NONPROFITS
Nonprofits urged to stay accountable

By Kelvin H. Taketa

By most estimates, there are more than 5,000 registered nonprofits in Hawai'i and 1.3 million across the country. While it is unrealistic to believe that all episodes of abuse can be eliminated from the nonprofit sector, the truth is that very few organizations prompt serious allegations of misconduct. Clearly, most nonprofits are not only well-intentioned but are run with integrity.

In response to claims of high-profile abuses of a few private foundations and nonprofits, however, several members of Congress are proposing comprehensive reforms for the entire nonprofit sector.

The group, called the Panel on the Nonprofit Sector, delivered the first of two installments of its plan to the U.S. Senate Finance Committee this month. The group's work was guided by several principles that include proposing a reasonable system of self-regulation or best practices for the sector, balancing the scope of new government regulations to prevent abuse and improve transparency without hindering the ability of legitimate nonprofits to serve the community, and adjusting the scope of required compliance in accordance with the size, scale and resources of the nonprofit organizations.

There are a number of recommendations that will affect most nonprofits. First, there is increased reliance on the Form 990 federal tax return as the principal means to ensure transparency. It recommends that the return is signed, under penalty of perjury, by the highest-ranking official of an organization and that criminal and financial penalties would apply to those involved in preparing false returns. Further, the IRS would suspend the tax-exempt status of any nonprofit that fails to comply with filing requirements for two or more consecutive years. It also calls for accelerating the use of electronic filing of tax returns to enhance IRS review and public accessibility to 990 returns.

If a nonprofit were excused from filing an annual information return because its annual gross receipts are under $25,000, the organization would be required to file an annual notice with the IRS. Further, nonprofits would notify the IRS if and when they cease operations and to file a final Form 900 series return within a specified period after they close. These proposals recognize that there are many smaller charities for whom the 990 return is not necessary and would also help to eliminate from tracking thousands of nonprofit organizations that have long since become dormant or cease to exist.

In order to improve the financial accuracy of information, nonprofits with more than $2 million in revenue would be required to conduct an annual financial audit. Because audits can be costly for many smaller organizations, a lesser standard is proposed for those organizations with revenues between $500,000 and $2 million; they would be required to have an independent auditor review their financial statements. Further, it is recommended that every organization should include board members with some financial literacy and that they should also consider establishing a separate audit committee of the board if the organization has its financial statements independently audited. Again, these recommendations speak to the integrity of the tax return and financial statements of nonprofit organizations and the appropriate skill and oversight that needs to be exercised to ensure their accuracy.

Finally, nonprofits should establish procedures to protect and encourage whistle-blowers to report suspected financial impropriety and misuse of resources and conflict of interest policies that conform to best practice and state laws. Included in the report are other recommendations related to tax-related gifts, donor-advised funds and supporting organizations as well as a call for increased resources for oversight and enforcement by the IRS. There is also the commitment for a second report in the fall to cover additional issues not addressed in the first report.

But why wait until any or all of these proposals become law? It shouldn't take a government mandate for the nonprofit sector to start adopting these recommendations right now. The implementation of a set of best practices will help to ensure public confidence in our nonprofit organizations. After all, these organizations fulfill an essential role in our society and provide services that would otherwise have to be performed, less efficiently, by other entities.

Kelvin H. Taketa is president and CEO of the Hawai'i Community Foundation.Reach him at kelvin@hcf-hawaii.org.