Massachusetts Tax Filing Compliance

If you are a non-profit located in Massachusetts this article is for you.  It has come to my attention that a lot of organizations have contracted accountants who are not familiar with all the required documents that must accompany the Massachusetts annual tax filing of Form PC.  The requirements include:

1.    An accurate Form PC.  Special attention to the questions on the form can error be answered incorrectly.

2.    Accompanying IRS Filing of either Form 990EZ or Form 990.

3.    Reviewed financial statements issued by a CPA form if revenue is between $200,000 and $499,999.  Audited financial statements if revenue exceeds $499,999.  Audited financial statements per Government auditing standards if federal revenue for a federal contract is $750,000.

4.    Failure to comply can jeopardize an Organization’s ability non-profit status in the Commonwealth of Massachusetts.  Of special note is that your organization has not complied with complete filings for a period of five (5) years your non-profit status in Massachusetts risks losing its non-profit status.  The process to rectify the above can be an expensive and lengthy process.

Ethical Compliance In the Nonprofit World

Unethical behavior remains a persistent problem in nonprofits and for-profits alike. To help organizations solve that problem, organizations need to examine the factors that influence moral conduct, the ethical issues that arise specifically in charitable organizations, and the best ways to promote ethical behavior within organizations.

The corporate sector has no monopoly on greed. According to Internal Revenue Service records, a multibillion-dollar student loan charity organization abused its tax-exempt status by charging excessive interest on loans and by providing millions in compensation and lavish perks to its CEO and her husband, including use of the organization’s $31 million private jet for family and friends.

Unsurprisingly, these and a host of other scandals have eroded public confidence in our nation’s leadership. According to numerous polls, only a quarter of Americans think that top executives are honest. Even executives themselves acknowledge cause for concern. The American Management Association Corporate Values Survey found that about one third of executives believed that their company’s public statements on ethics sometimes conflicted with internal messages and realities. And more than one third of the executives reported that although their company would follow the law, it would not always do what would be perceived as ethical.

Employee surveys similarly suggest that many American workplaces fail to foster a culture of integrity. Results vary but generally indicate that between about one-quarter and three-quarters of employees observe misconduct, only about half of which is reported. In the 2007 National Nonprofit Ethics Survey, slightly more than half of employees had observed at least one act of misconduct in the previous year, roughly the same percentages as in the for-profit and government sectors. Nearly 40 percent of nonprofit employees who observed misconduct failed to report it, largely because they believed that reporting would not lead to corrective action or they feared retaliation from management or peers.

Remember that you must first identify past and potential future costs of failing to be ethically compliant.  Will your organization lose funding or perhaps its nonprofit status?  With more social media exposure of ethical violations is much easier for others to research.

What Can Your Organization Do to Remedy the Situation?

Set ethical standards, policies and guidelines for your organization. For example, have a code of conduct, provide ethical compliance training, and revise the code of conduct periodically to expand its reach

Manage the ethics conversation in your organization.Develop “ethics hotline” where people can report ethical concerns anonymously.·Your organization must develop a means to support the activity.  Develop an array (current listing) of ethical threats and challenges that your           organization is facing and is expected to face. Update this list periodically and use this list to predict where ethical challenges will come in the future. The process takes leadership in setting high ethical compliance standards. There must be a zero tolerance policy towards failures to be ethically compliant.

Seeking Donations Before December 31st?

For most nonprofit corporations (like 501(3)(c) organizations), maintaining tax-exempt status is paramount. In order to do so, make sure your nonprofit complies with a few special rules. 

Donors are Looking for Organizations to Donate to Before Year End

Despite differences in behavior, all donor categories (individuals, advisors, and foundation grantmakers) want similar types of information from nonprofits presented in similar ways. Communicating and connecting with each group doesn't require a vastly different strategy or different information.

In terms of the type of information, all donors want to understand the full story of an organization, including:

• The financial picture, including how an organization spends its money
• That a nonprofit is legitimate
• The basics of the organization—its mission, approach, and make up
• The breadth and depth of the cause
• The nonprofit's impact

Some of the information donors want, such as financials, is fairly easy to come by. In fact, donors state they are able to find each of the first four items on the list without much difficulty. But donors also want information on a nonprofit's impact, which can be very difficult to obtain. This information—how effectively nonprofits achieve their missions—is the true "unmet need" of donors.

Presentation

Just as important as the information that donors want is how they want that information presented. All three groups clearly prefer an easy-to-digest report similar to what is produced by Consumer Reports. This format balances simplicity and thoroughness. It is easy to understand, while still allowing each person to make his or her own decision.

Descriptions of nonprofits without ratings also scored high; in fact, these descriptions—provided by a third-party site or by the nonprofit itself—scored higher than the simple "stamp of approval" approach that is so common today. It is not necessarily the case that donors don't want a perspective or star rating. They just want those perspectives to be conveyed in context, and with an eye on the full picture of the organization.

Trusted Sources and Location

Donors also have clear and consistent preferences on the source of information on nonprofits and where they want to find this information. On both dimensions donors give high ratings to nonprofit information portals and rating agencies as well as the nonprofit itself. It is important to know, however, that although donors say they like third-party sites, their awareness and knowledge of the ones that already exist today is very limited. The vast majority of research that is done by donors happens through direct contact with the nonprofit itself—be it the organization's Web site, materials, or staff.

How You Benefit from Offering Donors More Information

The bottom line of this research is that donors care about nonprofit performance, they want a complete picture of a nonprofit, and they want that picture presented in a clear, easy-to-understand way. Connecting with donors and communicating this information can help you access your share of the $15 billion in annual giving donors are willing to move to high-performing nonprofits. Best of all, collecting and communicating the information donors care about and want does not need to be an onerous, expensive process.

Corporate Records Requirements

All nonprofit corporations must keep good corporate records. These records help to preserve directors' limited personal liability and protect your organization's tax-exempt status. Good record keeping means preparing minutes of directors' and members' meetings and documenting important corporate decisions.

You'll want to organize these materials in a corporate records book, which should also contain a copy of your articles of incorporation, bylaws, and tax exemption determination letters from the IRS and your state tax agency.

In addition to keeping records of important decisions, your nonprofit corporation must record any financial transactions in a bookkeeping system and keep other financial records in order to file an annual corporate tax return.   In the Commonwealth of Massachusetts if your Organization receives for than $200,000 in revenue in any one year it will also have a requirement to have the accounting records either reviewed or audited by an independent Certified Public Accountant and have formal financial statements prepared.  Usually an audit is required if gross revenue exceeds $500,000.

Segregation of Duties

Introduction
The concept of Segregation of Duties is to separate the major responsibilities of authorizing transactions, custody of assets, recording of transactions and reconciliation/verification of transactions for each business process.  From a separation of duties perspective, the completion of more than one of these functions would be considered performing "incompatible duties".  In other words, no one employee should have responsibility to complete two or more of these major responsibilities.  However, staff limitations may make this impractical and that is when Compensating controls must be considered.

Matrices are available upon request to assist you in structuring proper separation of duties and identifying areas where separation of duties is lacking.  They will cover the most common processes that everyone should have (Cash, Petty Cash, Investments, Purchasing, Payroll, Inventory, Fixed Assets and General Ledger).

If you identify employees who perform two or more tasks for each business process area, you will need to determine if those tasks would be considered a performance of "incompatible duties".   If so, you will need to consider compensating controls or revise duties. 

We should always strive for the optimum degree of segregation of duties.  However, due to limited staff sizes at some organizations, optimum separation of duties cannot be achieved.  In those circumstances you should at least strive for an acceptable(minimal) level of segregation of duties which when combined with compensating controls will minimize the impact of control deficiencies and exposure to errors or irregularities.  A minimal level of segregation of duties could possibly be achieved by verifying that no one employee performs more than two of the "incompatible duties".  For example, an employee might perform the authorization and verification/reconciliation functions but they should not record the transaction or maintain custody of assets.  A compensating control would be managerial review.  

Some Basic Suggestions for Best Practices

Generally, the Chief Financial Officer, Controller and accounting department personnel should not have access to modify general ledger accounts or change mappings for these accounts.  Normally these changes should be made by IT personnel after approval by CFO or Controller.

Employees responsible for preparing/initiating a journal entry should not be able to approve or record the journal entries.

Financial statements should be approved by supervisory personnel at a higher authority level than person preparing the financial statements.

If the general ledger system is configured so that journals cannot be approved prior to posting a compensating control would be to print a report of all journal entries at the end of each period and have a supervisory level employee who does not have access to record transactions review and approve the transactions that have been recorded.

Segregation of Duties

Introduction

The concept of Segregation of Duties is to separate the major responsibilities of authorizing transactions, custody of assets, recording of transactions and reconciliation/verification of transactions for each business process.  From a separation of duties perspective, the completion of more than one of these functions would be considered performing "incompatible duties".  In other words, no one employee should have responsibility to complete two or more of these major responsibilities.  However, staff limitations may make this impractical and that is when Compensating controls must be considered. 

Matrices are available upon request to assist you in structuring proper separation of duties and identifying areas where separation of duties is lacking.  They will cover the most common processes that everyone should have (Cash, Petty Cash, Investments, Purchasing, Payroll, Inventory, Fixed Assets and General Ledger). If you identify employees who perform two or more tasks for each business process area, you will need to determine if those tasks would be considered a performance of "incompatible duties".   If so, you will need to consider compensating controls or revise duties.  

We should always strive for the optimum degree of segregation of duties.  However, due to limited staff sizes at some organizations, optimum separation of duties cannot be achieved.  In those circumstances you should at least strive for an acceptable(minimal) level of segregation of duties which when combined with compensating controls will minimize the impact of control deficiencies and exposure to errors or irregularities. 

A minimal level of segregation of duties could possibly be achieved by verifying that no one employee performs more than two of the "incompatible duties".  For example, an employee might perform the authorization and verification/reconciliation functions but they should not record the transaction or maintain custody of assets.  A compensating control would be managerial review.  

Some Basic Suggestions for Best Practices

Generally, the Chief Financial Officer, Controller and accounting department personnel should not have access to modify general ledger accounts or change mappings for these accounts.  Normally these changes should be made by IT personnel after approval by CFO or Controller.

Employees responsible for preparing/initiating a journal entry should not be able to approve or record the journal entries. Financial statements should be approved by supervisory personnel at a higher authority level than person preparing the financial statements.

If the general ledger system is configured so that journals cannot be approved prior to posting a compensating control would be to print a report of all journal entries at the end of each period and have a supervisory level employee who does not have access to record transactions review and approve the transactions that have been recorded.