Nonprofit Update from Miller Cooper & Co.

June 2010

In this issue:

New Guidelines Issued for Single Audits

Did You File Your 990 Returns on Time?

IRS Releases Interim Report on Nonprofit Colleges and Universities Compliance Project

New Guidelines Issued for Single Audits

In its June 2007 Report on National Single Audit Sampling Project, the President’s Council on Integrity and Efficiency (PCIE) found that, overall, approximately 49% of single audits fell into the acceptable group, with the remaining 51% having deficiencies severe enough to classify the audits as limited in reliability or unacceptable. The PCIE found a significant difference in results by audit size. Specifically, 63.5% of the large audits ($50 million or more in federal award expenditures) were deemed acceptable compared with only 48.2% of the smaller audits (with at least $500,000 but less than $50 million in federal award expenditures).

In its 2007 report, the PCIE offered three recommendations:

• Revise and improve single audit standards, criteria and guidance

• Establish minimum Continuing Professional Education (CPE) standards for auditors

• Review and enhance the disciplinary processes for unacceptable audits and for not meeting CPE and training requirements

Based on the PCIE report recommendations, the Single Audit Approach has changed starting with the current audit year. Among other requirements, there will be increased emphasis for auditors to correctly identify major programs, include more detailed requirements and guidance for compliance testing, document understanding and testing of internal controls, and use sampling methods prescribed by current government audit standards. In addition to higher standards for auditors, audited organizations are expected to identify all federal awards received and expended, as well as provide a summary schedule of prior audit findings, which the auditor will use to assess risk.

While improvements in audit process and procedures are needed to assure a higher percentage of acceptable single audits, on the plus side of the PCIE report, the acceptable audits represented 92.9% of the value of federal award amounts among the audits the study reviewed (208). 

Organizations undergoing single audits this year should be prepared to provide more information and documentation to their auditors than in past years, as well as support for increased sample sizes. Based on the report’s findings, using an auditor with single audit experience and knowledge of federal laws and regulations as they relate to auditing standards will also be critical in assuring the organization’s single audit report is acceptable.

Did You File Your 990 Returns on Time?

Most tax-exempt organizations, other than churches, must file a yearly return or notice with the IRS. If an organization does not file as required for three consecutive years, the law provides that it automatically loses its tax-exempt status. Loss of exempt status means an organization must file income tax returns and pay income tax, and its contributors will not be able to deduct their donations.

The exempt status of an organization that does not file a required annual return or notice for three consecutive years is automatically revoked, effective as of the filing due date of the third year. The filing due date for annual returns is the 15th day of the 5th month after an organization’s tax year ends. An exempt organization is entitled to an automatic three-month extension of time to file its annual return, and may request an additional (not automatic) three-month extension.

If your organization’s exempt status was automatically revoked because you missed the filing date, you must apply to have its tax-exempt status reinstated, even if the organization was not originally required to file an application for exemption. Once your organization successfully applies for reinstatement, the effective date of its reinstated tax-exempt status will usually be the date the organization filed its application. In addition, an organization may request to have its tax-exempt status reinstated as of the effective date it was automatically revoked

IRS Releases Interim Report on Nonprofit Colleges and Universities Compliance Project

The Internal Revenue Service today released an interim report summarizing responses to compliance questionnaires sent to 400 public and private colleges and universities in October 2008. Colleges and universities make up one of the largest nonprofit segments in terms of revenue and assets.

The interim report contains preliminary information on the respondents’ organizational structures, demographics, exempt and unrelated business activities, endowments, executive compensation as well as governance practices. Respondents are divided into three groups based on size of student population.

The IRS has not yet completed compiling the information, however here are few preliminary results:

• Nearly half (48%) of small colleges and universities reported never filing a Form 990-T (for Unrelated Business Income [UBI]), compared with 29% for medium colleges and universities and 4% for large colleges and universities.

• The most frequently reported UBI activities were advertising and facility rental.

• In most cases, the percentage of colleges and universities that indicated engaging in a UBI activity was much higher than the percentage of organizations that reported including that activity on their Form 990-T.

• 76% of small colleges and universities reported making their audited financial states available to the public while 91% of medium organizations and nearly all (97%) of the large college and universities reported doing so.

• More than 60% of the colleges and universities in each size category reported they did not rely on outside advice on unrelated business income issues, such as determining whether business activities were related or unrelated to the organization’s exempt purpose, the allocation of expenses between related and unrelated business activities, and intercompany pricing between the organization and related entities.

For more information on these articles, please contact one of the following Nonprofit Group members: Andy Mace, Principal; Chris Powers, Principal; Irwin Lyons, Principal; Avrum Katz, Principal; Mark Foltynewicz, Senior Manager; Betsy Allen, Senior Manager; or Tim Waryas, Manager. You can also call us at 847-205-5000.

Miller, Cooper & Co., Ltd.

1751 Lake Cook Road, Suite 400, Deerfield, IL  60015     500 West Madison St., Suite 3350, Chicago, IL  60661