Eight practices to prevent fraud and theft

Business man pulling a big green dollar sign concept on background

From time to time you hear about theft within non-profit organizations. Usually the organization did not have sufficient internal controls to prevent or catch the situation, and sometimes the thief gets by with it for years. Here are eight practices that will discourage theft, or will catch the thief in the act.

  1. Check references and/or require bonding for personnel who have responsibility for the funds of your organization. You don’t want to hire some e with a history of theft.
  2. Require actual receipts be attached to any credit card bill. The bill itself doesn’t include enough detail for you to assure that all the costs were legitimate.
  3. Take inventory of purchases, so when someone runs to the grocery store or office store, they bring the items in and someone else checks them against the receipt so that no one is siphoning off items for their home. When a package of items is received at the office, two people check off the items and store them for later use.
  4. Reconcile the bank statements by actually viewing the checks or images of the checks and comparing them to the check register in the accounting software. Someone other than the accountant should do this — preferably the executive director or the chair of the finance committee, depending on the size of your organization. This prevents changing the payee, shows gaps in the numbering of checks so you can find the missing ones, and reveals any checks that have been signed fraudulently.
  5. Assure that the person who prepares the checks is not allowed to sign the checks, and no payee should be able to sign their own check.
  6. The person who prepares the checks should put the entire packet together for the signer to review, including all costs covered by the check, the detailed receipt(s) and the allocation of the costs to the proper grant or cost objective. Include the envelop for mailing the checks. Then the checks should be mailed by someone other than the person who prepared them. Again, this assures that the payee isn’t changed.
  7. Secure Directors and Officers insurance and listen to what the insurer has to say about good practices.
  8. Conduct an audit – a single audit if your center spent $750,000 of more in federal funds in the year, and a financial statement audit otherwise.

Take a look at your policies and practices. The board members and management staff are stewards of public funds, and you need to preserve the public trust as well as your organization’s future. Make sure you are doing what you can to prevent the misuse of your assets and preserve your organization.

You can find sample financial policies and procedures on our website. For more information about the audit, check out an earlier post.

Eight topics your new CIL executive director needs

  1. Learn about the history and philosophy behind Independent Living. Go to https://www.ilru.org/il-history-and-philosophy-orientation-for-il-staff if you prefer video. Use https://www.ilru.org/training/introduction-independent-living-history-philosophy-for-new-cil-personnel-online-course if you prefer an on-line course.
  2. Go to https://www.ilru.org/training/know-your-resources-orientation-il-net-and-cil-netorg-and-silc-netorg-0 to learn how to navigate training options and our website. Email Technical Assistance Coordination with questions paulamcelwee.illru@gmail.com
  3. Meet with each staff person and ask them to tell you about their job, then work with them to update it. Check how they fit in the organizational chart. Ask each staff member what you can expect them to accomplish in the next six months. Then follow up!
  4. View financial management presentations at https://www.ilru.org/training/internal-controls-for-centers-for-independent-living and https://www.ilru.org/training/applying-your-indirect-cost-rate-centers-for-independent-living Read your own policies and procedures to see if they meet the requirements. Discuss with your financial manager (whether on staff or contract) what financial concerns they have if any. Review the most recent financial statements with them, including budget to actual comparisons.
  5. Get to know your board. Take the time to talk with each board member to learn what they bring to your board, and why they are involved in Independent Living. Ask who they know in the community that you should meet. This training might also be helpful: https://www.ilru.org/training/supporting-your-cil-board-for-success
  6. Learn about the other Independent Living centers in your state. You might start with the directory you can find at https://www.ilru.org/projects/cil-net/cil-center-and-association-directory Update your own listing by using the “contact us” form on the website. Then see where the other centers are and find out when they meet, if they do. You can find the associations listed at https://www.ilru.org/projects/cil-net/association-directory  or you can check in with another center to learn if your state has an association for centers, and get on their phone/email list. 
  7. Learn about the Statewide Independent Living Council in your state, including who the representative for the Centers is.  You can find contact information here: https://www.ilru.org/projects/silc-net/silc-directory You can learn more about how the CILs and SILC work together here: https://www.ilru.org/training/working-together-building-statewide-il-network-through-cil-silc-collaboration
  8. Complete ACL’s hiring checklist for Executive Directors at https://www.ilru.org/sites/default/files/resources/il_administration/CIL_ED_AOR_Changes_GRANTEE_CHECKLIST.pdf

Your IRS Form 990 Questions Answered

IRS form 990 questions answered. Woman in glasses pulling at her hair, question marks surround her.

by Cassie Strain on March 11, 2019 Reprinted from Blue Avocadohttps://blueavocado.org/finance/your-irs-form-990-questions-answered/

Do you ever have a question about your IRS Form 990 and can’t seem to find the answer? Today we’ll give you some valuable information concerning your filings, written in plain English with links to forms, websites, and information that will hopefully keep your fiscal year-end stresses at bay.

Serious Business

Nobody likes taxes or the IRS, but don’t let that stop you from acknowledging the seriousness of filing your 990 annually. The IRS is the real deal. Like Santa except far more aggressive, they have a list that tells them whether or not your nonprofit has filed its 990 consistently and on time. It’s called the IRS Automatic Revocation of Exemption List.

The IRS website states that “the Internal Revenue Code automatically revokes the exemption of any organization that fails to satisfy its filing requirement(s) for three consecutive years.” This means you have to file your 990 completely and on time each to year to avoid joining the 28,000 nonprofits that are revoked annually on average, of which only 20 percent are reinstated. Keep in mind that even if you’re reinstated after revocation, you remain on this list.

While you may be happier and a great deal less stressed out ignoring your IRS requirements, doing so will not have a happy ending.

Below are the answers to common 990-related questions:

What is a 990?

In “IRS Speak” the 990 Form is the annual reporting tax return document required to be filed by all federally tax-exempt organizations. This form is the way the government (via the IRS) ensures your compliance and evaluates how your institution is doing financially.

In plain English, the 990 is the report card for your nonprofit. Like your personal tax returns, it allows the government and your donors to ascertain whether you are a reliable, honest institution.

Do we have to file?  

If you are a tax-exempt organization, you are probably a 501(c)(3) public charity or private foundation and are required to file a 990.

If your project is a fiscally sponsored initiative within an established nonprofit, it’s on them to file. Finally, if you’re a church or state institution, filing requirements are different—see the hyperlinks I just shared for details.

Which form do we need?

Determining which form to complete is based on the amount of your Gross Receipts. Gross receipts are the total amount your nonprofit received from all sources during your accounting period (fiscal year), without subtracting costs or expenses.

Once you know your Gross Receipts, it’s easy to figure out which form to complete:

  • Smaller nonprofits (Gross Receipts ≤ $50,000) file a 990-N (e-postcard)
  • Mid-size organizations (Gross Receipts < $200,000, and total assets < $500,000) file a 990 or 990-EZ
  • Larger organizations (Gross Receipts ≥ $200,000, or total assets ≥ $500,000) file a 990
  • Private Foundations file a 990-PF

When is our 990 due?

Forms 990 are due on the 15th day of the fifth month following the end of your organization’s taxable year. For nonprofits on a calendar fiscal year, your due date will be May 15th of the following year.

When is our organization’s fiscal year?

You can find your organization’s fiscal year printed on the upper right section of your IRS Determination Letter. It will be listed as “Accounting Period Ending.”

What if we can’t meet the deadline?

To obtain an automatic six-month extension for your 990, simply file a Form 8868, also known as the Application for Extension of Time to File an Exempt Organization Return.

What happens if we don’t file?

Many consequences can come from not filing your 990 return, including (but not limited to):

  • Ineligibility to receive tax-deductible contributions
  • Losing your 501(c)(3) status 
  • Your organization’s name and information being added to the IRS Automatic Revocation List 
  • Liability to pay federal income taxes
  • Fees averaging $20 a day, up to $10,000 
  • Loss of donor confidence, and often donors themselves!

Do I have to file with my state? 

Maybe. Each state has individual requirements for tax-exempt filings, some of which require greater detail or additional forms to accompany your 990 filing. For example, the state of New York requires Form CHAR500 to be filed each year. See the IRS’ list of states and their requirements to ease your journey.

Who can see my organization’s 990?

You are required to make your 990 available for public inspection (without charge, except the cost of any copies printed) at regional and district offices during regular business hours, but this burden can be minimized by posting your 990 to your website. There are numerous websites that provide information on exempt organizations, and many of them provide previously-filed 990’s. Anyone can view the 990 you file—in fact, many donors will specifically search for them and other details prior to making donations. A copy can also be viewed on Guidestar.org or by request through the IRS.

Death and Taxes

The only things certain in life are death and taxes; this is as true now as it was in the 1700’s when Ben Franklin wrote it. For that reason, you should keep your relationship with the IRS a healthy one. If you haven’t had any extenuating issues with them as of yet, 2019 isn’t the year to start! If you have, set a resolution that it won’t happen again.

Although taxes are daunting for many, there are so many resources out there to ease the burden. Can’t find an answer to a 990 question on the IRS website? No problem! Free resources like Blue Avocado and GuideStar offer a helping hand for all of your nonprofit tax questions. Now that you know all the essentials to your 990 filing, you should be ready for a stress-free tax season!

Pop Quiz!

Test your 990 knowledge by answering the following questions and checking the answers at the bottom of the page.

1) What 2 types of organizations do not require filing a 990?

2) What type of 990 should your organization file if:

a) Your gross receipts are less than $50,000 a year?

b) Your gross receipts are less than $200,000 a year but more than $50,000 a year?

c) Your gross receipts are greater than $200,000 a year?

3) When is your 990 due?

4) What form must you file if you cannot meet your 990 deadline?

5) Does your state require any additional documentation to file your 990?

What are the IRS requirements for my CIL?

Just because your non-profit doesn’t pay federal income tax doesn’t mean you have no dealings with the Internal Revenue Service. You are required to file an annual report to the IRS of your standing as a non-profit. This form is called a Form 990, and it is important for all CILs and those SILCs that are not-for-profit to file correctly and on a timely basis. If you don’t you risk losing your non-profit status and if you don’t have that private, non-profit status, your CIL is no longer eligible to receive your federal grant for Independent Living services.

The form 990 is a public document, so when you complete it remember that you are communicating both with the IRS and with the public. Be sure that the board of directors has reviewed your filing document prior to submission. Best practice usually requires that the board chair signs the document on behalf of the organization. It is not unusual for foundations and other private and public funders to check what you’ve said in your Form 990. Take it seriously.

If your tax-exempt organization has gross receipts of more than $200,000 or assets worth $500,000 you must complete a full Form 990. Smaller non-profits with gross receipts of $50,000 or less have an e-Postcard version called the 990-N. Those that fall between $50,000 and $200,000 can file a 990-EZ. Every center is required to be a private, not-for-profit entity so every center must complete the appropriate form annually.

Your timeline for this form is the 15th day of the 5th month after your fiscal year ends (which may or may not match your state or federal fiscal year). If your organization’s fiscal year ends June 30, your 990 is due November 15. If your fiscal year ends September 30, your 990 is due February 15. If your fiscal year ends December 31, your 990 is due May 15. NOTE: if you lose your exempt status by not filing the 990, according to the IRS there is no appeal process. If a CIL loses exempt status, they are no longer eligible for either Sub-chapter B or Sub-chapter C funds through the Rehabilitation Act. It is possible to reinstate your status, but this lengthy process can include paying income taxes during the period you were out of compliance, and other penalties and fees, including not being able to draw funds from your grants.

More soon about the content of the 990.

Your non-profit is also required to withhold both taxes and social security from employee paychecks following the employee’s W4 form, matching social security and providing a report of the withholding on an annual W2 form, which is provided to both the employee and the state and federal tax entities.

You are also required to report any payment you gave to a contractor or other non-employee that was in excess of $600 for the year. This is filed on a 1099.

Contractor or Subrecipient? Does it matter?

In a couple of states the DSE (Designated State Entity) is allowing only overdue reimbursement and not advances or timely payment. Both SILCs  are considered contractors by their state. I wondered if there is enough difference between a contractor and a sub-recipient to make the case that SILCs and CILs are sub-grantees/sub-recipients and not contractors. Here is what I found.

EDGAR, the regulations that most DSE’s fall under, specifies that contractors do not need to be paid an indirect cost rate, while SILCs and CILs are required to have and use a negotiated federal indirect cost rate. I think it is arguable that, since funds are set up in the Rehab Act to go to these entities, that is another argument for sub-recipient status.

Here’s some other criteria that will help you differentiate whether you should be paid as a subrecipient or a contractor, from 2 CFR 200.330 Subrecipient and contractor determinations.

The non-Federal entity may concurrently receive Federal awards as a recipient, a subrecipient, and a contractor, depending on the substance of its agreements with Federal awarding agencies and pass-through entities. Therefore, a pass-through entity must make case-by-case determinations whether each agreement it makes for the disbursement of Federal program funds casts the party receiving the funds in the role of a subrecipient or a contractor. The Federal awarding agency may supply and require recipients to comply with additional guidance to support these determinations provided such guidance does not conflict with this section.

(a)Subrecipients. A subaward is for the purpose of carrying out a portion of a Federal award and creates a Federal assistance relationship with the subrecipient. See § 200.92 Subaward. Characteristics which support the classification of the non-Federal entity as a subrecipient include when the non-Federal entity:

(1) Determines who is eligible to receive what Federal assistance;

(2) Has its performance measured in relation to whether objectives of a Federal program were met;

(3) Has responsibility for programmatic decision making;

(4) Is responsible for adherence to applicable Federal program requirements specified in the Federal award; and

(5) In accordance with its agreement, uses the Federal funds to carry out a program for a public purpose specified in authorizing statute, as opposed to providing goods or services for the benefit of the pass-through entity.

(b)Contractors. A contract is for the purpose of obtaining goods and services for the non-Federal entity‘s own use and creates a procurement relationship with the contractor. See § 200.22 Contract. Characteristics indicative of a procurement relationship between the non-Federal entity and a contractor are when the contractor:

(1) Provides the goods and services within normal business operations;

(2) Provides similar goods or services to many different purchasers;

(3) Normally operates in a competitive environment;

(4) Provides goods or services that are ancillary to the operation of the Federal program; and

(5) Is not subject to compliance requirements of the Federal program as a result of the agreement, though similar requirements may apply for other reasons.

(c)Use of judgment in making determination. In determining whether an agreement between a pass-through entity and another non-Federal entity casts the latter as a subrecipient or a contractor, the substance of the relationship is more important than the form of the agreement. All of the characteristics listed above may not be present in all cases, and the pass-through entity must use judgment in classifying each agreement as a subaward or a procurement contract.

Grants.gov puts it this way in Grants Learning Center’s Terminology page :

Subaward: An award provided by a pass-through entity to a subrecipient for the subrecipient to carry out part of a Federal award received by the pass-through entity. It does not include payments to a contractor or payments to an individual that is a beneficiary of a Federal program. A subaward may be provided through any form of legal agreement, including an agreement that the pass-through entity considers a contract.

So there is a distinction, even if you have a “contract” to describe the relationship. If any of you find this useful in your discussion between the SILC and the DSE, please comment here or let me know what has been helpful.

Which comes first?

Strips of paper reading How to comply, New compliance rules, How rules affect you,

As Centers and SILCs, we have a number of regulations that we follow, and some take priority over others. So if they don’t say the same thing, which one are we supposed to follow?

White board with large letters stating KNOW THE RULES. This is being underlined by a hand with a pen.

Recently the Independent Living Administration clarified to us that the Assurances for the Designated State Entity (DSE) are now included in the remarks section (6) of the ILS Notice of Award (NoA). The Assurances are adopted when the DSE Administrator accepts the NoA.

The terms and conditions of a NoA and other requirements have the following order of precedence: (1) statute (in our case the Rehabilitation Act); (2) executive order; (3) program regulation found in 45 CFR 1329 (which references some other applicable regulations); (4) administrative regulation found in 45 CFR Part 75; (5) agency policies; and (6) any additional terms and conditions and remarks on the NoA.

A good example of how one of these pieces might contradict another is found in the requirement in the Rehabilitation Act that Centers for Independent Living conduct Resource Development (Section 725 (b)(7). This is juxtaposed with the prohibition on spending federal dollars to fund raise found in 45 CFR Part 75. As you can see, the Rehabilitation Act as the statute takes precedence over the administrative regulation.

This is not to say that Resource Development and Fund Raising are precisely the same thing, but it is allowed for SILCs and required for CILs to conduct resource development using federal funds. At the very least, you should have a category for the cost of resouce development in your chart of accounts and your own internal definition of these terms to assure you are not paying for fund raising with federal dollars.

Are indirect costs the same as administrative costs?

Question: I am interested in your thoughts on something. I know we’ve always said that the indirect costs are not the same as G&A. However, when we submit the proposal we have to include the statement of functional expenses from the audit which breaks out G&A and also 990 which breaks out the G&A. I assumed they compare the indirect cost proposal to those G&A figures, so I’ve always made sure they match. Is that not the case?

Response: The proper answer is that indirect does not always match general and administrative, but in many cases it will.

Sometimes there are direct costs that are minor and for practicality get combined with indirect (copies as an example).

Sometimes there are indirect costs like accounting or insurance that may be required to a much greater extent, for a specific program, so those are directly allocated.

In the absence of those unusual situations indirect will equal general and administrative

A dozen ways to reduce the risk of theft

Business man pulling a big green dollar sign concept on background

It happened again just a few weeks ago. This isn’t the first time a center has been victimized by employee theft. And usually it is the bookkeeper or accountant, someone you trusted. Often they are not small thefts, but larger ones that have been going on for awhile before being detected. So what can you do to prevent or at least find and end such theft?

Most centers depend on their auditors to protect them against theft. However, unless you are spending at least $750,000 in federal funds you are not required to have an annual audit. Even if you do have a review of financial statements, that is not an engagement to investigate fraud. When auditing financial statements, the theft might not be found, depending on the level of sophistication of your financial person.

Remember that the person holding the financial position in the organization has an understanding of the audit process and its inherent limitations. They may be able to divert the center’s assets into their own pocket through several deceptive practices. It is your responsibility as the executive director or a board member, to make sure that your practices limit the possibility of theft. Here are some important practices that will offer protection:

  1. The executive director or board treasurer should receive bank statements directly from the bank and review them. Look at each check. Are some made out to a staff person that don’t seem right? How was the check endorsed? (Some staff create an account for themselves with an innocent-sounding name, but they have to endorse the check to deposit it.) If cancelled checks are not returned by the bank, arrangements can generally be made for online access enabling the key officer to view scanned images. After this review, the bank statements and checks can be given to the accounting department for reconciling to the books. The completed reconciliation should then be returned to the key officer for review and approval.
  2. Review credit card bills including the original receipts. Employees have been known to use cards for their own utility bills, for example. If you see the original receipt you will see the address. If the original receipt isn’t available, request it from the vendor or the credit card company.
  3. Employees have been known to add some of their own items to their cart at the office supply store. Someone different from the person who ran the errand should put away the supplies, checking them off the receipt.
  4. Make sure that someone other than the accountant picks up the mail and opens/directs it. This is where late payment notices are hiding, and where donations may be received and pocketed rather than deposited. If the receptionist or the executive director reviews the mail they can log in the donations and stamp checks for deposit only.
  5. Regularly check payroll. Verify the names. Notice whether the amounts withheld agree with what is sent to IRS. Check the hours. Make sure your withholding is sent on a timely basis. Thefts can occur by siphoning off payroll related funds.
  6. Do not allow the controller or bookkeeper to sign checks.
  7. Occasionally verify the names of all the suppliers.
  8. Do not sign checks which have not been completely filled in.
  9. Require that checks that were cut in error are saved and filed, so that you know if a check is missing. Typically the signature is torn off the check and the original, not the copy, is kept to insure that a missing check can’t be used.
  10. Require employees with accounting functions to take annual vacations and have others perform their duties.
  11. Prepare and carefully review monthly financial statements in detail. Especially look at significant variances from prior year or budget to the current year.
  12. Carry insurance for employees in sensitive positions. Consider fidelity insurance, bonding, and directors and officers insurance to protect the organization.

These steps cannot prevent all fraud, but should allow you to find most of the sources of fraud and take appropriate action. When you have routine policies and practices like these in place, the likelihood of fraud is greatly reduced.

One more note. You are required to report any fraud to your funders immediately. You will want to make sure your board is informed, and that you have turned the investigation over to law enforcement at the local, state and/or federal level for appropriate prosecution of anyone guilty of theft, fraud or abuse of funds.

What are some interview questions for candidates for the Executive Director position?

We are seeing a lot of Executive Director positions open up as the Baby Boomers retire. Here are some potential questions for the interview, and a few tips as well.

Interview Questions for candidates for Executive Director

  • Tell us a little about yourself and why you feel you would like this position.
  • How did you learn about this job opening?
  • Why are you leaving your current employer? (Or why did you leave?)
  • What do you know about this organization, and what would you like to know?
  • What are three words that describe your ideal working environment?
  • Tell us why you think you would be a good match for this organization.
  • What is your personal experience with disability? (If they do not have a visible disability and do not bring up having a disability, you can’t ask more at this point.)
  • Describe your experience with promoting human rights.
  • What professional achievement are you most proud of?
  • What is one area of weakness and how are you addressing it?
  • What is your experience supervising staff? What do you find is the most difficult part of being a supervisor?
  • Have you ever had to lay staff off? What did you do and what do you wish you had done?
  • Tell us about your strategic or long-range planning efforts with organizations where you’ve worked. What is your approach? Who is involved?
  • How would you describe your management style?
  • If you get this job, what is the first thing you will do?
  • What financial records would/do you provide to the board and how often?
  • Have you ever had to investigate a complaint against a staff member? What was your process and how did you feel about the resolution?
  • A board member is quoted in the newspaper saying something inaccurate about your organization. What do you do?
  • What is the best/most effective community partnership that you developed in your professional life?
  • What excites you about this position?
  • What questions do you have for us?

Tips for your interview process:

  • Allow at least an hour for each interview. Ninety minutes might be better. That gives you a little time to make notes and discuss impressions before the next candidate arrives.
  • Introduce the interviewers to the candidate and shake hands all around. (If the board members aren’t aware, it is appropriate to shake hands even when the candidate has limited use of them.)
  • Make sure the candidate has water or coffee.
  • Provide the board committee with the printed questions and room to jot down the candidate’s comments and to make their own observations.
  • Don’t try to fill in silence or finish sentences. Let the candidate say all they want to say about the question.  If they don’t say enough, follow up with, “Can you tell us about a time when you applied what you just said?”
  • Ask followup questions if you are unclear about the meaning of a statement.
  • It is nice when several people take turn asking the questions.

Privacy and Confidentiality

What are the privacy rights of the people you serve? Can they expect staff to keep visits and personal information private? Do you need consumers to sign a release of information? If yes, when?

Some centers seem like tight-knit communities, where everyone knows everyone else, and sometimes everyone else’s business. It isn’t unusual for a consumer to ask staff, “Hey, has Joe been in lately? I haven’t heard from him. Is he okay?”

While Centers aren’t usually privy to health or medical information, the same type of privacy is expected for a CIL’s consumers as what you think of when you consider HIPAA (Health Insurance Portability and Accountability Act). You don’t have the right to share or talk about a consumer’s personal information without their permission.

This includes not sharing with other staff or volunteers unless they have a need to know and the consumer grants permission. The records are confidential — both paper and electronic — and should be locked or safeguarded. Privacy includes not sharing with other members of the same consumer group, or with their friends or relatives without the consumer’s written permission.

The permission is usually in the form of a written release of information form, which specifically indicates who can receive information, what information can be shared, and is signed by the consumer and kept in the Consumer Service Record.