My Guest:
Gene Takagi: Your 5-Point, 1-Hour Legal Audit
Gene Takagi returns! He walks you through five quick checks of your nonprofit’s documents, processes and status, to make sure you’re on the right side of the law. Gene is our legal contributor and managing attorney at NEO, the Nonprofit & Exempt Organizations law group.
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Transcript for 548_tony_martignetti_nonprofit_radio_20210706.mp3
Great to be back. tony How are you? [00:02:03.54] spk_0:
Always a pleasure you’re smiling, I love it, thank you. How is everything going in san Francisco wise now? Late june [00:02:08.14] spk_1:
well we’ve been having really comfortable, even chilly weather that Mark Twain quote, I don’t think it was actually Mark Twain, but about the coldest day spending a summer in san Francisco is uh somewhat apt right now, but I’m not envying the high temperatures up in my home country of the pacific northwest [00:02:43.84] spk_0:
Oregon. I was just talking to AMY sample ward earlier today and yesterday too. And uh 116 she said it’s broken. It’s broken since then, but uh astronomically high temperatures for for three days in a row. They had. [00:02:49.04] spk_1:
Yeah, unbelievable. [00:02:54.14] spk_0:
Yeah, I know. Okay. But you’re you’re much more comfortable in san Francisco good complaints taking any time off this summer. [00:03:00.84] spk_1:
Um I’m planning to go back to Canada once the borders are open to visit my mom and family, but no word on the official opening date yet, we’re hoping by August one. [00:03:12.79] spk_0:
Okay, So Canada is still restricting us residents? [00:03:16.74] spk_1:
Yeah, it’s still kind of closed off right now, but we’ll see when it opens up again. Okay. [00:03:23.37] spk_0:
Okay. Maybe I’ve been paying more attention to Australia than I have Canada. I know, I know Sydney is on a new lockdown. All right, Where in Canada? Where is your family in Canada? [00:03:33.44] spk_1:
In Vancouver? So in that pacific northwest? [00:03:50.44] spk_0:
Yes. Right. Right. All right. So you have this nifty one hour, 5. for us. A review of documents and a process and your status. Why don’t you why don’t you get us started? But this is not this is a legitimate audit. Uh Not a uh this is not an Arizona style audit from. [00:04:05.84] spk_1:
Yeah. And this is an accountant. Side it. So this is kind of your own internal check of do these things and you’ll sleep better at night knowing that you’re either okay or you know what you need to fix. So, [00:04:12.32] spk_0:
okay, if you need to fix some things, you might need someone like, like you to help. [00:04:28.54] spk_1:
Could be or you might even be able to do it yourself. So, some of the fixes are easy. Some of the fixes might be a little bit more difficult, but um, you should know where you stand. I think that’s that’s the first thing and that’s why [00:04:32.36] spk_0:
for sure. First step, no, no your status. Okay. So so kick us off. What’s your what’s your first idea? [00:05:48.04] spk_1:
So I think the first thing you look at is your articles or certificate of incorporation. That was your formation document to start out with. And you want to see what the purpose of the organization is. So the articles govern every other there the like the one ring that rules all the rings showing my geeky side. That’s the one document that rules all the other documents and there’s no superseding what the articles say. So the articles say in the purpose statement, what you do and you’ve evolved past that. Maybe there’s a geographic limitation that says you only operate in new york in the articles and, you know, 50 years ago, that was true. But since then, you’re, you know, you’re operating in the tri state area or also in California, whatever that may be your articles, we’ll tell you what you can and can’t do and if they’re so limiting and you’ve grown past it, you’ve got to fix that. So amending the articles would be the next step. But within that one hour, it’ll probably just take you two minutes to read that purpose statement and say, oh, this is right online with our mission statement or it’s so broad that it covers anything we might do now, we’re in the future. Or you might get that note that says, ah, because the geographic limitation or our purpose isn’t so specific anymore. We’ve expanded beyond that and we need to fix it. So that that’s the first thing. [00:06:06.24] spk_0:
Why does this matter? Well, suppose we have evolved past what our articles of incorporation say. That’s an ancient document. Yeah, it got us started. Uh, it’s outlived its usefulness. What’s the difference? [00:07:00.84] spk_1:
Well, it’s that one document that rules all that that still is in effect. So even though it was drafted and adopted a long time ago, that is the principle document that governs what you can do. So, if you’re doing something that you’re not allowed to do in your articles, you could actually be subject to a lawsuit that says you are operating and diverting charitable assets that were intended for this purpose. Which was your article in the Articles of Incorporation and now using it for another purpose. So that’s, that’s the big thing to, to, to worry about in terms of operating outside of your articles. How much is this enforced? Probably not very much absent a complaint from somebody, but if you have an unhappy board member or an unhappy donor that takes a look at the articles or an unhappy thunder, um, that can get you into some trouble. And it probably shows you that the very, very most basic step in your due diligence on your homework about making sure your organization is run properly. You missed. Um, and that could be a sign of other problems. So you want to fix that if it’s if it’s a problem, don’t lose too much sleep over it, but identify it and fix it if necessary. [00:07:40.64] spk_0:
Alright, so you mentioned funders, I assume this is such a basic document. And we uh, you lawyers, me former lawyer would call them your organic documents because they are your your origin. This and the next one we’re gonna talk about your bylaws. Um, so these are, these are commonly asked for by by, by foundations or other other institutional funders, [00:08:02.44] spk_1:
I wouldn’t necessarily say commonly, but they’re usually publicly available. Um, and so that means that anybody could ask for it and you would have to give it to them or more often it’s just available on the Secretary of State’s website or something where you could just alright file, you [00:08:08.64] spk_0:
want to, you want to avoid embarrassment there too, if you like that. Um, What about financial purposes? Would would banks if you were opening up some kind of credit relationship or something, might they ask for your articles of incorporation? [00:09:37.54] spk_1:
Yeah, that’s not so uncommon for a bank to take a look to see your formation document. They’re not going to be sort of regulating whether you’re operating within your purpose or not. But one thing to think about is that if a donor gives to you, and let’s say your purpose was to feed those experiencing homelessness in new york city. Um, and then 10 years later, oh, by the way, you want to turn into an arts organization that supports the opera in Manhattan. Um, you could do that by amending your articles and if you do something drastic like that, if, if your mission has evolved over time, quite distinct from what you originally planned and you never bothered fixing your articles, that could be seen as a serious breach and diversion of charitable assets. So a donor that donated to you would have expected you to be in compliance with your articles and may have donated based on that reliance that you’re helping the homeless rather than supporting the opera. And that’s another thing you need to avoid. So if you were raising funds under the old purpose, the funds that you raised are still stuck on that purpose, you can’t deploy those assets for a brand new purpose that you never informed, um, the government agency that has your secretary, your articles of incorporation filed, um, you can’t divert it for other purposes. [00:10:00.84] spk_0:
Okay. And that’s, that’s probably the Secretary of State. Uh, well, it varies, I shouldn’t say, probably it’s right. Secretary of State in some states, some states, it’s the Attorney General’s Office has a charities bureau, that might be the office in some places. [00:10:24.24] spk_1:
Yeah, So the Secretary of State or division of corporations or something like that would be the ones that are looking at your articles on the formation and then amending it. So they’re kind of a ministerial body. The Attorney General’s usually are your charities regulator. So they would be the ones that say you’re not, you’re using charitable assets for the wrong purpose. [00:10:33.94] spk_0:
Okay, right. Because you are incorporated as a not for profit corporation in your state. So that’s why Gene, that’s why you’re saying you folks are incorporated as that in that way. So that’s why it would be whatever agency that regulates the corporations in your state, [00:10:48.24] spk_1:
Right? That’s that’s how you would fix the articles and why you want to check check, because anybody else may be able to pull those articles from that, that department, [00:11:38.34] spk_0:
you’re, you’re a nonprofit corporation, yep. Under state law, it’s time for a break. Turn to Communications, The Chronicle of philanthropy, The new york Times, The Wall Street Journal, usa Today stanford Social Innovation Review, the Washington post, the Hill Cranes, nonprofit quarterly Forbes Market Watch. That’s where turned to clients have gotten exposure. Do you want that kind of exposure Turn to has the relationships that can make it happen? Turn hyphen two dot c o. Your story is their mission. All right. So I mentioned, uh, the second check of our five is your bylaws remind folks what the purpose of the bylaws are and what are we looking for here? [00:14:33.14] spk_1:
The bylaws are pretty much the instruction manual for how your organization is governed by governed. I mean, sort of board of directors, how they operate, how they meet, who are the officers of the organization? What authority do they have? What committees do they have? Um, and so really are more specific than the articles of incorporation, although they have to be consistent with the articles because again, the articles rule all. Um, but in an hour you won’t be able to review your whole bylaws. But what I suggest here in that one hour audit is check the provisions on how directors are selected. So there may be a regular election process where the board is called self perpetuating the board elects its own successors. But oftentimes organizations will forget to elect their directors. You know, when their term ends. That might say the term is two years or three years, um, and they just let directors keep serving until they want to resign. Well, that’s a problem. Um, so making sure that you are fulfilling the requirements uh, about director elections is really important. And sometimes directors are selected through other methods. They might be appointed or designated by another party or an individual. And that’s pretty common in private foundations, a little less common in public charities. But if you have those type of provision in your bylaws, you want to make sure that the person who is appointing or designating them is actually doing so. Uh, and you want to make sure that you’re sort of following all the provisions about, well, how elections are supposed to be run if they’re nominating processes or anything else, if you’re not complying with those, get rid of them. Um, and, and state exactly how you are electing directors. And and that’s that’s what you should really check, because if you enter into a big transaction, like a merger or you’re going to get into a big lease, oftentimes, the other party may want to see your bylaws. Um, and you are making representations in that contract of saying that we are in compliance with all of our organizational documents, uh, and by not checking whether you are or not, especially on the selection of directors, which is maybe the most important thing in your bylaws. Um, that’s that’s a huge red flag and they let the other party off the hook to be able to cancel that contract that you entered into and kick you out if it’s a lease or blow the merger up. So you want to make sure if you’re making those type of representations that you are compliant, and again, it’s just basic compliance. That’s one of the, you know, top five, I would say, to make sure your directors are regularly elected. So you want to make sure you cover your bases just to look like a good corporate citizen. [00:15:03.34] spk_0:
And part of what you’ll find in the Bye laws is how to amend the bylaws. So if you find that you’re not complying with what the bylaws are. Either I get you either amend the bylaws to, to the way you are practicing now or conform your practice to what the bylaws says. But but if you need to amend the bylaws in the by laws, that should say how to amend them right with some majority or other vote of the board members, I presume. [00:15:24.14] spk_1:
Yeah, absolutely. So if it’s really simple, it’ll say you can amend it by action of the board, but there are some complicated amendment provisions as well. So now we’re digging a little deeper. So if we do need to amend it, we’re going to go more than an hour on our overall legal review. Okay? Yeah. It is something you’re going to need to do and you want to check in that case. If you can get, if you have the resources to afford a lawyer, can get a pro bono lawyer, have them help you with the amendment to the bylaws. That’s a pretty major action. [00:16:02.34] spk_0:
Okay. Okay. Well, yeah, but we’re just that were the exploratory state. This is an audit. We’re not, we’re not doing the corrective actions were preparing. We’re preparing our auditor’s report. So we know we know we’re uh we we’re okay. Sleeping soundly. We’re not we don’t have any time bombs that we’re not aware of. The unknown unknowns. We don’t have any of those because we’re digging. Okay? But then if you need to go further beyond the the hour, you probably should read all your by laws to make sure that everything you’re doing is in compliance with what you say you’re supposed to be doing. [00:16:17.94] spk_1:
Yeah. And, you know, even before you hire a lawyer, it would be a great idea for cost efficiency to figure out what you actually do that’s compliant with the bylaws and wherever you’re not compliant. So you can just make that list for the lawyer to say, oh, we haven’t been doing this. Can you help us fix it? [00:16:48.14] spk_0:
Okay. Right. And then, Right. And there are gonna be provision of state law, right? That are going to govern some of the actions, depending on what they are. All right. That’s where we get too much in the weeds. Okay. That’s why you need. That’s why it’s good to have some help. Either paid or pro bono. So, you know, you’re complying with state law if you need to amend your bylaws. [00:16:50.74] spk_1:
That’s right. [00:16:58.84] spk_0:
Okay. Cool. I say I’m trainable. I’m training through the years. I’ve picked up some things from you. Um, All right. What’s our what’s our number three of five? [00:17:25.34] spk_1:
So number three is because fundraising is so important, of course, for for non profit organizations, you want to make sure that you are helping your donors as well. And if you don’t have the right language and your donor receipt, a donor might not be able to take a charitable contribution deduction if audited and might get it reversed on them. So it’s really important to know what you need to put in a donation receipt. [00:17:32.64] spk_0:
Okay. Um, and we know that, uh, for donations of $250 or more, that’s when, that’s when you have to issue the receipt. [00:19:06.04] spk_1:
Yes. So that is for for donors, the donor might need just a check, you know, their, their return check for, or a copy of the check for a donation of $100 until they take a deduction for that may be enough. But if it is $250 or more, they need a special receipt coming back from the charity. Uh, and in that receipt, of course, it’s, you know, the name of the donor and the amount donated. And if there’s non cash stuff, a description of that stuff. But what’s key is there has to be a specific sentence in there that says something to the effect of, um, no goods or services were provided by the organization in return for this contribution. Um, or if there was something that was given back to the, to the donor in exchange, that wasn’t just very trivial. And what lawyers called the minimus jargon jail there, but uh, for something so so trivial and small, like a little sticker or something, you don’t have to value that. But if it’s something like a ticket to a concert, um, it’s kind of like the same type of receipt for those of you out there that attend a gala event and you get the chicken dinner that comes with your, you know, uh, Attendance and you spend $100 on a ticket, you get some sort of receipt that comes back to you saying Thank you for your $100 by the way, $25 with the value of your chicken dinner. So you can get a charitable contribution deduction of up to $75. So that’s the same type of thing that you would expect here. [00:20:00.94] spk_0:
The other, the other place this plays out a lot is uh schools with sporting events. When people make a donation and maybe in exchange for their donation, they get a ticket package of some value. So you have to report that reveal that ticket value in your receipt or your acknowledgement letter. The other thing we didn’t mention is okay, Okay. Um also the date of gift, which which becomes important at the end of the year. Some, you know, some last minute december 30 december 31 gifts might not get processed until early january, but the gift was received On December 30 or 31st. So you want to make that? Make that clear? [00:20:54.04] spk_1:
Yeah. Absolutely. And the I. R. S. Has a publication. If you if you google I. R. S. Sort of donor receipt, you’ll probably find the publication that tells you exactly what elements that you should include on a receipt. And when it’s triggered, we talked about $250 or more. There’s also something called the quid pro quo, which we talked about as well. The chicken dinner type contribution. So there’s certain elements that need to be put in depending upon that gift. And what else comes back to the donor in return. Just take a quick look at that but make sure your donor received has that language if nothing is returned back to the donor that it actually states that because in every legal case where the I. R. S. Tries to deny a deduction and the donor fights it, this could sometimes be for like a million bucks or two million or $10 million. The IRS always wins because the plain language of the statute says if you don’t have this language you don’t get a deduction and it’s hard to fight. Even if you think for moral reasons of course they gave this gift and they should get a deduction and it’s just one little sentence or phrase that’s missing. That’s ridiculous. But that’s the law. [00:23:26.04] spk_0:
It’s time for Tony’s take two Mr cooper. If you were a fast listener last week, you would have listened on monday and you would have heard a nonprofit radio with an inappropriate Tony is take two. I made a inappropriate joke about drug addiction and boasted about privilege without bothering to acknowledge it. If you heard that show that had that version of tony state too, I’m sorry you had to listen to that. I regret that I recorded it. I thank the team at N 10 and Amy Sample Award for Pointing out the inappropriate Tony’s take 2 to me. They did it on monday by Tuesday morning. There was a new version of nonprofit radio with a different Tony is take two. I hope it never happens again. If it does, I hope you and your fellow listeners. Well, let me know that is tony state too. Now, back to your 5.1. Our legal audit. The publication you’re referring to is uh, 526. It’s, it’s written, it is very, really, very valuable. Um, It’s written for donors to tell them what they need to substantiate. But nonprofits can use it to make sure that they’re giving their donors what they need to make the substantiation. So, uh, you’re right. It’s online it’s publication 526 and it it goes through all the rules that your donors have to follow. So you can help them by reading that right by checking that out as well. [00:23:27.70] spk_1:
And there’s a little brochure to. That’s a summary of the things that we talked about which is even shorter so at least use that. [00:24:29.04] spk_0:
Yeah. Yeah 5 26 is pretty long but it’s got a link herbal or linked table of contents to, so there’s there’s some help. The I. R. S. Is I mean the folks are trying to do their jobs. I always I always feel bad for the I. R. S. I don’t know that’s a tough job, beleaguered agencies and nobody wants to pay them or do what they nobody wants to be uh questioned by them. People’s hearts race when they get an envelope from them, you know? But overall I mean I think for as broad as their work is I credit them and I think I think the I. R. S. Is I think they’re doing a good job as best they can with being having the reputation that they have and all this being so politicized through the years and etcetera. So I’ve never been audited though too. So maybe if I had been privately audited maybe maybe my opinion of the I. R. S. Would be different. I don’t know. Have you ever been audited jean? [00:25:10.94] spk_1:
I have been when I left a big firm and opened my own firm, my income went down that first year dramatically because I left the big firm with no clients. So that triggered an audit. What are you doing? Okay. I’ll just say yeah the audit room at the I. R. S. Office is a very very depressing place where people are married. They’re scared out of their lives. It was academically it was kind of interesting for me because I had no no problems with explaining it. Um But uh yeah I could see the nerves or feel the tension in that office for both the IRS agents and the taxpayers. Okay. [00:25:26.64] spk_0:
I’m glad you you stayed out of you stayed out of prison. Right. No fine. Okay. Okay. Just settled out. You settled uh admitted no guilt, admitted no wrongdoing and settled. All right. What’s next in our in our five points? [00:26:45.04] spk_1:
Um So this one is kind of a little bit of a no brainer but I think just make sure you you’re standing with the I. R. S. Still says you have five oh one C. Three status. So I think it’s a good idea to check because your donors will be checking. Especially your funders will be checking. And it’s so simple to do, literally, if you’ve done it a couple times, you can do it in under a minute. Um, So the, you know, if you google I. R. S. And T. E. O. S, which stands for tax exempt organizations search. So I. R. S. Taos you’ll get the website where you just enter the organization’s name or E. I. N. And it’ll spit out a link and you link to your organization’s name and it’ll tell you if you’re five oh one C three, non or not. And whether you’re a public charity, which may be an important distinction for some organizations, a public charity would be obviously not a private foundation and not subject to all those other rules, uh, that private foundations are subject to. But if you don’t get the numbers right, you can actually tip over into private foundation status. Um So it’s an important thing for some organizations to keep track of to make sure you’re still five or once you re exempt uh And a public charity in the I. R. S. Views and that’s updated nearly weekly. So um you have a good sense of where you actually stand and again take you a minute or two minutes to find that [00:27:00.84] spk_0:
jean. Was that like three or four years ago when tens of thousands or maybe hundreds of thousands of organizations lost their exempt status because they hadn’t filed their their nine nineties for three consecutive years. I’m sure you remember that, What was that like 34 years ago or [00:28:19.84] spk_1:
I think it was even longer, so I think it might have been Gosh, close to seven or eight years ago. Um and about 600,000 organizations, I believe tax tax exempt status. So it was a huge number um partly because smaller some organizations just weren’t running anymore. And the I. R. S. Doesn’t know when you stop running. So they’re just on the list of on their list and they were dropped off but many were actually running and just didn’t file their nine nineties and there was no rule before that said if you miss three in a row were automatically revoking your tax exempt status and it’s done electronically so it’s no agent discretion. It just happens. Um And so it’s hard to come back from that. It is possible but it’s still important for organizations to keep track if you miss 1990 or you’re late. Don’t worry too much about it. But if you have missed two High alert that you don’t even get an extension on your third missed one, even if you apply for one, you have to file it by the May 15 deadline if you’re a calendar filer. So pay attention to that. [00:28:50.64] spk_0:
Okay important thank you. And you know this is an easy thing you can check in a couple minutes. Uh So it’s part of your one hour audit. So just make sure that something uh something didn’t happen even if you’re you’re sure you’re filing your nine nineties, you know for for two or three minutes. Check out uh I. R. S. Tax exempt organizations search [00:29:12.94] spk_1:
just in case it was lost in the mail and you know the I. R. S. During the covid pandemic had I think 10,000,010 million pieces of paper filings in their warehouses that somebody had to process when they started coming back so they’re delayed still on that. So it annual filings could easily have been lost. Um So double check that website just to make sure you’re you’re okay. [00:29:24.04] spk_0:
Yeah, be good to your organization please. All right. The last one when I love go ahead. [00:30:40.44] spk_1:
So the same way you want to check with your I. R. S. Status, you probably want to check with your state status and that can be a couple agencies. So the corporate agency that we talked about, usually the secretary of state’s office, you want to make sure your corporation is in good standing, that they usually require some sort of annual or biannual filing that that comes to them. And then the attorney general or charities regulator might be a different agency. And they may also require charity registration on an annual basis. So making sure you file with each of those agencies is really important. And there’s usually an online database for most states where you can check to see what your most recent filing was and if you’re delinquent or if you’ve been suspended, um, or even uh, in in some cases, um, terminated because of lack of filing. So if if you find that, then, you know, there’s stuff to fix and you probably need to call a lawyer at that point, um, but just check it, if you check it annually, you’ll find it’s easy again, probably once you’ve done it once, and you write down a few notes about how to access that side, it’ll only take you a few minutes to just double check both the state, usually Secretary of State, for your corporation, um status and the Attorney General, or charities regulator for your charities registration status. [00:31:11.94] spk_0:
You want to make sure that your uh, in compliance not and for the, for the ladder of that in compliance, not only in your state, but now I’m going beyond your one hour. But, uh, that’s okay. We’ll go a little deeper. You need to be in compliance with solicitation regulations in all the states where you are soliciting donations now, I just need a car, not just you and me, [00:31:25.34] spk_1:
and they need to call somebody like you, if that’s the case. So if they know their fundraising in multiple states are using, um, people or companies to help them fundraise in other states, they need to call someone like you and say, hey, what do we need to do to make sure that we’re in compliance with that. Other states. Rules were not incorporated there, but we’re doing business or fundraising there. What do we need to do? [00:32:53.24] spk_0:
Right. Thank you. It’s time for a break. Send in blue. It’s an all in one digital marketing platform with tools to build end to end digital campaigns that look professional are affordable and keep you organized. They do digital campaign marketing. Most marketing software is designed for big companies and has that enterprise level price tag tisk, tisk. If you’re using those, send in blue is priced for nonprofits. It’s an easy to use marketing platform that walks you through the steps of building a campaign to try out sending blue and get a free month. Hit the listener landing page at tony-dot-M.A.-slash-Pursuant in blue. We’ve got boo koo but loads more time for your 5.1. Our legal audit for for the I’m going backwards a little bit because, you know, your host is lackluster. I’m sorry. Um if we find out that we’re on a step forward, if we’re not, if we have lost our IRS 501 C3 status for some reason, what would you recommend doing? [00:34:24.84] spk_1:
So find out the reason first of all. So if it was for failing to file 3990s in a row that’s probably the most common reason for getting your exemption revoked. Um Find out if that was actually true. Did you actually miss those filings? Did an accountant help you with them? Did some volunteer do that find out what the status is? Uh and then contact the I. R. S. To ensure that that was the actual reason and if you have filed the 19 nineties and the IRS has somehow lost it you should tell that to them. Um See if you have a like a return receipt which I always recommend if you haven’t electronically filed, make sure you have some evidence that actually got sent uh to the I. R. S. Office because that will help you. And if they had made the mistake or they lost the finding that will help them reverse the process. But if it is actually the case where you fail to file um have those filings ready to go. Some hire an accountant or somebody who can help you prepare those files, have them ready to go. And there is a reinstatement process where you actually have to Fill out the form 1023 which is the exemption application that a start up would have to file. But you’re doing it for reinstating your tax exempt status. Um So there is a process the I. R. S. Has tried to make it easier for some organizations where they just kind of missed filings but it hasn’t been like We’ve been out of compliance for 20 years, [00:34:26.73] spk_0:
we’ve never filed. Yeah [00:34:49.44] spk_1:
so go through that process if you can get a lawyer or an accountant to help you um, please do. So it’s while they try to make it as easy as possible. It’s still kind of complicated and there are some nuances that can help you and the sum that can hurt you. So that’s going to take a little bit longer to fix if you have to fix it. But it is for the most part fixable. [00:34:54.44] spk_0:
If we’re going to go beyond our one hour, 55 point legal audit, what would, where would we spend more time? [00:36:44.53] spk_1:
So there are some common areas of concern for nonprofits. I would say one of the big ones is getting your independent contractor employee distinction. Right? So knowing what the difference is, because I would say that a lot of organizations when they get into trouble, they get into trouble on that point. And on that point, volunteer borrowing members could actually be held personally liable for non payment of payroll taxes. And by that, I mean, if you determine that a worker is an independent contractor, but legally they should have been an employee, let’s say they’re working 40 hours a week and they don’t work for anyone else, and they’re doing the job that, you know, an executive director does for an organization. But you go, I don’t want to pay the payroll taxes because we can’t afford it. So we’re just going to call you an independent contractor, that’s not going to be consistent with the definition that the I. R. S. Views and the state may have their own definitions as well. Um, but the employer for an employee has to pay their portion of the payroll tax. If the payroll tax didn’t get paid, uh, then there may be a claim against the organization. And then in enforcing that, they may say this was the board’s fault, charitable assets should not be used to pay for this type of penalty because this was sort of gross negligence on this part. So board members could be out of pocket to pay for those payroll taxes if they haven’t been paid. So because withholding and paying payroll taxes, the employer shares is the employer’s duty. So be careful of that one distinction I would say is my next thing, that’s going to take longer, but it would be the next thing on my audit list. Okay. [00:37:17.93] spk_0:
Yeah. Common misconception that if we, if we call them a contractor and we send them a 1099, then that’s what they are. And, and there’s a whole, you and I have done shows on this, there’s a whole test of, you know, do they work for the people whose equipment do they use, Who sets the hours, who sets the location of the work, Who sets the timing of the work? It’s the whole list of fact multi factor test. Uh, So it’s not just, you know, you call it a, you call them an independent contractor because you’re saving on employment taxes and uh and unemployment and and benefits that are required. It’s not it’s not that simple. So, [00:37:32.43] spk_1:
okay, not only the I. R. S. Could be involved, but the person the worker who got misclassified could actually go after you later [00:37:40.89] spk_0:
or your state or your state Department of Labor. [00:38:13.52] spk_1:
Yeah, exactly. And they may have a slightly different definition of independent contractors and employees. And California is kind of this big example because they’re there sort of leading the way if you will in terms of employment rights. Um, and so they have made a much more difficult distinction, making it very hard for nonprofits to claim that they have independent contractors if they occupy the type of job that an employee would occupy. So even if it was for a limited duration of time, that may not matter anymore that they were there for three months only, but if they were an administrative assistant or an executive director, they may need to be called a temporary or part time employee and not an independent contractor anymore. So it’s gotten much, much tougher on the state level. [00:38:40.12] spk_0:
What’s next? What in your experience, what do you see as another common problem? [00:40:23.81] spk_1:
So not necessarily a problem. But for a way for the boards to sort of quickly get policies in place to make sure that they’re doing their job in terms of providing oversight since they’re not there every day. And you know, maybe they’re meeting once a month or once every other month. Um uh and maybe for just a couple hours. So there’s only so much that they can do. But what they can do is create some policies or have policies created that they can approve that governed the organization. And these policies, some of them are referenced in the form 9 90. And the 9 90 asks you the I. R. S. Is asking you through the 9 90 do you have these policies and if you say no, Well it used to be kind of normal awhile ago, you know, more than 10 years ago for a lot of organizations to say no, but since they started asking these questions, I think in 2000 eight maybe. Um the more often you put no the more an outlier you become because most organizations have seen these questions and said, oh if we keep saying no to this, is this going to trigger an audit risk? And the answer is probably yes. So saying yes to. We have these policies make sense. And that would be a document retention and destruction whistle blower. The Board Level Review of the Form 9 90. Um, those are really common ones that that you can incorporate really quickly. I would also add expense reimbursements. Who has signing authority. Can anybody in your organization signed a contract or sign a check or only the executive director? What if they’re not around? So just having policies rather than the board going, you guys figure it out. Having a policy in place is really important for a board to do gift acceptance, another one. [00:41:03.31] spk_0:
Gift acceptance. Yeah, right. Uh, there’s another angle to this too, which is the, uh, the charity rating agencies, um, Charity Navigator. Uh, well, uh, the old guidestar now it’s merged and it’s Candid merged with the Foundation Center Candid. But those rating agencies also ask ask about the standard policies like whistleblower document retention, etcetera. Yeah, it’s a proxy conflict, conflict of interest, border conflict of interest, another another common commonly required policy. [00:41:11.35] spk_1:
Absolutely. And I’m sorry, I missed that one because I think that’s the most important, one of all of them, outside of the articles and bylaws that I [00:41:28.31] spk_0:
got, I got Eugene. All right, No problem. So, yeah. So aside from the I. R. S asking charity rating agencies ask also for these basic policies. All [00:41:41.71] spk_1:
right. And it’s a proxy for them to say is this organization well governed. Does it have a good board of directors in place? And if you keep answering no, we don’t have these policies, then they’re going to assume that you’re not very well covered. Yeah, [00:42:03.20] spk_0:
it’s like someone reading your bylaws or your articles of incorporation. You know, somebody might get a wild hair and decided to go read your articles of incorporation and then see that they are out of date. Or you might, you know, you might have your bylaws disclosed on your website. But some disgruntled person or just even some uh, neutral person might see that, you know, you don’t, you don’t conduct yourself the way your documents that you’re supposed to, you know, it’s embarrassing at the at the best. It’s embarrassing. [00:42:14.50] spk_1:
Yeah. And for for older folks like me, tony when somebody has in their bylaws like you can deliver notice by telegraph. Not a great sign for some of the younger funders may be considering your organization. [00:42:35.90] spk_0:
All right. All right. Or we can even update it and make it still bad facts. Notice noticed by facts. Facsimile. [00:42:38.83] spk_1:
I still have a hotmail account so I’m okay with facts. All [00:42:43.89] spk_0:
right. But you don’t use your fat. You don’t have a fax machine, do you? [00:42:46.57] spk_1:
I still do [00:42:47.63] spk_0:
you do you get any traffic on it? [00:42:50.20] spk_1:
Um I I use effects as as my primary. So I have a paper printing facts as a backup. But exit the primary. [00:43:09.10] spk_0:
Remember if ax you used to send people would send documents to the phone number right at like the phone number at the fax dot com. So that they would print on your machine. Wasn’t that isn’t how it works. [00:43:17.90] spk_1:
So this effects is um they sent a fax to my fax machine. But I have my fax machine turned off and it sends me an email of what the facts would look like. [00:43:30.10] spk_0:
Okay. Okay, well, that’s OK. So I’m starting. But there there was a there was in fact used to, somebody could send an email to your fax machine through the phone number at fox dot com and it would print on your machine. [00:43:34.10] spk_1:
Yeah, I think that’s right. But [00:43:35.44] spk_0:
You’ve updated your, you updated sometime around 1997, I guess [00:43:40.32] spk_1:
one. Some level of [00:43:41.57] spk_0:
you get an email now. Congratulations. You’re getting emails. All right. Uh, [00:43:46.70] spk_1:
my anything don’t even answer emails now. It has to be text not responding. [00:43:57.30] spk_0:
Right. Another year. It’ll just be if it’s not a Tiktok then forget about it. They don’t know you. All right. We’re gonna leave it there, jean. So we talked about our five points. You’re talking about going a little further. If you’re if you if you want the suma cum laude of legal audits, you can go a couple of steps further. Thank you very much. Gene [00:44:12.79] spk_1:
great to be with you Tony. Thank you. [00:44:30.29] spk_0:
My pleasure. Thank you, Jeanne Takagi Neo is the firm, the nonprofit and exempt organizations law group in SAn Francisco subscribe to this blog, nonprofit law blog dot com. It is wildly popular and jean is at g attack. Thanks again jean. [00:44:32.19] spk_1:
Thanks tony [00:45:27.59] spk_0:
next week. More from 21. NTC, the nonprofit technology conference. If you missed any part of this week’s show, I beseech you find it at tony-martignetti dot com. We’re sponsored by turn to communications pr and content for nonprofits. Your story is their mission turn hyphen two dot c o and by sending Blue the only all in one digital marketing platform empowering non profits to grow. tony-dot-M.A.-slash-Pursuant in Blue, Our creative producer is Claire Meyerhoff shows social media is by Susan Chabon’s Mark Silverman is our web guy and this music is by scott Stein, thank you for that. Affirmation Scotty You’re with me next week for nonprofit radio big non profit ideas for the other 95% go out and be great
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[00:01:46.44] spk_0:
Hello and welcome to Tony-Martignetti non profit radio big non profit ideas for the other 95%. I’m your aptly named host of your favorite abdominal podcast and oh I’m glad you’re with me, I’d suffer the effects of pro so PAG nausea if I saw that you missed this week’s show. Eur 5.1 Our legal audit, jeanne Takagi returns, he walks you through the five quick checks of your nonprofits, documents, processes and status that make sure you’re on the right side of the law genius. Our legal contributor and managing attorney at neo the nonprofit and exempt organizations Law group on tony state too. Mayor Cooper, We’re sponsored by turn to communications pr and content for nonprofits. Your story is their mission turn hyphen two dot c o. And by sending blue the only all in one digital marketing platform empowering non profits to grow tony-dot-M.A.-slash-Pursuant in blue, what a pleasure to welcome as it always is, Jean Takagi back to nonprofit radio He is our legal contributor of course and managing attorney of neo the nonprofit and exempt organizations law group in SAN Francisco. He edits the wildly popular nonprofit law blog dot com and is a part time lecturer at Columbia University. The firm is that neo law group dot com and he’s at G attack. You certainly should be following him if you’re not. Uh it’s your life. Welcome back jean,
Great to be back. tony How are you? [00:02:03.54] spk_0:
Always a pleasure you’re smiling, I love it, thank you. How is everything going in san Francisco wise now? Late june [00:02:08.14] spk_1:
well we’ve been having really comfortable, even chilly weather that Mark Twain quote, I don’t think it was actually Mark Twain, but about the coldest day spending a summer in san Francisco is uh somewhat apt right now, but I’m not envying the high temperatures up in my home country of the pacific northwest [00:02:43.84] spk_0:
Oregon. I was just talking to AMY sample ward earlier today and yesterday too. And uh 116 she said it’s broken. It’s broken since then, but uh astronomically high temperatures for for three days in a row. They had. [00:02:49.04] spk_1:
Yeah, unbelievable. [00:02:54.14] spk_0:
Yeah, I know. Okay. But you’re you’re much more comfortable in san Francisco good complaints taking any time off this summer. [00:03:00.84] spk_1:
Um I’m planning to go back to Canada once the borders are open to visit my mom and family, but no word on the official opening date yet, we’re hoping by August one. [00:03:12.79] spk_0:
Okay, So Canada is still restricting us residents? [00:03:16.74] spk_1:
Yeah, it’s still kind of closed off right now, but we’ll see when it opens up again. Okay. [00:03:23.37] spk_0:
Okay. Maybe I’ve been paying more attention to Australia than I have Canada. I know, I know Sydney is on a new lockdown. All right, Where in Canada? Where is your family in Canada? [00:03:33.44] spk_1:
In Vancouver? So in that pacific northwest? [00:03:50.44] spk_0:
Yes. Right. Right. All right. So you have this nifty one hour, 5. for us. A review of documents and a process and your status. Why don’t you why don’t you get us started? But this is not this is a legitimate audit. Uh Not a uh this is not an Arizona style audit from. [00:04:05.84] spk_1:
Yeah. And this is an accountant. Side it. So this is kind of your own internal check of do these things and you’ll sleep better at night knowing that you’re either okay or you know what you need to fix. So, [00:04:12.32] spk_0:
okay, if you need to fix some things, you might need someone like, like you to help. [00:04:28.54] spk_1:
Could be or you might even be able to do it yourself. So, some of the fixes are easy. Some of the fixes might be a little bit more difficult, but um, you should know where you stand. I think that’s that’s the first thing and that’s why [00:04:32.36] spk_0:
for sure. First step, no, no your status. Okay. So so kick us off. What’s your what’s your first idea? [00:05:48.04] spk_1:
So I think the first thing you look at is your articles or certificate of incorporation. That was your formation document to start out with. And you want to see what the purpose of the organization is. So the articles govern every other there the like the one ring that rules all the rings showing my geeky side. That’s the one document that rules all the other documents and there’s no superseding what the articles say. So the articles say in the purpose statement, what you do and you’ve evolved past that. Maybe there’s a geographic limitation that says you only operate in new york in the articles and, you know, 50 years ago, that was true. But since then, you’re, you know, you’re operating in the tri state area or also in California, whatever that may be your articles, we’ll tell you what you can and can’t do and if they’re so limiting and you’ve grown past it, you’ve got to fix that. So amending the articles would be the next step. But within that one hour, it’ll probably just take you two minutes to read that purpose statement and say, oh, this is right online with our mission statement or it’s so broad that it covers anything we might do now, we’re in the future. Or you might get that note that says, ah, because the geographic limitation or our purpose isn’t so specific anymore. We’ve expanded beyond that and we need to fix it. So that that’s the first thing. [00:06:06.24] spk_0:
Why does this matter? Well, suppose we have evolved past what our articles of incorporation say. That’s an ancient document. Yeah, it got us started. Uh, it’s outlived its usefulness. What’s the difference? [00:07:00.84] spk_1:
Well, it’s that one document that rules all that that still is in effect. So even though it was drafted and adopted a long time ago, that is the principle document that governs what you can do. So, if you’re doing something that you’re not allowed to do in your articles, you could actually be subject to a lawsuit that says you are operating and diverting charitable assets that were intended for this purpose. Which was your article in the Articles of Incorporation and now using it for another purpose. So that’s, that’s the big thing to, to, to worry about in terms of operating outside of your articles. How much is this enforced? Probably not very much absent a complaint from somebody, but if you have an unhappy board member or an unhappy donor that takes a look at the articles or an unhappy thunder, um, that can get you into some trouble. And it probably shows you that the very, very most basic step in your due diligence on your homework about making sure your organization is run properly. You missed. Um, and that could be a sign of other problems. So you want to fix that if it’s if it’s a problem, don’t lose too much sleep over it, but identify it and fix it if necessary. [00:07:40.64] spk_0:
Alright, so you mentioned funders, I assume this is such a basic document. And we uh, you lawyers, me former lawyer would call them your organic documents because they are your your origin. This and the next one we’re gonna talk about your bylaws. Um, so these are, these are commonly asked for by by, by foundations or other other institutional funders, [00:08:02.44] spk_1:
I wouldn’t necessarily say commonly, but they’re usually publicly available. Um, and so that means that anybody could ask for it and you would have to give it to them or more often it’s just available on the Secretary of State’s website or something where you could just alright file, you [00:08:08.64] spk_0:
want to, you want to avoid embarrassment there too, if you like that. Um, What about financial purposes? Would would banks if you were opening up some kind of credit relationship or something, might they ask for your articles of incorporation? [00:09:37.54] spk_1:
Yeah, that’s not so uncommon for a bank to take a look to see your formation document. They’re not going to be sort of regulating whether you’re operating within your purpose or not. But one thing to think about is that if a donor gives to you, and let’s say your purpose was to feed those experiencing homelessness in new york city. Um, and then 10 years later, oh, by the way, you want to turn into an arts organization that supports the opera in Manhattan. Um, you could do that by amending your articles and if you do something drastic like that, if, if your mission has evolved over time, quite distinct from what you originally planned and you never bothered fixing your articles, that could be seen as a serious breach and diversion of charitable assets. So a donor that donated to you would have expected you to be in compliance with your articles and may have donated based on that reliance that you’re helping the homeless rather than supporting the opera. And that’s another thing you need to avoid. So if you were raising funds under the old purpose, the funds that you raised are still stuck on that purpose, you can’t deploy those assets for a brand new purpose that you never informed, um, the government agency that has your secretary, your articles of incorporation filed, um, you can’t divert it for other purposes. [00:10:00.84] spk_0:
Okay. And that’s, that’s probably the Secretary of State. Uh, well, it varies, I shouldn’t say, probably it’s right. Secretary of State in some states, some states, it’s the Attorney General’s Office has a charities bureau, that might be the office in some places. [00:10:24.24] spk_1:
Yeah, So the Secretary of State or division of corporations or something like that would be the ones that are looking at your articles on the formation and then amending it. So they’re kind of a ministerial body. The Attorney General’s usually are your charities regulator. So they would be the ones that say you’re not, you’re using charitable assets for the wrong purpose. [00:10:33.94] spk_0:
Okay, right. Because you are incorporated as a not for profit corporation in your state. So that’s why Gene, that’s why you’re saying you folks are incorporated as that in that way. So that’s why it would be whatever agency that regulates the corporations in your state, [00:10:48.24] spk_1:
Right? That’s that’s how you would fix the articles and why you want to check check, because anybody else may be able to pull those articles from that, that department, [00:11:38.34] spk_0:
you’re, you’re a nonprofit corporation, yep. Under state law, it’s time for a break. Turn to Communications, The Chronicle of philanthropy, The new york Times, The Wall Street Journal, usa Today stanford Social Innovation Review, the Washington post, the Hill Cranes, nonprofit quarterly Forbes Market Watch. That’s where turned to clients have gotten exposure. Do you want that kind of exposure Turn to has the relationships that can make it happen? Turn hyphen two dot c o. Your story is their mission. All right. So I mentioned, uh, the second check of our five is your bylaws remind folks what the purpose of the bylaws are and what are we looking for here? [00:14:33.14] spk_1:
The bylaws are pretty much the instruction manual for how your organization is governed by governed. I mean, sort of board of directors, how they operate, how they meet, who are the officers of the organization? What authority do they have? What committees do they have? Um, and so really are more specific than the articles of incorporation, although they have to be consistent with the articles because again, the articles rule all. Um, but in an hour you won’t be able to review your whole bylaws. But what I suggest here in that one hour audit is check the provisions on how directors are selected. So there may be a regular election process where the board is called self perpetuating the board elects its own successors. But oftentimes organizations will forget to elect their directors. You know, when their term ends. That might say the term is two years or three years, um, and they just let directors keep serving until they want to resign. Well, that’s a problem. Um, so making sure that you are fulfilling the requirements uh, about director elections is really important. And sometimes directors are selected through other methods. They might be appointed or designated by another party or an individual. And that’s pretty common in private foundations, a little less common in public charities. But if you have those type of provision in your bylaws, you want to make sure that the person who is appointing or designating them is actually doing so. Uh, and you want to make sure that you’re sort of following all the provisions about, well, how elections are supposed to be run if they’re nominating processes or anything else, if you’re not complying with those, get rid of them. Um, and, and state exactly how you are electing directors. And and that’s that’s what you should really check, because if you enter into a big transaction, like a merger or you’re going to get into a big lease, oftentimes, the other party may want to see your bylaws. Um, and you are making representations in that contract of saying that we are in compliance with all of our organizational documents, uh, and by not checking whether you are or not, especially on the selection of directors, which is maybe the most important thing in your bylaws. Um, that’s that’s a huge red flag and they let the other party off the hook to be able to cancel that contract that you entered into and kick you out if it’s a lease or blow the merger up. So you want to make sure if you’re making those type of representations that you are compliant, and again, it’s just basic compliance. That’s one of the, you know, top five, I would say, to make sure your directors are regularly elected. So you want to make sure you cover your bases just to look like a good corporate citizen. [00:15:03.34] spk_0:
And part of what you’ll find in the Bye laws is how to amend the bylaws. So if you find that you’re not complying with what the bylaws are. Either I get you either amend the bylaws to, to the way you are practicing now or conform your practice to what the bylaws says. But but if you need to amend the bylaws in the by laws, that should say how to amend them right with some majority or other vote of the board members, I presume. [00:15:24.14] spk_1:
Yeah, absolutely. So if it’s really simple, it’ll say you can amend it by action of the board, but there are some complicated amendment provisions as well. So now we’re digging a little deeper. So if we do need to amend it, we’re going to go more than an hour on our overall legal review. Okay? Yeah. It is something you’re going to need to do and you want to check in that case. If you can get, if you have the resources to afford a lawyer, can get a pro bono lawyer, have them help you with the amendment to the bylaws. That’s a pretty major action. [00:16:02.34] spk_0:
Okay. Okay. Well, yeah, but we’re just that were the exploratory state. This is an audit. We’re not, we’re not doing the corrective actions were preparing. We’re preparing our auditor’s report. So we know we know we’re uh we we’re okay. Sleeping soundly. We’re not we don’t have any time bombs that we’re not aware of. The unknown unknowns. We don’t have any of those because we’re digging. Okay? But then if you need to go further beyond the the hour, you probably should read all your by laws to make sure that everything you’re doing is in compliance with what you say you’re supposed to be doing. [00:16:17.94] spk_1:
Yeah. And, you know, even before you hire a lawyer, it would be a great idea for cost efficiency to figure out what you actually do that’s compliant with the bylaws and wherever you’re not compliant. So you can just make that list for the lawyer to say, oh, we haven’t been doing this. Can you help us fix it? [00:16:48.14] spk_0:
Okay. Right. And then, Right. And there are gonna be provision of state law, right? That are going to govern some of the actions, depending on what they are. All right. That’s where we get too much in the weeds. Okay. That’s why you need. That’s why it’s good to have some help. Either paid or pro bono. So, you know, you’re complying with state law if you need to amend your bylaws. [00:16:50.74] spk_1:
That’s right. [00:16:58.84] spk_0:
Okay. Cool. I say I’m trainable. I’m training through the years. I’ve picked up some things from you. Um, All right. What’s our what’s our number three of five? [00:17:25.34] spk_1:
So number three is because fundraising is so important, of course, for for non profit organizations, you want to make sure that you are helping your donors as well. And if you don’t have the right language and your donor receipt, a donor might not be able to take a charitable contribution deduction if audited and might get it reversed on them. So it’s really important to know what you need to put in a donation receipt. [00:17:32.64] spk_0:
Okay. Um, and we know that, uh, for donations of $250 or more, that’s when, that’s when you have to issue the receipt. [00:19:06.04] spk_1:
Yes. So that is for for donors, the donor might need just a check, you know, their, their return check for, or a copy of the check for a donation of $100 until they take a deduction for that may be enough. But if it is $250 or more, they need a special receipt coming back from the charity. Uh, and in that receipt, of course, it’s, you know, the name of the donor and the amount donated. And if there’s non cash stuff, a description of that stuff. But what’s key is there has to be a specific sentence in there that says something to the effect of, um, no goods or services were provided by the organization in return for this contribution. Um, or if there was something that was given back to the, to the donor in exchange, that wasn’t just very trivial. And what lawyers called the minimus jargon jail there, but uh, for something so so trivial and small, like a little sticker or something, you don’t have to value that. But if it’s something like a ticket to a concert, um, it’s kind of like the same type of receipt for those of you out there that attend a gala event and you get the chicken dinner that comes with your, you know, uh, Attendance and you spend $100 on a ticket, you get some sort of receipt that comes back to you saying Thank you for your $100 by the way, $25 with the value of your chicken dinner. So you can get a charitable contribution deduction of up to $75. So that’s the same type of thing that you would expect here. [00:20:00.94] spk_0:
The other, the other place this plays out a lot is uh schools with sporting events. When people make a donation and maybe in exchange for their donation, they get a ticket package of some value. So you have to report that reveal that ticket value in your receipt or your acknowledgement letter. The other thing we didn’t mention is okay, Okay. Um also the date of gift, which which becomes important at the end of the year. Some, you know, some last minute december 30 december 31 gifts might not get processed until early january, but the gift was received On December 30 or 31st. So you want to make that? Make that clear? [00:20:54.04] spk_1:
Yeah. Absolutely. And the I. R. S. Has a publication. If you if you google I. R. S. Sort of donor receipt, you’ll probably find the publication that tells you exactly what elements that you should include on a receipt. And when it’s triggered, we talked about $250 or more. There’s also something called the quid pro quo, which we talked about as well. The chicken dinner type contribution. So there’s certain elements that need to be put in depending upon that gift. And what else comes back to the donor in return. Just take a quick look at that but make sure your donor received has that language if nothing is returned back to the donor that it actually states that because in every legal case where the I. R. S. Tries to deny a deduction and the donor fights it, this could sometimes be for like a million bucks or two million or $10 million. The IRS always wins because the plain language of the statute says if you don’t have this language you don’t get a deduction and it’s hard to fight. Even if you think for moral reasons of course they gave this gift and they should get a deduction and it’s just one little sentence or phrase that’s missing. That’s ridiculous. But that’s the law. [00:23:26.04] spk_0:
It’s time for Tony’s take two Mr cooper. If you were a fast listener last week, you would have listened on monday and you would have heard a nonprofit radio with an inappropriate Tony is take two. I made a inappropriate joke about drug addiction and boasted about privilege without bothering to acknowledge it. If you heard that show that had that version of tony state too, I’m sorry you had to listen to that. I regret that I recorded it. I thank the team at N 10 and Amy Sample Award for Pointing out the inappropriate Tony’s take 2 to me. They did it on monday by Tuesday morning. There was a new version of nonprofit radio with a different Tony is take two. I hope it never happens again. If it does, I hope you and your fellow listeners. Well, let me know that is tony state too. Now, back to your 5.1. Our legal audit. The publication you’re referring to is uh, 526. It’s, it’s written, it is very, really, very valuable. Um, It’s written for donors to tell them what they need to substantiate. But nonprofits can use it to make sure that they’re giving their donors what they need to make the substantiation. So, uh, you’re right. It’s online it’s publication 526 and it it goes through all the rules that your donors have to follow. So you can help them by reading that right by checking that out as well. [00:23:27.70] spk_1:
And there’s a little brochure to. That’s a summary of the things that we talked about which is even shorter so at least use that. [00:24:29.04] spk_0:
Yeah. Yeah 5 26 is pretty long but it’s got a link herbal or linked table of contents to, so there’s there’s some help. The I. R. S. Is I mean the folks are trying to do their jobs. I always I always feel bad for the I. R. S. I don’t know that’s a tough job, beleaguered agencies and nobody wants to pay them or do what they nobody wants to be uh questioned by them. People’s hearts race when they get an envelope from them, you know? But overall I mean I think for as broad as their work is I credit them and I think I think the I. R. S. Is I think they’re doing a good job as best they can with being having the reputation that they have and all this being so politicized through the years and etcetera. So I’ve never been audited though too. So maybe if I had been privately audited maybe maybe my opinion of the I. R. S. Would be different. I don’t know. Have you ever been audited jean? [00:25:10.94] spk_1:
I have been when I left a big firm and opened my own firm, my income went down that first year dramatically because I left the big firm with no clients. So that triggered an audit. What are you doing? Okay. I’ll just say yeah the audit room at the I. R. S. Office is a very very depressing place where people are married. They’re scared out of their lives. It was academically it was kind of interesting for me because I had no no problems with explaining it. Um But uh yeah I could see the nerves or feel the tension in that office for both the IRS agents and the taxpayers. Okay. [00:25:26.64] spk_0:
I’m glad you you stayed out of you stayed out of prison. Right. No fine. Okay. Okay. Just settled out. You settled uh admitted no guilt, admitted no wrongdoing and settled. All right. What’s next in our in our five points? [00:26:45.04] spk_1:
Um So this one is kind of a little bit of a no brainer but I think just make sure you you’re standing with the I. R. S. Still says you have five oh one C. Three status. So I think it’s a good idea to check because your donors will be checking. Especially your funders will be checking. And it’s so simple to do, literally, if you’ve done it a couple times, you can do it in under a minute. Um, So the, you know, if you google I. R. S. And T. E. O. S, which stands for tax exempt organizations search. So I. R. S. Taos you’ll get the website where you just enter the organization’s name or E. I. N. And it’ll spit out a link and you link to your organization’s name and it’ll tell you if you’re five oh one C three, non or not. And whether you’re a public charity, which may be an important distinction for some organizations, a public charity would be obviously not a private foundation and not subject to all those other rules, uh, that private foundations are subject to. But if you don’t get the numbers right, you can actually tip over into private foundation status. Um So it’s an important thing for some organizations to keep track of to make sure you’re still five or once you re exempt uh And a public charity in the I. R. S. Views and that’s updated nearly weekly. So um you have a good sense of where you actually stand and again take you a minute or two minutes to find that [00:27:00.84] spk_0:
jean. Was that like three or four years ago when tens of thousands or maybe hundreds of thousands of organizations lost their exempt status because they hadn’t filed their their nine nineties for three consecutive years. I’m sure you remember that, What was that like 34 years ago or [00:28:19.84] spk_1:
I think it was even longer, so I think it might have been Gosh, close to seven or eight years ago. Um and about 600,000 organizations, I believe tax tax exempt status. So it was a huge number um partly because smaller some organizations just weren’t running anymore. And the I. R. S. Doesn’t know when you stop running. So they’re just on the list of on their list and they were dropped off but many were actually running and just didn’t file their nine nineties and there was no rule before that said if you miss three in a row were automatically revoking your tax exempt status and it’s done electronically so it’s no agent discretion. It just happens. Um And so it’s hard to come back from that. It is possible but it’s still important for organizations to keep track if you miss 1990 or you’re late. Don’t worry too much about it. But if you have missed two High alert that you don’t even get an extension on your third missed one, even if you apply for one, you have to file it by the May 15 deadline if you’re a calendar filer. So pay attention to that. [00:28:50.64] spk_0:
Okay important thank you. And you know this is an easy thing you can check in a couple minutes. Uh So it’s part of your one hour audit. So just make sure that something uh something didn’t happen even if you’re you’re sure you’re filing your nine nineties, you know for for two or three minutes. Check out uh I. R. S. Tax exempt organizations search [00:29:12.94] spk_1:
just in case it was lost in the mail and you know the I. R. S. During the covid pandemic had I think 10,000,010 million pieces of paper filings in their warehouses that somebody had to process when they started coming back so they’re delayed still on that. So it annual filings could easily have been lost. Um So double check that website just to make sure you’re you’re okay. [00:29:24.04] spk_0:
Yeah, be good to your organization please. All right. The last one when I love go ahead. [00:30:40.44] spk_1:
So the same way you want to check with your I. R. S. Status, you probably want to check with your state status and that can be a couple agencies. So the corporate agency that we talked about, usually the secretary of state’s office, you want to make sure your corporation is in good standing, that they usually require some sort of annual or biannual filing that that comes to them. And then the attorney general or charities regulator might be a different agency. And they may also require charity registration on an annual basis. So making sure you file with each of those agencies is really important. And there’s usually an online database for most states where you can check to see what your most recent filing was and if you’re delinquent or if you’ve been suspended, um, or even uh, in in some cases, um, terminated because of lack of filing. So if if you find that, then, you know, there’s stuff to fix and you probably need to call a lawyer at that point, um, but just check it, if you check it annually, you’ll find it’s easy again, probably once you’ve done it once, and you write down a few notes about how to access that side, it’ll only take you a few minutes to just double check both the state, usually Secretary of State, for your corporation, um status and the Attorney General, or charities regulator for your charities registration status. [00:31:11.94] spk_0:
You want to make sure that your uh, in compliance not and for the, for the ladder of that in compliance, not only in your state, but now I’m going beyond your one hour. But, uh, that’s okay. We’ll go a little deeper. You need to be in compliance with solicitation regulations in all the states where you are soliciting donations now, I just need a car, not just you and me, [00:31:25.34] spk_1:
and they need to call somebody like you, if that’s the case. So if they know their fundraising in multiple states are using, um, people or companies to help them fundraise in other states, they need to call someone like you and say, hey, what do we need to do to make sure that we’re in compliance with that. Other states. Rules were not incorporated there, but we’re doing business or fundraising there. What do we need to do? [00:32:53.24] spk_0:
Right. Thank you. It’s time for a break. Send in blue. It’s an all in one digital marketing platform with tools to build end to end digital campaigns that look professional are affordable and keep you organized. They do digital campaign marketing. Most marketing software is designed for big companies and has that enterprise level price tag tisk, tisk. If you’re using those, send in blue is priced for nonprofits. It’s an easy to use marketing platform that walks you through the steps of building a campaign to try out sending blue and get a free month. Hit the listener landing page at tony-dot-M.A.-slash-Pursuant in blue. We’ve got boo koo but loads more time for your 5.1. Our legal audit for for the I’m going backwards a little bit because, you know, your host is lackluster. I’m sorry. Um if we find out that we’re on a step forward, if we’re not, if we have lost our IRS 501 C3 status for some reason, what would you recommend doing? [00:34:24.84] spk_1:
So find out the reason first of all. So if it was for failing to file 3990s in a row that’s probably the most common reason for getting your exemption revoked. Um Find out if that was actually true. Did you actually miss those filings? Did an accountant help you with them? Did some volunteer do that find out what the status is? Uh and then contact the I. R. S. To ensure that that was the actual reason and if you have filed the 19 nineties and the IRS has somehow lost it you should tell that to them. Um See if you have a like a return receipt which I always recommend if you haven’t electronically filed, make sure you have some evidence that actually got sent uh to the I. R. S. Office because that will help you. And if they had made the mistake or they lost the finding that will help them reverse the process. But if it is actually the case where you fail to file um have those filings ready to go. Some hire an accountant or somebody who can help you prepare those files, have them ready to go. And there is a reinstatement process where you actually have to Fill out the form 1023 which is the exemption application that a start up would have to file. But you’re doing it for reinstating your tax exempt status. Um So there is a process the I. R. S. Has tried to make it easier for some organizations where they just kind of missed filings but it hasn’t been like We’ve been out of compliance for 20 years, [00:34:26.73] spk_0:
we’ve never filed. Yeah [00:34:49.44] spk_1:
so go through that process if you can get a lawyer or an accountant to help you um, please do. So it’s while they try to make it as easy as possible. It’s still kind of complicated and there are some nuances that can help you and the sum that can hurt you. So that’s going to take a little bit longer to fix if you have to fix it. But it is for the most part fixable. [00:34:54.44] spk_0:
If we’re going to go beyond our one hour, 55 point legal audit, what would, where would we spend more time? [00:36:44.53] spk_1:
So there are some common areas of concern for nonprofits. I would say one of the big ones is getting your independent contractor employee distinction. Right? So knowing what the difference is, because I would say that a lot of organizations when they get into trouble, they get into trouble on that point. And on that point, volunteer borrowing members could actually be held personally liable for non payment of payroll taxes. And by that, I mean, if you determine that a worker is an independent contractor, but legally they should have been an employee, let’s say they’re working 40 hours a week and they don’t work for anyone else, and they’re doing the job that, you know, an executive director does for an organization. But you go, I don’t want to pay the payroll taxes because we can’t afford it. So we’re just going to call you an independent contractor, that’s not going to be consistent with the definition that the I. R. S. Views and the state may have their own definitions as well. Um, but the employer for an employee has to pay their portion of the payroll tax. If the payroll tax didn’t get paid, uh, then there may be a claim against the organization. And then in enforcing that, they may say this was the board’s fault, charitable assets should not be used to pay for this type of penalty because this was sort of gross negligence on this part. So board members could be out of pocket to pay for those payroll taxes if they haven’t been paid. So because withholding and paying payroll taxes, the employer shares is the employer’s duty. So be careful of that one distinction I would say is my next thing, that’s going to take longer, but it would be the next thing on my audit list. Okay. [00:37:17.93] spk_0:
Yeah. Common misconception that if we, if we call them a contractor and we send them a 1099, then that’s what they are. And, and there’s a whole, you and I have done shows on this, there’s a whole test of, you know, do they work for the people whose equipment do they use, Who sets the hours, who sets the location of the work, Who sets the timing of the work? It’s the whole list of fact multi factor test. Uh, So it’s not just, you know, you call it a, you call them an independent contractor because you’re saving on employment taxes and uh and unemployment and and benefits that are required. It’s not it’s not that simple. So, [00:37:32.43] spk_1:
okay, not only the I. R. S. Could be involved, but the person the worker who got misclassified could actually go after you later [00:37:40.89] spk_0:
or your state or your state Department of Labor. [00:38:13.52] spk_1:
Yeah, exactly. And they may have a slightly different definition of independent contractors and employees. And California is kind of this big example because they’re there sort of leading the way if you will in terms of employment rights. Um, and so they have made a much more difficult distinction, making it very hard for nonprofits to claim that they have independent contractors if they occupy the type of job that an employee would occupy. So even if it was for a limited duration of time, that may not matter anymore that they were there for three months only, but if they were an administrative assistant or an executive director, they may need to be called a temporary or part time employee and not an independent contractor anymore. So it’s gotten much, much tougher on the state level. [00:38:40.12] spk_0:
What’s next? What in your experience, what do you see as another common problem? [00:40:23.81] spk_1:
So not necessarily a problem. But for a way for the boards to sort of quickly get policies in place to make sure that they’re doing their job in terms of providing oversight since they’re not there every day. And you know, maybe they’re meeting once a month or once every other month. Um uh and maybe for just a couple hours. So there’s only so much that they can do. But what they can do is create some policies or have policies created that they can approve that governed the organization. And these policies, some of them are referenced in the form 9 90. And the 9 90 asks you the I. R. S. Is asking you through the 9 90 do you have these policies and if you say no, Well it used to be kind of normal awhile ago, you know, more than 10 years ago for a lot of organizations to say no, but since they started asking these questions, I think in 2000 eight maybe. Um the more often you put no the more an outlier you become because most organizations have seen these questions and said, oh if we keep saying no to this, is this going to trigger an audit risk? And the answer is probably yes. So saying yes to. We have these policies make sense. And that would be a document retention and destruction whistle blower. The Board Level Review of the Form 9 90. Um, those are really common ones that that you can incorporate really quickly. I would also add expense reimbursements. Who has signing authority. Can anybody in your organization signed a contract or sign a check or only the executive director? What if they’re not around? So just having policies rather than the board going, you guys figure it out. Having a policy in place is really important for a board to do gift acceptance, another one. [00:41:03.31] spk_0:
Gift acceptance. Yeah, right. Uh, there’s another angle to this too, which is the, uh, the charity rating agencies, um, Charity Navigator. Uh, well, uh, the old guidestar now it’s merged and it’s Candid merged with the Foundation Center Candid. But those rating agencies also ask ask about the standard policies like whistleblower document retention, etcetera. Yeah, it’s a proxy conflict, conflict of interest, border conflict of interest, another another common commonly required policy. [00:41:11.35] spk_1:
Absolutely. And I’m sorry, I missed that one because I think that’s the most important, one of all of them, outside of the articles and bylaws that I [00:41:28.31] spk_0:
got, I got Eugene. All right, No problem. So, yeah. So aside from the I. R. S asking charity rating agencies ask also for these basic policies. All [00:41:41.71] spk_1:
right. And it’s a proxy for them to say is this organization well governed. Does it have a good board of directors in place? And if you keep answering no, we don’t have these policies, then they’re going to assume that you’re not very well covered. Yeah, [00:42:03.20] spk_0:
it’s like someone reading your bylaws or your articles of incorporation. You know, somebody might get a wild hair and decided to go read your articles of incorporation and then see that they are out of date. Or you might, you know, you might have your bylaws disclosed on your website. But some disgruntled person or just even some uh, neutral person might see that, you know, you don’t, you don’t conduct yourself the way your documents that you’re supposed to, you know, it’s embarrassing at the at the best. It’s embarrassing. [00:42:14.50] spk_1:
Yeah. And for for older folks like me, tony when somebody has in their bylaws like you can deliver notice by telegraph. Not a great sign for some of the younger funders may be considering your organization. [00:42:35.90] spk_0:
All right. All right. Or we can even update it and make it still bad facts. Notice noticed by facts. Facsimile. [00:42:38.83] spk_1:
I still have a hotmail account so I’m okay with facts. All [00:42:43.89] spk_0:
right. But you don’t use your fat. You don’t have a fax machine, do you? [00:42:46.57] spk_1:
I still do [00:42:47.63] spk_0:
you do you get any traffic on it? [00:42:50.20] spk_1:
Um I I use effects as as my primary. So I have a paper printing facts as a backup. But exit the primary. [00:43:09.10] spk_0:
Remember if ax you used to send people would send documents to the phone number right at like the phone number at the fax dot com. So that they would print on your machine. Wasn’t that isn’t how it works. [00:43:17.90] spk_1:
So this effects is um they sent a fax to my fax machine. But I have my fax machine turned off and it sends me an email of what the facts would look like. [00:43:30.10] spk_0:
Okay. Okay, well, that’s OK. So I’m starting. But there there was a there was in fact used to, somebody could send an email to your fax machine through the phone number at fox dot com and it would print on your machine. [00:43:34.10] spk_1:
Yeah, I think that’s right. But [00:43:35.44] spk_0:
You’ve updated your, you updated sometime around 1997, I guess [00:43:40.32] spk_1:
one. Some level of [00:43:41.57] spk_0:
you get an email now. Congratulations. You’re getting emails. All right. Uh, [00:43:46.70] spk_1:
my anything don’t even answer emails now. It has to be text not responding. [00:43:57.30] spk_0:
Right. Another year. It’ll just be if it’s not a Tiktok then forget about it. They don’t know you. All right. We’re gonna leave it there, jean. So we talked about our five points. You’re talking about going a little further. If you’re if you if you want the suma cum laude of legal audits, you can go a couple of steps further. Thank you very much. Gene [00:44:12.79] spk_1:
great to be with you Tony. Thank you. [00:44:30.29] spk_0:
My pleasure. Thank you, Jeanne Takagi Neo is the firm, the nonprofit and exempt organizations law group in SAn Francisco subscribe to this blog, nonprofit law blog dot com. It is wildly popular and jean is at g attack. Thanks again jean. [00:44:32.19] spk_1:
Thanks tony [00:45:27.59] spk_0:
next week. More from 21. NTC, the nonprofit technology conference. If you missed any part of this week’s show, I beseech you find it at tony-martignetti dot com. We’re sponsored by turn to communications pr and content for nonprofits. Your story is their mission turn hyphen two dot c o and by sending Blue the only all in one digital marketing platform empowering non profits to grow. tony-dot-M.A.-slash-Pursuant in Blue, Our creative producer is Claire Meyerhoff shows social media is by Susan Chabon’s Mark Silverman is our web guy and this music is by scott Stein, thank you for that. Affirmation Scotty You’re with me next week for nonprofit radio big non profit ideas for the other 95% go out and be great