Employment Tax Audits Include Nonprofits.  According to a Tax Alert issued by accounting firm Grant Thornton, LLC, the IRS will conduct random intensive employment tax audits beginning this month. The IRS objective is to gather information in four areas including worker classification, fringe benefits, non-filers and officer compensation.  Particular attention will be paid to worker misclassification (employee vs. independent contractor). The IRS expects to target 6,000 organizations across all types, but has specifically identified nonprofits for audit.  Grant Thornton states, “In our experience, upon examination, each of the areas noted above, especially worker classification, can result in significant employment tax and penalty assessments.”

NAVREF encourages NPCs to review their employment tax reporting and withholding policies and procedures.  Ensure that no independent contractors are in fact functioning as employees.  Consult with your accountants or human resource management experts as needed.  For discussion of employee vs. contractor classification see http://www.irs.gov/businesses/small/article/0,,id=99921,00.html 

Although issues related to exemption from the Fair Labor Standards Act (FLSA) fall under the jurisdiction of the Department of Labor, not the IRS, this may be a good time to verify that employees are properly identified as exempt or non-exempt from the FLSA provisions pertaining to overtime and that job descriptions support the appropriate status.  For discussion of exempt vs. non-exempt status see http://www.paychex.com/pdf/exempt.pdf and http://www.flsa.com/coverage.html.

NAVREF’s July 8, 2009, newsletter discussed various sub-classifications within 501(c)(3) status and offered NPCs sample materials to use in the event they decided to request a change. The Boston VA Research Institute (BVARI) recently successfully obtained IRS re-classification from 509(a)(3) status as a supporting organization to 509(a)(1) status as medical research organization. Chief Executive Officer Nancy Watterson-Diorio has generously shared the documents used by BVARI to request this change in the hope they may be of use to other NPCs. See http://www.navref.org/newsletter/pdf/BVARI_Change_In_IRS_Subclassification-ltr_only.pdf.

Benchmark Your Accounting Expense.     NAVREF is often asked what is a reasonable amount to expect to pay for an audit.  Unfortunately, there is no easy answer because a number of variables come into play – revenues certainly, but also whether an A-133 audit is required or the NPC is located in an area with a high cost of living.  However, in an effort to provide information that NPCs may use for benchmarking, NAVREF has compiled the amounts reported for accounting expenses in NPCs’ most recent IRS Form 990s (Part II, line 31, of the 2007 IRS Form 990 or Part IX, line 11.c. of the 2008 IRS Form 990).

Please be aware that the amounts reported and reflected in the table may include fees paid to non-employee individuals or accounting firms for routine accounting services as well as the audit and 990 preparation.  However, our experience is that almost all of the amount reported on this line item is attributable to the audit and 990 preparation.  The compilation posted at http://www.navref.org/newsletter/New_Folder/Accounting_Expenses.xls includes data about federal and non-federal revenue (expense data by federal vs. non-federal is not available) so consideration can be given to whether the accounting expense reported by each NPC is likely to include the cost of an A-133 audit. Also, keep in mind that NPCs with revenues less than $300,000 must have an audit only once every three years. Additionally, NPCs with revenues less than $10,000 are exempt from the statutory NPC audit requirement entirely

. 

NAVREF’s End of Year Financial Statements.  Because the NAVREF 2009 Annual Membership Meeting occurred before the end of NAVREF’s last fiscal year, the Treasurer’s Report given at the meeting reflected only three quarters of financial information.  Complete end of year financial statements and NAVREF’s budget for the current fiscal year are posted at http://www.navref.org/newsletter/pdf/NAVREF_FY08-09_Financials_and_FY09-10_Budget.pdf.  Please contact Treasurer Cindy Reutzel or the NAVREF office if you have questions.