Sometimes It’s Good to be Last
“GetInvolved Nonprofit Guide” Article for April 2014 from Cover & Rossiter, P.A.
By Pete Kennedy, CPA – Director at Cover & Rossiter, P.A
About a year ago, I attended a conference in New York during which a nationally renowned nonprofit attorney was one of the presenters. On the topic of nonprofit oversight at the state level, the attorney made the shocking statement that she considers it tantamount to malpractice to set up a nonprofit in the state of New York whenever there is any other option. The reason is the onerous regulatory environment. As an example, there used to be a federal requirement to publish in the local newspaper when a private foundation filed its annual IRS Form 990-PF so that people would know it was available for their inspection. In this day and age of electronic media, the IRS came to its senses about 10 years ago and removed the requirement to publish the notice. New York quickly re-enacted the requirement at the state level (the only state to do so!) because it was worried about the impact on advertising revenues. The attorney went on to describe other facets of the incredibly ponderous New York bureaucracy and said she sets up nonprofits in Delaware whenever possible because of the very low burden of registration and reporting. There are efforts underway in New York to do away with unnecessary nonprofit regulations, but it is a slow process.
We truly don’t know how good we have it in Delaware. Virtually all other states have significant state-level registration and reporting requirements. As corporate entities, Delaware nonprofits must file their annual franchise tax reports on-line and pay the nominal fee. They also share the federal 990 reporting requirements and private foundations must send a copy of their 990-PF to the Delaware Attorney General’s Office each year (as required by federal IRS regulations). Indeed, Delaware is one of the very last states with no additional significant state-level reporting and registration requirements … but that may be about to change!
House Bill 187 (HB 187) has been slowly winding its way through the Delaware General Assembly. HB 187 would require for various entities initial registration, annual reporting (including copies of the form 990) and audited financial statements with filing fees. One of the stated purposes of the Bill is to provide donors with additional information on nonprofits to enable them to make informed gifting decisions. In that pursuit, Delaware will join Give.org, Charitynavigator.org, Guidestar.org, the IRS and others. In spite of the fact that the 990 (and analysis of certain metrics derived from it) is publicly available from multiple sources – including the charity itself as mandated by law – nonprofits may soon need to send another copy to the Consumer Protection Unit of the Delaware Attorney General’s Office to further inform donors.
Here is a link to the text of the Bill: http://legis.delaware.gov/LIS/lis147.nsf/vwLegislation/HB+187/$file/legis.html
The requirements proposed in HB 187 would apply to all charitable organizations except for those with some defined exceptions (including religious organizations, charities that do not raise more than $50,000 or do not receive contributions from more than 10 persons; schools, hospitals and some others are also exempt). There is an initial registration requirement (with a $25 fee) and subsequent annual report requirements. Annual reports must include audited financial statements (for organizations with over $1 million in annual revenue) or reviewed financial statements (for $500,000 – $1 million), a copy of the 990, and a filing fee of $10 – $100 depending on gross revenue. All agreements with outside fundraisers need to be in writing with certain specific terms included and signed by two board members.
Note to any “professional solicitor” or “professional fund-raising counsel:” you better review the Bill thoroughly – your world is about to change. As defined in the Bill, this would exclude direct employees of nonprofits, but would include most outside fundraisers in any capacity.
As I’ve pointed out several times previously, it is beyond doubt that fraud occurs at IRS-recognized charities, but my observation is that for the most part they are “charities” set up with the fraud in mind. Would a real charitable organization, a social service organization, or museum whose very existence depends on support of the public, really risk the negative publicity brought on by a bogus fundraising campaign? I’d have to say it’s highly unlikely for those that I deal with. Furthermore, if you want to send off your money without knowing any more about a charity than what you read online or hear from a phone call – well, it’s your money. If you really want to know how your funds will be spent and how they will make a difference, get involved with potential recipients. Volunteer, go to fundraisers and speak with those involved, ask questions – most will be delighted that you are showing the interest.
So all this begs the question, how much value will the new registration and reporting for nonprofits really bring to the donating public? Is the need really there to justify the effort and fees involved? I suppose that remains to be seen and I’ll certainly be interested to hear about the Delaware Consumer Protection Unit’s plans. I do kind of like the fact that my college alma mater won’t be able to call me after 9 PM asking for money anymore (one provision of the Bill). It’s possible that oversight of independent professional fundraisers in Delaware is needed – I wouldn’t know – but those provisions are separate from the registration and reporting requirements for charitable organizations.
Overall I have two significant concerns. The first is that we are adding significant administrative burdens to an already challenged sector. One of Delaware’s hallmarks is its low level of regulation. I have at times recommended reviews or compilations to organizations that are looking for ways to save money. That will no longer be an option where audits and reviews may be mandated since the additional reporting and fees will cost affected organizations money and time. Second, this will set the precedent for fees levied against nonprofit organizations. If there is anyone out there who thinks the fees are only temporary or that they won’t rise in future years, the bogus charities probably already have you on speed-dial.
“But wait a minute, Pete,” you may be thinking. “Don’t you make your living auditing nonprofit financial statements? Wouldn’t you support the imposition of a requirement for significant additional numbers of nonprofits to be audited?” On the surface, you might think that additional regulations would be a positive for a CPA firm that specializes in nonprofits. But the reality is that when an entity is audited voluntarily, as is the case today, they are much more likely to be attuned to the quality of the audit and the value they are receiving from it. In an environment in which audits are compulsory, the audit can become thought of as a commodity where quality and value are much less important. I must say, I don’t like where that leads.
If you need assistance in understanding the proposed regulations or any other nonprofit topic, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.
Cover & Rossiter, P.A. (www.CoverRossiter.com) is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.