Our analysis of IRS data on nonprofit revocations show that nearly 20% of revocations happen due to failure to file annual returns and reports. Simple mistakes like missing deadlines or reporting inaccurate financial information seem harmless on the surface. But they can indicate deeper issues with an organization’s governance, finances, and operations.

We compiled the five most common nonprofit compliance pitfalls reported in IRS examination letters over the past five years. We’ll break down each mistake and provide tips to steer clear of problems. With some diligent planning and commitment to sound policies and procedures, your nonprofit can avoid risky missteps.

Mistake #1: Inaccurate Recordkeeping

Clear, consistent financial documentation is essential for accurate reporting. A stunning 65% of small-to-mid-sized nonprofits struggle with inconsistent recordkeeping.

Errors often stem from:

• Sloppy classification of donations, grants, program revenues.
• Incomplete or contradictory paper/digital trails.
• Staff turnover leading to incorrect coding.

These issues leave nonprofits vulnerable to questions about funding sources, ratios of program expenses to overhead, and other compliance red flags.

Tips:

• Institute system-wide recordkeeping policies and procedures.
• Cross-train employees on recording donations, expenses, programs costs.
• Conduct periodic internal spot-checks for consistency.
• Establish controls to avoid inaccurate record-keeping.
• Conduct regular audits and reviews to verify accuracy.

Mistake #2: Compensation Benchmarking

In a 2022 survey by NonprofitQuarterly, 39% of respondents said unclear IRS guidance on compensation was their top compliance challenge.

The key factor is ensuring executive and key employee compensation is “reasonable” compared to peers. If compensation appears excessive, it can jeopardize tax exemption or trigger penalties.

Tips:

• Review comparability data from trusted salary surveys.
• Document decision-making procedures.
• Seek expert input when needed.

Mistake #3: Conflicts of Interest

Even when no corruption exists, perceived conflicts of interest shake stakeholders’ trust. According to IndependentSector.org, 33% of chief executives say conflicts of interest created compliance issues for their nonprofit.

Conflicts arise when board members or staff stand to gain personally from deals with vendors or other partners. Even small, undisclosed conflicts raise stakes for scrutiny.

Tips:

• Annually collect conflict disclosure forms from all leadership, staff.
• Refrain from appointing board members with built-in conflicts.
• Develop robust conflict policy outlining procedures.

Mistake #4: Spotty Governance Practices

Strong boards are vital for oversight. But a 2022 study found only 55% of nonprofit boards conduct self-assessments to identify governance gaps.

Common pitfalls include:

• Inadequate oversight on finances, policies, executive performance
• Lack of regular board meetings leading to disengaged members
• No CEO succession plan causing disruption

Tips:

• Centralize compliance activities and insights.
• Institute annual board self-evaluations.
• Plan 6-12 regular board meetings annually.
• Create emergency CEO succession plan.

Mistake #5: Non-Compliant Political Activities

Nonprofits tread tricky ground on allowable lobbying and political activities under IRS code. One misstep can trigger scrutiny, fines, or revocation.

Watch out for:

• Partisan statements on hot-button issues.
• Unsupported claims about legislation.
• Rallies, marches veering into no-no territory.

Tips:

• Annually train staff/volunteers on guidelines.
• Seek expert input when political messaging is unclear.
• Refrain from partisan comments on organizational accounts.

Strategies on Avoiding These Mistakes

Strategy 1: Emphasizing the Importance of Documentation and Record Keeping

• Implement standardized documentation procedures across all departments.
• Train staff regularly on the importance of accurate and timely record-keeping.
• Utilize software tools to digitize and organize records for easy access and review.

Strategy 2: Implementing Strong Conflict of Interest Policies

• Develop a comprehensive conflict of interest policy, clearly defining what constitutes a conflict.
• Require annual disclosure statements from board members and key staff.
• Establish a review committee to evaluate and manage potential conflicts of interest.

Strategy 3: Regular Filing and Review of Tax Returns

• Create a calendar with all important filing deadlines and ensure it’s accessible to relevant staff.
• Conduct pre-filing reviews to ensure accuracy and completeness of tax documents.
• Engage with tax professionals for periodic audits and consultations.

Strategy 4: Strengthening Board Governance and Structure

• Regularly assess the board’s composition to ensure a diverse and skilled group.
• Implement a structured orientation program for new board members.
• Hold frequent board meetings and encourage active participation in decision-making.

Strategy 5: Regularly Checking and Maintaining Tax-Exempt Status

• Stay updated on changes in laws and regulations that affect tax-exempt status.
• Conduct annual reviews to ensure ongoing compliance with IRS requirements.
• Engage in regular legal consultations to proactively address potential compliance issues.

Steering Clear with Help from VComply

By understanding common nonprofit compliance pitfalls, organizations can target policies and procedures to avoid missteps. But with small teams wearing multiple hats, it’s tough to cover all the bases effectively.

That’s where purpose-built platforms like VComply can help. VComply’s integrated governance, risk, and compliance tools simplify tracking, monitoring, and reporting to keep pace with regulations. With customizable assessments, automated workflows, and expert-verified content, VComply has the solutions to bulletproof your compliance foundation.

How VComply Helps to Manage Risk

• VComply offers a centralized platform for risk management, allowing nonprofits to identify, assess, and mitigate risks effectively.
• Its intuitive interface enables organizations to track and monitor risk indicators, facilitating early detection of potential compliance issues.
• The platform provides tailored risk management solutions, helping nonprofits focus on specific areas of vulnerability.

The Advantages of VComply in Streamlining Compliance:

• VComply simplifies the compliance process by automating routine tasks such as data collection, report generation, and deadline tracking.
• It offers customizable compliance templates and checklists, ensuring that all regulatory requirements are met efficiently.
• The platform’s real-time compliance dashboards offer instant insights into the organization’s compliance status, aiding in quick decision-making.

Use of VComply in Managing Multiple Compliance Frameworks:

• VComply is designed to handle multiple compliance frameworks simultaneously, making it ideal for nonprofits operating under various regulations.
• It allows for easy integration of new compliance standards as they emerge, ensuring that the organization remains up-to-date with the latest requirements.
• The platform also facilitates cross-departmental collaboration, ensuring that all aspects of compliance are uniformly addressed across the organization.

VComply thus serves as a comprehensive tool for nonprofits, addressing diverse compliance needs while promoting a culture of accountability and transparency within the organization.

Frequently Asked Questions