Special to Philanthropy Journal
Everyone has heard the
term mom-and-pop business. We normally associate it with grocery stores or
other small ventures. But there are other similar businesses that start up –
and fail – almost as often. These are the mom-and-pop-sized nonprofit
My introduction to
the world of tax-exempt organizations (the federal term for nonprofits) was in
Washington, D.C., as an internal revenue agent with the IRS. From my
assignments, it was easy to believe that most nonprofit organizations had
budgets of at least several million dollars.
After moving to
North Carolina in 2005, I realize that the vast majority of nonprofits are
relatively small and modestly funded. From a philosophy and purpose
perspective, these nonprofits offer definite advantages over their larger
counterparts. Community-based, they enjoy a much closer relationships with the
people they serve. And these relationships cannot help but generate a passion to
further the nonprofit’s purpose.
small often results in a lack of resources to administer effectively. The
passion and excitement that make small nonprofits so effective sometimes cause administrators
to assign record-keeping a back seat. This can result in delayed or late
payments to creditors and, often more costly, lack of adherence to government requirements.
should seek a professional who can guide and protect them in navigating the
unusual path of nonprofit law. Failure to file a single annual IRS Form 990 can
result in a penalty of $10,000 for organizations with revenue of less than $1
million. The same penalty for an organization with revenue of a million-plus can
be up to $50,000. Likewise, Internal Revenue Code Section 4958 assesses a tax
of up to 225 percent on funds incorrectly diverted for personal use.
The resources that
should go toward the nonprofit’s socially responsible purpose all too often are
lost due to administrative failures. There are other potential hazards, such as
trust fund assessments made against an organization’s officers for not paying
income and FICA taxes withheld from employee paychecks. These are amounts that
those personnel with the authority to pay – regardless of their ability – can be
held personally liable for, if the incorporated nonprofit is unable to pay.
understanding of pertinent laws, or ineffective adherence to the laws, is more
often the cause of a mom-and-pop business failure than intentionally bad
practices. Without careful record-keeping and attention to detail, they also can
dash the dreams of a small nonprofit to make a difference in its community.
Rose is a former IRS agent who operates a
nonprofit consulting business in Summerfield, N.C.
Labels: Daniel Rose, IRS, nonprofit taxes, record-keeping