Nonprofit Radio: Your 5-Point, 1-Hour Legal Audit

I spoke with host Tony Martignetti on his Nonprofit Radio podcast about a quick legal audit executives or boards can perform on their organizations. This follows a recent post we published on the One Hour Nonprofit Legal Audit. But on the program, we were able to discuss each of these elements in more depth and added a few more for high achievers. Here are some highlights and resources related to our discussion:

  1. Articles/Certificate of Incorporation. Review your purpose statement. See if it’s still accurate. The Articles/Certificate of Incorporation is the governing document that rules them all [s/o LOTR!]. And a corporation cannot operate outside of the purposes set forth in its governing documents. So, check to see if your purpose statement still rings true or if you need to amend it to reflect how the corporation has evolved.
  2. Bylaws. Review the provisions on the selection of directors and officers. See if they are still accurate and whether your practices match up. Are directors and officers being elected and/or re-elected in a timely manner consistent with the terms set forth on the Bylaws? Do the Bylaws provide for a voting membership that elects directors and/or officers? Do the Bylaws provide any requirements related to qualifications; nominations; and/or diversity, equity, and inclusion?
  3. Donation receipts. Make sure they contain all of the required language to comply with the law and allow your donors to qualify for a charitable contribution deduction. “Written acknowledgment” language is required for a donor to take a deduction of $250 or more. This includes a statement that no goods or services were provided by the organization, if that is the case. A donation receipt without the written acknowledgment language may result in a very angry major donor denied a deduction on audit and an embarrassed charity that is shamed for not providing the required information. Because of the timeliness requirement, this may be impossible to cure for the donor. “Written disclosure” language is required for a quid pro quo contribution (part donation, part payment for something of value – e.g., chicken dinner, concert ticket). This includes a statement that the amount that is deductible is limited to the difference between the value of the “contribution” and a good faith estimate of the fair market value of the good or service received by the donor in return. See Charitable Contributions – Written Acknowledgments; Charitable Contributions – Quid Pro Quo Contributions.
  4. IRS tax-exempt status. Check your current IRS tax-exempt status on the IRS Tax Exempt Organizations Search (TEOS) site. You’ll be relieved to see that you are officially recognized by the IRS as tax-exempt and, if applicable, a public charity. If the site doesn’t list your organization, run the search by Employer Identification Number instead of by name. If you still don’t show up, you have some more work to do.
  5. State agency statuses. These agencies may have online databases in which you may be able to check on your standing, registration, and tax-exempt status with respect to the state(s) in which you are organized or operate. For example, in California, check with the Secretary of State Business Search site; Attorney General Registry Verification Search site; and the Franchise Tax Board Entity Search site (which can also issue an entity status letter).

Got More Than an Hour?

  1. Check whether you have policies on document retention/destruction, whistleblowers, review of the Form 990 at the Board level, expense reimbursements, signing authority (check/contract), gift acceptance, joint ventures.
  2. Check laws regarding paid fundraisers if using a non-employee to help with fundraising.
  3. Check laws regarding the employee – independent contractor distinction, which is getting more complicated on the state level but also has a very important federal tax law component since board members may be held personally liable for unpaid payroll taxes. This can result from the organization’s failure to properly classify a worker as an employee, when that was required.

Additional Resources

Nonprofit Corporation Legal Audit