center for Public Integrity.

It follows an investigation the Center for Public Integrity published in July that found Congress has systematically weakened the IRS’ exempt organizations division in recent years, leading to the IRS all but quitting its regulation of politically active nonprofit groups.

The agency’s enforcement capabilities were further degraded because of political fallout from some employees’ decisions to delay approval of conservative groups’ applications for nonprofit status.

“The aftershocks from the political targeting scandal certainly don't facilitate prompt solutions,” said Mark Everson, a former IRS commissioner appointed by President George W. Bush. “I would imagine there is a real slowdown getting issues resolved because there is a tendency on the part of employees to make sure they aren't causing new problems.”

Cheryl Chasin, who worked for 32 years until 2010 in the IRS’ exempt organizations division, which oversees nonprofits, went further: “Anybody who at this point stuck their neck out [by delving into political spending] … would be slapped so hard and so fast they would bounce.”

Politically active nonprofits are simply “not afraid of the IRS or anybody else on this matter,” said Paul Streckfus, a former exempt organizations division employee who now edits a trade journal focusing on nonprofits. “Anything goes as far as spending” by these groups.

Politically active nonprofits include 501(c)(4) “social welfare” groups, 501(c)(5) labor unions and 501(c)(6) trade groups.

It’s not that investigators can’t look at the issue: Auditors are empowered to probe groups for suspected political transgressions during the course of other audits, an agency spokesman said. The number of those audits, however, isn’t tracked.

The number of employees responsible for investigating nonprofits in the IRS exempt organizations division has dropped 9 percent from fiscal year 2010 through fiscal year 2013 — from 538 to 489.

There has also been a 16 percent decline in “determinations” employees — workers who process applications for nonprofit status. Their numbers fell from 297 in fiscal year 2009 to 248 in fiscal year 2013.

Meanwhile, applications for “social welfare” nonprofit status — the status obtained by many of the nation’s most politically active groups — increased by more than 17 percent, from 1,922 in fiscal year 2009 to 2,253 in fiscal year 2013.

The agency as a whole lost 13,000 employees in the past four years and has dealt with hefty budget cuts in recent years, and the exempt organizations division hasn’t been spared — even as its leaders “review how to most effectively use its staff,” said Bruce I. Friedland, an IRS spokesman.

Friedland also noted that the IRS has attempted to reduce the backlog of tax-exemption applications by, among other things, bringing in employees from another division to help.

A roster provided by the IRS of tax exempt and government entities division employees from 2001 to 2013 indicates support services for workers has also taken a blow.

For example, the 20 “employee development” positions in 2001 fell to three in 2013, plus four human resources positions.

Several IRS employees said the change was likely part of the overall decrease in training they encountered over the years. This, in turn, contributed to the uncertainty about how to handle applications for nonprofit status by a new wave of political groups.

“Practitioners [such as nonprofit tax attorneys] are saying they’re seeing a reduction in the quality of the work coming out of the IRS. A lot can be traced to that training budget being slashed,” said Streckfus, who worked for the IRS for six years during the 1970s.

 ‘Superfluous’ spending

Critics, including some Republican lawmakers, say the IRS shouldn’t get more money. Instead, they argue, it should tighten its belt further.

Some point to extreme examples of agency waste, such as when the IRS conducted expensive conferences and produced a “Star Trek” parody video in 2010.

They also note some IRS employees still on the job are earning more money.

Indeed, the average salary in the tax exempt and government entities division, which includes the exempt organizations division, increased more than 52 percent — at a higher rate than inflation or average U.S. wages — during the past 13 years, according to the roster of division employees provided to the Center for Public Integrity.

The IRS, as a government agency, must compete with the private sector for workers. But other reasons for the average wage increase are unclear because titles of positions in the division have changed in many cases and full position titles were not provided for some years.

What is clear: There were some steep pay jumps for specialized positions. For instance, the lowest paid actuary in 2001 was paid $41,010. That number more than doubled to $103,872 in 2013. Promotions and changes in pay grades are contributing factors.

In 2001, there were seven budget analysts earning $61,283 on average. In 2013, there were three earning $107,829 on average, or 76 percent more. Having fewer employees doing that work saved the IRS about $105,500.

And while there are fewer employees in the division overall, 2,011 in 2013 compared to 2.202 in 2001, it has managed to add positions in certain departments.

Chief among them: communications.

In 2013, the IRS employed 16 public affairs and customer outreach employees in its tax exempt division and paid them a total of $1.9 million.

In 2001, the division employed two public affairs employees and no customer outreach employees. The two workers together earned less than $133,000 total, IRS personnel data indicates.

The IRS declined to comment on the increase in communications positions.

“At the risk of sounding snarky, where were these people when EO was going to hell in a hand basket because it could not process exemption applications timely?” Marv Friedlander, a former chief of the exempt organization division’s technical branch, wrote in an email.

Streckfus, editor of a trade publication called EO Tax Journal, said he has dealt with the exempt organization division’s public affairs officers and they simply sent him to the national media relations office when he had questions. He takes a dim view of their usefulness, saying “they had the greatest jobs: they sat on their rear ends and collected a paycheck.”

Getting rid of some “superfluous” positions would help ensure there are “as many people as possible actually working cases, auditing individuals or reviewing applications,” Streckfus said.

Some former employees have criticized the IRS’s shift in resources to “customer service,” starting about 15 years ago, and poked fun at the idea of calling regulated nonprofits “customers.”

But others say the IRS — and those regulated by it — would benefit from improved outreach.

It helps make up for the diminished “cop-on-the-beat effect that forces compliance,” Friedlander said, adding that it would have been better if it was easier to measure whether customer outreach worked.

Either way, the exempt organization division’s customer education and outreach unit was moved this fall to another part of the IRS, according to a recent Government Accountability Office report.

The tax exempt and government entities division’s salary levels reflect the Office of Personnel Management’s broader federal pay scale, which rose by more than 42 percent from 2001 to 2014 in the Washington, D.C./Baltimore area, where a “substantial share” of division employees work, said Friedland, the IRS spokesman.

The division and the entire agency “are continually evaluating processes and strategy to operate with declining staff and resources,” he said.

The IRS is also working on rewriting its rules to define political activity and say how much is allowed for certain nonprofits. The rules may not be finalized until after the 2016 presidential election.

Until there are new rules, Streckfus said, it’s unlikely the IRS will do much to regulate nonprofit political activity: “Anything goes in the interim.”

Small Nonprofit? Get the Tax Credit You Deserve!

In March 2010, the Affordable Care Act was enacted to encourage small businesses and tax-exempt organizations to offer health insurance to their employees for the first time or continue the health care coverage they already provided.

The Act gave eligible nonprofits the opportunity to receive a Small Employer Health Care Tax Credit for premiums paid to provide health insurance to their employees. For tax years 2010 through 2013, the maximum allowable credit for nonprofits was 25% of premiums paid. For tax year 2014, the maximum allowable credit increased to 35% of premiums paid. The good news for eligible nonprofits is that the credit is refundable, meaning that even if the organization has no taxable income, they still may be eligible to receive the credit as a refund.

Eligibility is limited to those nonprofits that meet the following criteria:

Pay at least 50% of employee-only health care insurance costs for their employees.
Employ fewer than 25 full-time equivalent (FTE) employees. Generally, all employees who perform services are considered employees; however, special rules apply to leased employees, seasonal employees who work fewer than 120 days, and ministers.
Average employee wages are less than $50,000. Wages, for this purpose, are defined as wages subject to Social Security and Medicare tax withholding without considering any wage base limit.
Purchased health care insurance through the SHOP Marketplace, unless an exception was granted (applicable for tax years after 2013).
Eligible nonprofits can claim a credit for the years 2010 through 2013 and for any two years after that. The amount of the credit is determined by completing IRS Form 8941. Once the amount is calculated it is claimed on line 44f of IRS Form 990-T, even if the organization has no unrelated trade or business income.

The credit phases out gradually for organizations with average wages between $25,000 and $50,000, and for organizations with the equivalent of between 10 and 25 full-time employees.

A common question is “What if my nonprofit is eligible for the credit but failed to claim it in prior years?” To change a previously filed return, write “Amended Return” at the top of the Form 990-T. Also, include a statement that indicates the line numbers on the original return that were changed and provide the reason for each change. In this case, Form 8941 should also be included. Generally, the amended return must be filed within 3 years after the date the original return was due or 3 years after the date the organization filed it, whichever is later.

For more information about the Small Business Health Care Tax Credit, including detailed guidance, instructions for Form 8941, and answers to frequently asked questions, visit the IRS website.

Why Ending the NFL's Nonprofit Status Would be a Huge Waste of Time

FROM EQUITIES.COM

The National Football League has been in the crosshairs of late, and for good reason. Questions about how the league punishes its players swirled after two players, Ray Rice and Adrian Peterson, both became embroiled in domestic abuse scandals. The league’s black eye over the exposure of its systemic efforts to withhold information on just how damaging concussions are, meanwhile, is perhaps the issue that should really get more attention. And, of course, there’s the insistence on the part of Dan Snyder that he should be able to continue using a pretty egregious racial slur as the name of his team.

Not a good year for football, folks. Not as bad as 1905, sure, but it’s up there.

However, these recent scandals have given rise to an effort by the league’s detractors to remove the NFL’s nonprofit status. And I’m here to tell you that this is a really silly thing to get hung up on.

“Honey! Where Did I Leave My Pitchfork? The Angry Mob is Leaving Any Minute Now.”

The pitch is often something pretty similar to what appears in the change.org petition. “Professional football is a $10 billion a year industry but the NFL is legally defined as a nonprofit! You should be oh-so outraged at this tax loophole benefitting evil corporate fat cats and their violent sport! Quick! To Twitter!”

Unfortunately, there’s a certain degree of willful ignorance playing into the whole campaign. Let me be clear, it’s not that there isn’t a decent argument for removing the league’s nonprofit status. It’s just that it’s not really a big enough issue to warrant taking up anyone’s time.

At the core of this argument is actually a pretty simple legal definition that shouldn’t upset anyone, but leaves open a chance for unscrupulous issue advocates to exploit a semantic misunderstanding to drum up largely pointless outrage. I know, that’s pretty much all that’s left on the internet other than porn, but that doesn’t make it okay.

Okay, here’s the deal: Yes, the NFL is a nonprofit organization. It’s also a nonprofit in the sense that it usually doesn’t have any actual profits to speak of.

The NFL Pays No Taxes, but NFL Teams Definitely Do

“But – but – what about the $10 billion a year?!” I hadn’t forgotten that, it’s just that all of that money is taxed. The $10 billion figure comes from combining the income for the individual teams, each of which is a single privately owned business (save Green Bay). Basically, none of that income is using the NFL’s nonprofit status in any way, shape, or form.1 The league office may negotiate the TV contracts, but that money goes straight to the teams.

Why then, do you keep hearing that $10 billion in annual revenues figure quoted in arguments for removing the NFL’s nonprofit status? Wouldn’t it be intentionally misleading to reference total revenue for the league’s teams in the context of the league offices’ nonprofit designation? Correct! It totally is! That’s exactly why people do it: it’s a relatively easy way to drum up outrage by preying on people’s ignorance.

The Tax Filing that Launched a Thousand Blogs

The NFL is a trade organization that represents the 32 professional football teams that make up the league. It’s defined as a 501 (c)(6) nonprofit, the portion of the tax code that defines business leagues. So, part of the IRS “scandal” from last year was that at least a handful of people who actually did some research got a bit of a window into one of the murkier portions of the US tax code. Section 501 (c) outlines tax-exempt nonprofit organizations. All 29 kinds of them, from your cemetery companies (501 (c)(13)) to your Black Lung Benefit Trusts (501 (c)(21)).

The National Football League is a 501 (c)(6), a designation created for business leagues that act as an organizational structure for a group of private businesses trying to work together to advance their collective interests.

What does that mean? It means that the NFL doesn’t pay taxes, but then it’s not really making any money, either. It actually frequently operates at a loss.

What revenue the league office does have comes from team dues. With that money, the league pays its staff of nearly 1,600 people tasked with negotiating TV contracts, working through any rule changes, hiring referees (POORLY), and organizing charitable giving that boosts the league’s image in the general public.

It also means that, legally speaking, the NFL is not unlike the Chamber of Commerce or the American Medical Association, organizations that aren’t exactly taking heat for their nonprofit status. That’s because no one is actually upset about the existence of a legal distinction that allows trade organizations to operate, they just want to use the NFL as a whipping boy.

The thing is, the public attention lavished on the NFL means making a stink about its tax designation is a relatively easy way to get attention, something that politicians (and rage-baiting bloggers) love in almost all forms. That’s why Senators Tom Coburn and Cory Booker have both made public efforts to roll back the nonprofit status of the NFL and other sports leagues.

On its surface, the efforts aren’t entirely without merit. Firstly, the NFL, the NHL, and the PGA tour, among others, are able to use the 501 (c)(6) designation because of 1960s legislation that was the result of an NFL lobbying effort. Basically, merging the NFL with the relatively new AFL raised some monopoly concerns that would jeopardize the nonprofit status that had been employed since 1942, so the league managed to finagle a special addition to the tax code that allowed them to legally operate a monopoly.

Should the NFL get this special designation? Does it Really Matter?

Does the NFL get special status in the tax code? Yes, yes it does. Is that odd? Not so much. Again, there’s 29 different types of recognized 501 (c) groups out there. But then, the league’s legally protected status as a monopoly is arguably much more troubling, particularly when the league office is doing things like actively covering up the way its players were suffering brain damage.

At the end of the day, I can agree that the NFL might deserve any special favors from the tax code. I can even agree that removing its nonprofit status is warranted. But here’s the important question: what are the actual consequences of doing so? Basically nothing. And that’s why this issue is so frustrating.

The biggest clue that this is actually a total non-issue should be that Major League Baseball (MLB) voluntarily gave up the 501 (c)(6) designation for its league office in 2007. Yes, voluntarily. The league office would have to report salaries of any employees that exceeded $150,000 and they didn’t want to do that anymore, so they just gave up their nonprofit status.

This should be your first clue that this particular legal distinction means very, very little in the big picture. It’s not like the MLB owners opted to take on a massive tax bill because they were feeling guilty or they were really all that concerned about the commissioner’s salary being public record. Odds are, the MLB just determined that it could rework its finances to ensure the league office wouldn’t ever show enough of a profit for the switch to matter.

Estimates from the congressional Joint Committee on Taxation determined that eliminating the 501 (c)(6) designation for every sports league out there, not just the NFL, would increase tax receipts by a little under $11 million a year.

Is that nothing? No. Is it enough to actually be worth making a stink over? Good lord no. That $11 million a year represents about 0.0004% of the nation’s total tax receipts and 0.0003% of the total federal budget. Not the sort of numbers that warrant this kind of attention.

A Perfect Storm of Impotent Outrage

So why do so many people pretend this is an issue worth your attention? Because the NFL is visible. This whole campaign only exists because, despite being ridiculous, it grabs your attention.

Drumming up outrage surrounding football is easier than, say, doing the same thing for the home mortgage interest deduction, making it a lot more appealing to politicians and issue advocates. Coburn and Booker know they can get their name in the paper, and Slate and Salon and the rest of the outrage gristmill can count on plenty of clickthroughs from angry progressives.

So, the incentive is there to make a big stink. Not the incentive of making some sort of actual difference in the fairness of our tax code, but the incentive of getting votes and attention from people looking for a new pet cause.

At the end of the day, even if the assertion that the NFL’s nonprofit status should be revoked holds any water, it’s really on a fairly narrow legal justification, not the sort of broad, ideological grounds it’s usually getting sold as. And even then, the actual effects of revoking it would be so minimal it doesn’t justify the attention necessary to make it happen.

So if you’re looking for something to get mad about, keep looking. You can do a lot better.

1 So, apparently, the teams do count their dues paid to the league office as tax deductions, so there is technically some portion of profit from football operations avoiding taxes because of the NFL’s nonprofit status. I mean, a really miniscule portion of that revenue, but a portion nonetheless.

Likely ruling could pressure IRS to provide nonprofits' e-filed forms

The push to force the Internal Revenue Service to release nonprofit tax forms in electronic, searchable formats moved forward this week.

U.S. District Court Judge William H. Orrick, of the Northern District of California, said he intends to rule against the IRS and in favor of plaintiff Carl Malamud, founder of Public.Resource.org. Orrick's action could be a landmark ruling for transparency of tax-exempt organizations.

“We're totally gratified by the motion order, but it is premature to celebrate,” said Malamud, the open records advocate responsible for getting Securities and Exchange Commission data online in the 1990s.

The IRS declined to comment. The agency could decide to appeal the decision once it comes out as a formal order.

Malamud still would have to pay $6,200 for the machine-readable tax forms from nine nonprofits.The ruling won't result in immediate changes in the way the IRS discloses public records.

But Malamud hopes the precedent-setting move pressures the agency to rethink and upgrade its processes — unchanged since more than a decade before nonprofits started e-filing in 2004. Ultimately, he wants everyone to have access to such searchable tax forms, from GuideStar.org to Google to the average citizen.

Malamud sued the IRS in June 2013, when the agency denied his public records request seeking tax returns in the format that nine nonprofits used for online submission.

The tax forms, called Form 990s, are public documents.

The IRS, though, argued that Malamud's request was excluded from requirements under the Freedom of Information Act because of “established IRS procedure.”

The procedure makes it difficult to search for words and figures or identify aggregate trends without painstakingly key-punching information found on millions of pages.

Advocates say that making those records more accessible and searchable could provide meaningful transparency and self-policing to the tax-exempt sector.

The Pittsburgh region's charities alone control $24.2 billion in assets and take in $16.6 billion in revenue, according to the National Center for Charitable Statistics.

The IRS policy is years behind a December 2009 directive by President Obama, who asserted that “the default state of new and modernized government information resources shall be open and machine-readable.”

Shrinking IRS struggles to keep up with growing number of tax-exempt charities

FROM THE WASHINGTON POST:

Remember when conservatives accused the Internal Revenue Service of being too aggressive toward nonprofit tea party groups? Now the agency faces criticism for the opposite problem, this time related to a different type of tax-exempt organization.

An independent review released last month faulted the IRS for scant oversight of charities, saying the agency examined the groups less frequently while its budget and workforce steadily shrank in recent years.


With its budget and workforce shrinking, the IRS has examined charitable organizations with less frequency in recent years. (AP/Susan Walsh)
The Government Accountability Office said in its report that the IRS audited 0.7 percent of charities in 2013, down from 0.81 percent in 2011. By comparison, the agency audited individuals and corporations at rates of 1 percent and 1.4 percent, respectively, in 2013.

Meanwhile, the IRS’s budget decreased by $900 billion after 2010, and its workforce lost 10,000 full-time employees over the same period, according to the review. The staff reductions included 47 positions within the IRS’s exempt-organizations division, which examines charities, nonprofit advocacy groups and other entities that qualify for tax-free status.

“The number of employees performing exams has declined while the number of returns filed has increased,” GAO said.

In a separate report last year, GAO said that budget cuts and staffing declines have harmed the IRS’s performance, specifically with enforcement functions and customer-service.

But congressional Republicans, who now represent a majority in both chambers, have shown little desire to boost the IRS’s resources. A comprehensive spending bill lawmakers passed in December trimmed $346 million from the agency’s budget.

It’s worth noting that the IRS has shown little appetite for challenging tax-exempt groups after its tea party controversy, in which the agency was found to have targeted nonprofit advocacy groups based on their names and policy positions.

Notably, the agency in recent months has taken almost no action against a new movement of pastors who preach politics from the pulpit and sometimes endorse or oppose candidates — a violation of federal law for tax-exempt religious organizations.


Taxpayers and the U.S. government have a lot to lose by ignoring the rule-breakers among tax-exempt groups.


With charities alone, the number of tax-exemption filings have increased by about 5 percent since 2011, for a total of about 763,000 in 2013. Such groups cost the government about $100 billion a year in foregone revenue, according to the Congressional Research Service.

The GAO’s report last month said the IRS’s exempt-organizations division doesn’t have a handle on how well its oversight efforts are working, because it has not developed a system for measuring the outcomes.

“Because EO does not measure the current level of compliance, it cannot set goals for increasing compliance or know to what extent its actions are affecting compliance,” the review said.

The IRS said in a response letter that its exempt-organizations division would “refine its compliance strategy and approach” to determine how enforcement actions are affecting compliance with charitable groups.

The agency also said it had launched new initiatives to “assess and promote compliance by these organizations,” adding that it planned to do statistically valid random reviews of tax-exempt organizations.

5 Questions to Ask Before Giving to a Nonprofit

Most people get into the holiday spirit by opening their wallets and giving to local charities.

Many nonprofits depend on and base their budgets on the gifts they receive during the holiday season. For individuals, holiday giving is an opportunity to donate to a cause they care about while securing a last-minute tax break.

But how do you know if your money really goes to the charity’s mission? Nonprofits are not scrutinized as much by the IRS, but their 990 tax forms can be the first clues as to how well an organization manages its money.

Before you sign over the check, don’t be afraid to research the charity. If you don’t know if you should give, answer these five questions:

1. Is the charity tax-exempt?

If you know nothing about the organization, verify that it is a registered 501(c)(3) — a public charity nonprofit — with the Internal Revenue Service. You can use websites such as charitynavigator.org for reviews and guidestar.org for their 990 tax forms. Nonprofits are required to fill out these tax forms each year.

2. How much of the charity’s budget is spent on services?

Allow some wiggle room here. Experienced, efficient organizations should spend 75 percent or more of their money on programming. New charities should spend about 60 percent. New groups and those that work on less popular issues may have to spend more on fundraising and administrative costs.

To find the giving rate requires some math. First, look at the nonprofit’s 990 form for its total program service expenses. Divide that number by the line item for total expenses and then multiply by 100.

Yet even then, the tax forms will not always accurately reflect how much is spent on the charity’s mission. Small organizations often can't afford an accountant to fill out the form. The IRS does not audit nonprofits as much as other organizations, so errors sometimes can go unchecked for years. Also, many of the form’s line items are open to interpretation. Some groups consider salaries part of their program services expenses, while others may leave them out.

Remember, the 990s aren’t perfect. But they are the only public documents that nonprofits must fill out. If you have a question about a group’s 990, call the organization. No matter the reason, the organization’s executives should be able to pinpoint the charity’s challenges and goals with finances.

3. How much is the executive director’s salary?

Not all who work for a charity are paid, but those who do should have salaries listed in the 990.

Keep everything in context. If a nonprofit’s budget is $100,000 and the executive director makes $75,000, you have reason for concern.

According to the IRS, a nonprofit’s chief executive officer should receive a “reasonable” compensation. But the tax code remains vague on how much is unacceptable.

The IRS only requires nonprofits to report salaries of executives making more than $100,000. In the nonprofits used in this report, many of the organizations provided salary information of CEOs making much less.

4. Are board members compensated?

Nonprofit board members should participate for the public good, not for a salary. It’s not illegal if they are paid, but it's considered a red flag.

Board members are listed on the 990s with any reportable compensation or benefits. In the groups polled in this report, no board members were paid.

5. How does the charity make a difference?

Have you visited the organization? Met the executives? Talked to someone who benefited from its programs? Doing so can provide powerful insights on how the charity meets its goals and benefits the community.