Armanino Nonprofit Blog

Armanino Nonprofit Blog

Welcome to the Nonprofit Blog hosted by the professionals at Armanino, CPAs & Consultants. This blog is set up to inform nonprofit organizations of trends, rule changes, best practices and free educational offerings that we have built to support nonprofit organizations. Our professionals bring you their insights from an accounting and organization perspective to help nonprofits reach their goals. We support our clients with advice, direction and best practices.

Wednesday, September 24, 2014

Treasury report shows nonprofits face back tax scrutiny

A new report from the Treasury Department’s inspector general paints a clear target on nonprofit organizations that haven’t been paying their taxes.

The feds found more than 64,000 tax-exempt organizations owed nearly $875 million in back taxes as of June 2012. Most of the unpaid bill  (69%) represented unpaid payroll taxes but unrelated business income and excise taxes were also a factor.

All in all, Treasury found about 1,200 tax-exempt organizations owed more than $100,000 each. Drilling down on what the inspectors considered the 25 worst offenders, the feds found $25 million in tax delinquencies, some dating back a decade.

As a result, the IRS imposed the Trust Fund Recovery Penalty on several officers of those organizations, all of which are 501(c)(3) entities. That levy is imposed on the “responsible person” in an organization that hasn’t paid its taxes. And the penalty is huge—100% of the unpaid amount levied against the individual.

Think you’re immune because you’re ‘just’ a volunteer? There is an exception in the law for unpaid volunteers serving in an honorary position. But that exception doesn’t hold if the feds can’t identify another “responsible person” within the delinquent organization.

The silver lining here is that the feds found more than 96% of nonprofits have been doing the right thing. While that’s encouraging, the report fires the kind of warning shot that should prompt nonprofit executives to take a close look at their practices.

Start by reviewing your records to make sure your organization is current on all its tax bills. Pay particular attention to those payroll taxes. Then take a close look at your internal controls to identify that “responsible person.” Ask yourself if the finding is what you intend and whether the person knows they could be on the hook if anything goes wrong. This is also a good time to check your directors and business officers insurance coverage.

While the Treasury and IRS disagree on next steps, this is the kind of issue that likely won’t go away. Uncle Sam has a long arm and an $875 million unpaid bill is enough to get his attention. Read the full report to learn more: http://www.treasury.gov/tigta/auditreports/2014reports/201410012fr.pdf.

Wednesday, September 17, 2014

Fraud takes a bite out of nonprofit revenue

A new report puts some important detail on an unfortunate truth: Fraud is a major drag on business.

Overall, fraud is costing business 5% of gross revenue, according to the biennial Report to the Nations on Occupational Fraud and Abuse authored by the Association of Certified Fraud Examiners. The media loss is $145,000, and in 58% of cases, there is no recovery. Small or large. Private, public or nonprofit. It doesn’t matter. Dishonest employees don’t discriminate.

Think of fraud as a triangle, Jeff Stegner, Partner with Armanino’s Forensic and Valuation Services Group, and I explained during a recent webinar focusing on fraud prevention in the nonprofit sector. The legs of that triangle are:
  • Pressure – An employee is in need and feeling pressure
  • Rationalization – An employee rationalizes the fraud as justified or an entitlement
  • Opportunity – An employee finds an opportunity to commit fraud
And opportunity is the only one employers can control. Our best advice involves tightening internal controls and putting your firm in a position to detect a crime. The report showed that 42% of fraud is discovered through a tip from an insider. Another 30% is uncovered by internal controls and internal audits. An additional 11% is discovered purely by accident.

At the bottom of the list at 3% is external audits, highlighting a crucial lesson. Don’t count on external auditors as a frontline detection strategy. That’s not what external audits are designed to do. But that doesn’t mean your auditors can’t help. Ask them for suggestions on how to tighten your internal controls to make fraud easier to detect.

Fraud comes in three main forms, the report said:
  1. Fraudulent financial reporting – This category of white-collar crime makes up just 9% of total fraud but carries a median loss of $1 million. As bad as that it, the figure is down from the $4.1 million median chronicled in the 2010 report. Sarbanes-Oxley reporting requirements deserve much of the credit.  
  2. Asset misallocation – This is the largest category, making up 85% of U.S. cases with a median cost of $130,000. The category includes everything from no-show employees to skimming, theft of supplies to fictionalized expense reports. 
  3. Corruption -- This is a larger problem overseas than in the U.S. but represents 37% of reported cases. (Some cases involve more than one category, sending the total over 100%). The median corruption case costs $200,000.
The old school anonymous tip hotline is one of the most effective steps employers can take. Employers with hotlines find 51% of detection comes from tips while that number dips to 30% for employers without hotlines.

Nonprofits aren’t immune from fraud. Almost 11% of cases involve nonprofits and carry a media loss of $108,000. A common factor is lax internal controls. Also, for small nonprofits, a few key employees are often forced to take on incompatible roles that can open the door to fraud. Rotating duties and roles can lessen the opportunity for fraud.

To learn more about fraud and prevention techniques, download the PowerPoint presentation or replay the entire webinar on our website.

Monday, September 8, 2014

Unrelated Business Income: Tax-Exempt Revenue Can Hang By a Thread

The term ‘unrelated business income’ sounds innocuous on the surface, a kind of catchall for items accountants can’t categorize. For the nonprofit community, however, nothing could be further from the truth.

A miscalculation that moves tax-exempt revenue into the taxable realm of unrelated business income (UBI) can be devastating. The nuances are so granular, only a CPA can explain the ins, outs and ramifications. This is why my recent webinar presented more than a dozen case studies to explain the subtleties nonprofits need to master to stay on the right side of IRS rules.

The whole area of UBI stems from concerns raised more than 50 years ago by for-profit entities over what they characterized as unfair competition from tax-exempt entities. To level the playing field, Congress moved from considering the use of the revenue to considering the source.

The test for falling out of tax-exempt status involves three elements, all of which must be present:
  1. The activity must not be substantially related to the tax-exempt purpose
  2. It must be a trade or business
  3. And it must be regularly carried on
Is a hospital cafeteria substantially related to the mission of the hospital? How about a college that leases unused land for a cell phone tower? How about a fundraising gala or that Christmas tree lot on the corner?

These are tricky issues, with lots of variables. In addition, these nuances often have to be sorted out by the courts, resulting in a complex set of exceptions and modifications.

Nonprofits can slip into UBI territory without even knowing it. Watch those hyperlinks. The IRS is on the lookout for links that lead to pages that can be classified as advertising or political content. That’s enough to poison a whole partnership and make any revenues taxable. And that can really hurt at a time when nonprofits are watching every penny.

To hear some additional scenarios and learn more about UBI, click here to access my recent webinar presentation and recording.

Wednesday, September 3, 2014

Nonprofits: Go Beyond Storytelling

In the ongoing effort to engage donors, nonprofits have been developing a renewed appreciation for storytelling. But is storytelling alone enough to build the ongoing engagement with doors that modern nonprofits crave?

The ability to touch the heart and then the wallet isn’t a new concept. For decades, donors responded to actors telling stories of impoverished children rising above their circumstances; these stories touched hearts and drove donations. A number of charities connected donations with individual children and promised periodic updates from the children themselves.

Social Media

In the 21st Century, the addition of social media has supercharged storytelling. One good story can be re-purposed into many channels and touch prospective donors where they congregate rather than trying to drive them to the nonprofit’s site. That’s all progress. And there’s some evidence the Millennial generation responds to human narratives. Focusing on best practices helps:
  • First-person tales are most compelling
  • Use video to convey motion and emotion
  • Ensure the story isn't about the organization, but the impact on real human beings
  • Keep it simple and keep it under two minutes
The question is how to follow the initial success of a storytelling appeal.


In this results-oriented world, donors are looking for programs that solve problems, not bandage them. The focus on quantifiable outcomes is one step and can be a powerful tool when packaged in combination with quality storytelling.

Nonprofit website Socialbrite has a great post featuring 8 Great Examples of Nonprofit Storytelling, which showcases how visual storytelling can help advance the missions of nonprofits. It’s a powerful series of examples that are worth a look. However, remember that storytelling doesn’t work in a vacuum.

Modern donors increasing want to feel appreciate. Donor incentives are one way to accomplish this, but so are some spiffs of the social media age. A shout out via Facebook or Twitter, for example, can be a valuable perk for Millennial donors. They also demand transparency, which can reveal that a nonprofit doesn’t have the reach to solve a problem alone.

That’s where collaborations can become an attractive tool. Not only do they show donors a nonprofit is expanding its approach to the problem, it also lets a nonprofit mine another set of potential donors, albeit at the cost of sharing its own list. Finding the best fundraising techniques for your organization is an art, but it can be augmented by the science of best practices.

Monday, August 11, 2014

Should Your Nonprofit Cash in on Cryptocurrency?

A fascinating fad…or the next evolution of fundraising? Seems it’s what everyone is asking these days about the Bitcoins, Dogecoins and Peercoins of the cyber world. So, let’s take a look at how few early-adopting nonprofits have experienced some initial success in accepting these “cryptocurrencies” as donations.

Songs of Love, a national nonprofit that creates personalized, original songs for children and teens facing tough physical or emotional challenges, was one of the first nationally recognized 501(c)(3) charities to accept Peercoin donations. Donors simply send to the Peercoin wallet address provided on the organization’s website.

Another cryptocurrency, Dogecoin, has been used to raise money to fund everything from the Jamaican bobsled team’s trip to the Sochi Olympics to service dogs for children with disabilities.

Geekers Paradise?

Sure, it’s a brave new world when it comes to virtual currencies. But you don’t have to understand geek-speak to understand the basics.

The IRS refers to Bitcoin and similar cryptocurrencies as “convertible virtual currencies”, which means that they can be digitally traded between users and exchanged for legal tender or other virtual currencies. Cryptocurrencies don't exist in paper or coin form. They are downloaded from a virtual wallet, which is often housed on the owner's smartphone, to the charity's website, which is equipped to convert it to cash. Prompt exchange is often key due to the potential for volatility with virtual currency.

However, you can count on this: Somewhere, sometime, someone will contact your organization and want to make a donation using a cryptocurrency. If you have the ability to do so, you may just create a new platform and a new way to engage donors in the process. Of course, you’ll appeal to younger, tech-savvy donors. But the built-in PR buzz of this new technology may very well ripple across your entire base.

What the Tax Man Says

However, just because you can accept cryptocurrency donations doesn’t necessarily mean that you should. To be sure, a myriad of logistical and legal challenges can arise.

But figuring out the legalities of cryptocurrency donations got a bit easier after the IRS issued a March 2014 notice stating that cryptocurrencies should be treated as property (similar to the way stocks are treated for income tax purposes). Specifically:

  • Cryptocurrency received as payment (or donation) is includable as income for the recipient
  • The value of the cryptocurrency is determined to be the fair market value as of the date it was received

Consider Jumping In

Spare Key, a Minneapolis nonprofit that provides assistance to families with critically ill or injured children, began accepting Bitcoin donations at the beginning of 2014. In a blog post, Executive Director Erich Mische summed up his feelings on cryptocurrency’s future. “I am not smart enough to know where the cryptocurrency economy will end up in the weeks, months and years ahead. But I am old enough to know that I have been told too many times that things like cell phones, the Internet and reality shows would never catch on in my lifetime.”

If you’re considering crytocurrency, or have the same mindset as Mische, you’ll be glad to hear it’s actually pretty easy to jump into the world of cyber donations. Just go to Coinbase or BitPay to set up Bitcoin processing. Then, design a special Bitcoin donation page on your website. Sprinkle in a few “Bitcoin Accepted” logos and add some links on your donation pages to let people know they can donate.

Wednesday, July 2, 2014

Study suggests more female leadership needed in nonprofits

A recent Harris Poll of 644 women working in the nonprofit sector found 40% of those working at large nonprofits* felt that their organizations did not put as much effort into soliciting donations from affluent women as they did affluent men. The poll also found 58% of these women felt that their organizations would be more effective at raising money, and 59% said their organizations would be more effective at fulfilling their mission, if there were more women on the board of directors.

Debra Mesch, Director of the Women’s Philanthropy Institute at Indiana University, told the Chronicle of Philanthropy that the poll’s finding are consistent with research she’s conducted. Women “are not considered as major donors or perceived to be the decision makers,” she said. “We certainly see that, in many studies, there are financial gains for organizations when more women are on the board.”

Industry statistics indicate 82% of employees of nonprofit organizations are women while the majority of nonprofits are led by men, both as CEOs and as board members. Still, 57% of female employees aspire to top leadership positions. That sentiment is highest (72%) among workers aged 18-34. The number drops to 64% among those 35-44, to 48% among those 45-54 and 30% among those over 55.

The largest impediment to seeking a leadership role is the time commitment, cited by 55%, and stress, cited by 44%.

The survey was undertaken in conjunction with the George H. Heyman Jr. Center for Philanthropy and Fundraising at New York University. For more details, access this info-graphic or visit The Chronicle online now.

* The study, commissioned by The Chronicle of Philanthropy, defined large nonprofits as those with more than $25 million in assets.

Tuesday, June 24, 2014

An Affordable Care Act Update for Nonprofits

The Internal Revenue Service (IRS) has streamlined the reporting burden for employers under the Affordable Care Act (ACA)—but only if companies qualify and receive certification for 2014.

In its effort to determine which employers are offering qualified coverage and which face penalties for not playing, the IRS has outlined new reporting rules for employers with more than 50 full time employees (FTEs) or FTE equivalents.

IRS Section 6055 requires health insurers—including self-insured employers—to provide information on the type and period of coverage for every employee on the payroll during 2014. One copy goes to the IRS and another goes to the employee by Jan. 31, 2015 (or by March 31, if filed electronically).

IRS Section 6056 requires employers with more than 50 full-time employees to tell the IRS what health care coverage it offered to each employee and over what portion of the year that offer covered. That form is due Feb. 28, 2015, or March 31 if filed electronically.

Sec. 6056 also requires large employers to furnish related statements to employees that the employees can use to determine whether, for each month of the calendar year, they can claim a premium tax credit.

The goal of all this is to measure whether employers have complied with ACA’s requirement to offer “minimal essential” health care coverage at an affordable price that reaches a “minimal value” threshold for all employees and their families. Employers that don’t meet the test—and just one of their FTEs or equivalents received a premium tax break for buying insurance on the health exchange—will face significant tax penalties.

The new regulations are a significant improvement from earlier drafts. Gone are demands for some data that would have been costly to administer and have not helped the IRS determine penalties. The latest rules offer a combined form that allows employers to meet both Sec. 6056 and Sec. 6066 requirements (Form 1095-C). It’s a handy tool, especially for those employers who do not self-insure and do offer qualifying coverage to all of its FTEs.

The latest regulations also provide some short-term relief from penalties for employers who can show they have made good-faith efforts to comply with the ACA’s information reporting requirements in this first year.

To learn if your organization is eligible for transitional relief, review our latest webinar: Affordable Care Act: Tax Update for Nonprofits.

Like much of the ACA, the concrete hasn’t hardened yet and there could be additional changes before employers start filing in 2015. But these IRS regulations give employers a better measure of what’s expected as they weigh their employee benefit options.

If you’re unsure if your organization is required to take action to comply with ACA requirements, or if you’re still trying to minimize your FTE and FTE-equivalent headcount, contact Dan Jones (925-790-2644 or Dan.Jones@amllp.com) to learn more about how Armanino can help you minimize your “pay-or-play” tax risk.

Monday, May 12, 2014

Understanding recent OMB grant reform

After urging by grant recipients and two presidential directives, the Office of Management and Budget (OMB) has issued more than 100 pages of revised regulations governing administrative requirements, cost practices and audit procedures that take effect Dec. 26. And yes, it’s as big of a  deal as it sounds.

From an audit perspective, the shift in focus from a focus on procedures to a focus on program performance and measurable outcomes is one of the largest changes. There was also a $250,000 increase in the threshold that requires an audit—up from $500,000 to $750,000— and a decrease in the amount of sampling required by auditors.

From a consulting perspective, the OMB’s effort to streamline years of often confusing guidance into one uniform document was key, along with the changes that make accounting for indirect costs easier and less time consuming for grantees.

In addition, there are many technical changes that will require some additional training for accountants but, perhaps, the larger changes are in the new areas grantees will be expected to address:
  • A shift to electronic record keeping and the accompanying need for security are top of mind for OMB regulators.
  • A shift to an emphasis on program outcomes will push recipients into developing new non-accounting metrics.
  • A shift of submonitoring requirements from audit to the post award area with specific requirements stated for information in the award, ability to accept subrecipient indirect cost rates, and steps needed in monitoring.
It’s also important to note that some of the changes contained in preliminary OMB reform drafts didn’t make the official announcement—and the committee continues to meet.

Next Steps

Now is the time for nonprofits that receive federal grants to take a close look at their internal practices before December 26, when these changes will be included in their audits.
For an overview of the OMB reform changes and how they could impact your organization, listen to my recent webinar with Senior Consulting Manager, Karen Frost, titled Understanding OMB Reform for Grant Administration and Single Audits.

Monday, April 28, 2014

Program evaluation is worth the effort

For many nonprofits, the day-to-day struggle to keep the motor running has sapped the energy and enthusiasm for asking the most important question: How is my nonprofit doing?

Asking the stakeholders is time consuming. So is analyzing the data. Staff time is tight; so are the funds needed to buy software or outsource the process. Studying best practices can be helpful, but it can also be a frustrating reminder of the resources you lack. But without the knowledge, how do you know if your nonprofit needs to make changes? And what can you tell potential donors who ask about your effectiveness and efficiency? Here are some suggestions:

The Center for Effective Philanthropy offers a suite of tools, which give a 360-degree evaluation of a nonprofit. The tools measure perceptions of donors, staff, grantees and even declined applicants. Among the California nonprofits taking advantage of the donor perception tool, for example, are the Napa Valley Community Foundation, the San Francisco Foundation and the Orange County Community Foundation. There are 42 California nonprofits on the list of users for the Grantee Perception Tool.

The Foundation Center has also developed a valuable resource in its Tools and Resources for Assessing Social Impact (TRASI) database. There, nonprofits can access a number of tools that cover best practices and program evaluation.

Trade associations or your top advisors may also have information and resources to help you evaluate your program’s performance. For example, Armanino developed Rapid Performance Management, a benchmarking tool designed specifically to help our private school clients benchmark themselves against industry standards and their peers.

There’s no doubt evaluating your program takes work and resources, but in the long term, taking advantage of some of the tools and resources mentioned above will help you start improving your program’s performance and efficiency.