During the past two years, nonprofit organizations have had to rethink and restructure operations in an effort to keep donors engaged; run services, programs and fundraisers; and maintain staff and volunteers — all while managing day-to-day operations. As 2022 approaches, there remain key challenges that will require organizations to stop and reassess processes and approaches that if not proactively addressed, could result in legal issues. Here’s what your clients need to know.
Compliance with diversity, equity, and inclusion laws. Diversity, equity, and inclusion (DEI) is not a new concept. However, recent events have organizations reevaluating policies to ensure they are fostering a diverse and inclusive work environment for staff, directors, and volunteers. In fact, the Equal Employment Opportunity Commission has created specific DEI laws that all businesses must follow or risk costly penalties. According to the Nonprofit Law Blog by NEO Law Group, nonprofits should be at the forefront of incorporating DEI into their governance and operations. A good place to start is to include DEI principles and language in an organization’s bylaws, to serve as a manual for its board of directors.
Failure to file IRS Form 990. Tax-exempt status relieves an organization of most federal and state corporate income tax liabilities. It also allows organizations exempt under Section 501(c)(3) to receive tax-deductible charitable contributions. However, organizations must be cognizant of the fact that noncompliance with federal tax laws attracts penalties. IRS Form 990 must be filed annually by most exempt organizations. If the return is not filed by the required date, an individual within the organization may be charged a penalty of up to $5,000. Penalties for failure to file may be abated if the organization has reasonable cause for the failure to file timely, completely, or accurately. The website NonProfit PRO advises that board members should have a basic understanding of the restrictions imposed by tax laws and implement policies and procedures responsive to these requirements as well as Form 990’s reporting mandates.
COVID-19 federal relief programs. Many nonprofit (as well as for-profit) organizations have benefited from several federal financial aid programs implemented because of COVID-19 (e.g., the Paycheck Protection Program, Economy Injury Disaster Relief, the Employee Retention Credit, etc.). These federal programs come with various rules and requirements that are frequently updated/revised. According to the website Nonprofit Standard, a national organization committed to serving the nonprofit community, it is critical for organizations to involve key board members in discussions regarding management of the various requirements of COVID-19-related federal financial programs, as well as in documenting the organization’s compliance with these programs. To ensure compliance, your nonprofit clients should be asking the following questions:
- Is the organization covering the same cost using two sources of stimulus funding?
- How are costs and stimulus aid being accounted for?
- Is the funding a loan or revenue that could trigger an investigation in potential debt covenant implications?
- Are appropriate controls being maintained in the processing, funding, and compliance with federal relief programs?
As the nonprofit landscape continues to evolve, there will no doubt be additional issues that can lead to potential legal challenges. Your nonprofit clients will find themselves in a better position to navigate these issues by staying informed and proactively monitoring programs and processes.
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