The IRS is currently inundated with procedural and technical obstacles that have caused processing delays. Here are some items of note that have been reported by exempt organizations and their service providers.
Announcement 2001-33 Replaced.
Nonprofits should be aware that Announcement 2001-33 is no longer applicable, having been revoked by Announcement 2021-18 (2021-52 IRB 910) effective for tax years beginning after December 31, 2021.
Announcement 2001-33 acted as an addendum to the 1999 Form 990. Form 990 states that an organization paying a third-party entity that made use of specific individuals including trustees, directors, officers, or key employees (TDOKEs) must report their services as payments made directly to those individuals. Form 990 sought to remove money-channeling loopholes but created an unnecessary amount of work for tax-exempt organizations. Announcement 2001-33 alleviated some of these burdensome requirements.
Throughout the years, the IRS has streamlined Form 990 procedures, revising the form in 2001 and 2008 and rendering Announcement 2001-33 obsolete.
The instructions now state that if current or former TDOKEs or HCEs for a tax-exempt organization receive compensation from a management company that provided services to the tax-exempt organization, the organization must report the compensation for each individual separately. If the tax-exempt organization has assigned management duties to a third-party or management company, then the tax-exempt organization must report the arrangement on Form 990, Schedule O. This should include the name(s) of current or former HSEs and TDOKEs and the amounts they received by the management company.
Tax-exempt organizations can no longer file incomplete returns by invoking Announcement 2001-33.
Accounting Procedures for COVID-19 Relief Grants
The AICPA recently published TQA 5270.01, a guide for finding and applying for applicable grants centered around COVID-19 relief. TQA 5270.01 includes information for both for-profit and nonprofit entities.
Many nonprofits such as zoos, museums, aquariums, movie theaters and live performing arts organizations received Shuttered Venue Operators Grants (SVOG). Eligible uses for these grants were restricted to payroll costs, rent, utilities, scheduled mortgage, state and local taxes and fees, certain debt payments, payments to independent contractors, insurance, maintenance, and other typical business expenses. SVOG money could not be used for investments or real estate purchases.
According to FASB ASC 958-605 – Not-for-Profit Entities – Revenue Recognition – government grants are accounted for as contributions received. Therefore, entities must determine whether a contribution is conditional or unconditional.
Since there are conditions for receiving and keeping the funds, SVOG are considered conditional. Noncompliance with the conditions of the grant is grounds for returning the funds to the SBA. Therefore, the entity should not recognize the grant as contribution revenue until it meets the conditions or the government waives them.
SVOG payments in excess of acceptable expenses are recorded as a refundable advance liability. Excess payments are reversed and recorded as contribution revenue in subsequent periods when the entity incurs eligible expenses.
Since entities can only use SVOG funds for eligible business expenses, they are considered donor-restricted when applying FASB ASC 958-605. Since the entity will likely meet the restrictions when applying the grant against its expenses, any contribution revenue should be recognized as an increase in donor-restricted net assets with a reclassification to net assets without donor restrictions.
By choosing the accounting policy at FASB ASC 958-605-45-4A and -4B to simultaneously release donor-restricted contributions whose restrictions are met in the same reporting period, it can then report contribution revenue directly as support within net assets without donor restrictions.
Need Help? Use These RFP Tips to Find the Right Auditor.
Tax accounting and auditing for nonprofit organizations are complicated matters. The best way to find a firm that fits your needs is to create and issue an RFP. Prior to issuing an RFP, the organization’s management and the governing board should determine the criteria that are important to the organization. Try to be as specific as possible when submitting your RFP to an auditing firm clearly stating all of your organization’s needs. Things like the type of work, average timelines, and reporting requirements should be included so the auditing firm understands your business.
Here are a few tips for organizing an effective RFP:
- Prior to issuing an RFP, research the websites of firms that might be a good match for your needs.
- Ask the auditing firm specific questions about the methods they use to conduct business such as electronic vs paper submissions, in-person vs virtual meetings, archival methods and cybersecurity measures, etc.
- Ask about the auditing firm’s qualifications including firm size, state licensing, financial solvency, and firm history.
- Meet with prospective firms to interact with them, to evaluate your ability to work together.
- Limit the RFP request to no more than 6 firms
- Consider the firm’s industry knowledge. The right auditor should be able to identify opportunities and risks based on their knowledge of the organization and its industry.
- Ask the firm for references.
Structuring the RFP
The following is an overview of categories a nonprofit might want to include in its RFP.
Overview:
- Who are the contacts handling the RFP process?
- How many copies will be needed for the response.
- When the RFP is due.
- How proposals will be evaluated.
About the Firm:
- Mission and purpose, a brief history of its founding, location, staff size, and qualifications.
- Licensing by state.
- Technology used, and internal controls.
- Regulation, regulatory reviews and audits in progress.
- Service offerings and experience.
- Experience with nonprofit industry.
- Any disciplinary actions against the firm by professional associations and regulators, recent peer reports, and litigation history.
Services and Scope of Work:
- Scope of work and expected deliverables.
- Staff involvement and estimated hours to complete the audit.
- Use of any subcontractors.
- Fees for multiple years, including one-time costs for the first year.
- Conditions that would result in additional fees above the scope of work.
- How fees will be billed and reported.
While there are many accounting firms in the Birmingham area, Borland Benefield has built a reputation for having a specialized understanding of the needs of nonprofit organizations.