Increased Scrutiny on Non-Profit Organizations & How Churches Should Respond Now by Mark Helland, CPA

Increased Scrutiny on Non-Profit Organizations & How Churches Should Respond Now
Mark Helland, CPA

Mark Helland, CPA, is a partner with the accounting firm of Elliott, Dozier and Helland, PC which is located in Tulsa, Oklahoma. For further information on this topic, Mark’s firm has a short report on basic fraud prevention tactics which is available to you at no cost. Mark can be contacted via email at or by phone at (918) 627-2286.

In working with my many church and ministry clients, an overriding concern these days seems to be an increasingly adversarial relationship between non-profit organizations (“NPO’s”) and the federal government/Internal Revenue Service.  Exactly how adversarial this relationship has become is debatable as to perception vs. reality.  In other words, from my observation it seems that many of my clients overestimate the probability of extremely unlikely actions by the federal government/Internal Revenue Service whereas they underestimate the probability of real threats.  For example, popular opinion seems to be that the government’s increased scrutiny of NPO’s directly coincides with the beginning of President Obama’s term of office.  The prevalence of this opinion stems directly from President Obama’s various proposals to dramatically limit the ability for high income taxpayers to deduct charitable contributions.  These proposals have taken various forms over the past two years but to date none have been signed into law and none really seem to have any momentum at this point in time.  Regardless, many NPO’s are extremely concerned and their concern has made them overestimate the probability of this outcome.  In fact, some have even speculated (or exaggerated) that if congress were to curtail the charitable contribution deduction it could threaten the very existence of many churches and ministries.

My take on the issue is that it is certainly true that the regulatory environment for NPO’s has become much tougher in recent years. This is a trend that will likely continue to worsen in coming years in direct proportion to the weakened financial position of the United States of America.  So, while it is easy to blame the increased scrutiny on our current political leadership, I believe that the “less kind and less gentle” government approach to NPO’s can possibly be traced to the now infamous “Grassley letters” of 2007.  In my mind, the letters written by Senator Charles Grassley were a major warning shot over the bow of NPO’s (particularly religious NPO’s) that the government was taking scrutiny of NPO’s and their governance to a whole new level.  The Grassley letters were sent to the leaders of six large church or ministry organizations and the inquiries of these organizations were extensive in detail.  If you have not done so already, it is really worth your time to read these letters to understand the extent of detail that was requested from these organizations.  However, even in an era of increased scrutiny, I would strongly urge churches and ministries to ignore dire and improbable predictions and rumors that are so prevalent these days.  Churches and ministries need to instead focus on true NPO risk factors that have a much higher probability of creating problems for them.  Following are some current issues that should be on your radar:   

Redesigned IRS Information Return Form 990:

While NPO’s that are legally recognized as churches are exempt from filing an annual Form 990, faith-based ministries are required to file this form on an annual basis.  The Form 990 is essentially a reporting mechanism between the NPO and the IRS in which the financial activities of the NPO are reported along with many detailed questions.  While Form 990’s have been required of NPO’s for many years, the redesigned form is intended to give the IRS a much more detailed look at annual activities.  As per IRS proclamations, the stated goals of the redesigned 990 are as follows:

  1. Increasing transparency by giving the IRS and the public a more detailed picture of a specific tax exempt organization, its mission, revenues, expenses, policies, etc.
  2. Promoting accountability by sharing in a public document the way that the tax exempt organization conducts its operations and
  3. Encouraging compliance by reporting in detail on the tax exempt organization’s operations thus giving the IRS greater detail on potential areas of non-compliance.

The best analogy of the Form 990 that I have heard is that essentially the 990 serves to “prove” the organization’s right to claim non-profit status on an annual basis.  This is a very high standard and one that all NPO’s should take very seriously.  One special note here is that even though churches do not have to file a Form 990, they could potentially have a 990-T reporting requirement if they receive any form of unrelated business income (“UBIT”).  For example, if a church receives rental income for the use of facilities, rents its parking lot for events, engages in the sale of products not related to the religious mission of the church, etc., then UBIT may exist.  Unrelated business income is a topic that is complicated enough to write a complete article on, but suffice it to say that it is common for churches frequently receive unrelated business income and there is a filing requirement for such income.

The new Form 990 also asks several questions for which your organization needs to be able to check “yes”.  For example, the new Form 990 inquires as to whether your organization has written policies in place for the following; conflicts of interest, whistleblower treatment, document retention and destruction and joint venture participation.  While these policies may sound daunting, I would recommend that you simply “Google” these issues and you may be surprised at the number of sample documents that are readily available.  However, for more complex issues and questions regarding these issues you may need to contact your organization’s attorney for advice.

Employment Tax Audit Initiative:

This initiative started during February of 2010 and its focus is on performing audits or inquiries of approximately six thousand (6,000) organizations across the U.S., including tax-exempt and government entities.  The goal of the initiative is to reduce the size of what the IRS refers to as the “tax gap”.  The tax gap refers to IRS estimates of in excess of $50 billion in employment taxes that have not been collected due to improper classification of employees, failure to remit payroll taxes, etc.  According to the IRS, the five primary goals of this project are:

  1. Worker classification (employee vs. independent contractor)
  2. Fringe benefits
  3. Officer’s compensation
  4. Reimbursed expenses
  5. Non-filers of required IRS forms

I see several areas in this list that could be potential areas of weakness or inadequate documentation for NPO’s.  The first issue of worker classification pertains to whether an individual who is classified as an independent contractor (thus avoiding FICA and Medicare withholding) is actually an employee.  Again, entire articles could be written on this issue but it is important to make sure that classification of individuals as independent contractors meets with IRS regulations in this area.  Documentation for reimbursed expenses is another area that is more complex than it may seem.  NPO’s that reimburse employees for mileage or other out of pocket expenses need to make sure that they have an “accountable plan” in place that allows for such reimbursements.  Additionally, any payments to employees for reimbursements need to have adequate documentation to establish why such payments were made.  Failure to do so could result in these payments being considered taxable income to your employees.

One thing that I would strongly recommend to all NPO’s is a non-profit organization financial “check-up” to make sure that your organization is in compliance with key factors.  If your NPO is large or more complex and is not currently audited by an outside CPA firm, you might consider having an annual financial statement audit, review or agreed-upon procedures engagement.  As a result of such engagements, many issues could come to light that could benefit your NPO.  However, these engagements are expensive and if your NPO’s budget would not allow for such an expense, even an “internal inspection” of your NPO performed by your staff could be beneficial.  Our firm offers a sample internal inspection checklist that is free of charge to any readers of this article; simply send me an email request at  While this checklist is very simplified in nature it may help your organization identify some weaknesses that could head off future trouble from an ever vigilant Internal Revenue Service.


This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is shared with the understanding that neither the author nor Tony Cooke Ministries is engaged in rendering legal, accounting, psychological, medical or other professional services. Laws and regulations are continually changing, and can vary according to location and time. No representation is made that the information herein is applicable for all locations and times. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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