An Overview of Religious Non Profit Organizations By Br. Abdul Khadri Mahdi, CPA 1

Agenda Description of exempt organizations Applying for exempt status General expectations – membership and accountability Compliance matters IRS audit of religious organizations Employment compliance Red flag areas for the IRS Important sources 2

Exemption Requirements – Section 501(c)(3) Organizations 3 To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization Must be organized and Operated exclusively for exempt purposes set forth in section 501(c)(3), and None of its earnings may inure to any private shareholder or individual. It may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

Applying for Exempt status 4  Complete – IRS Form 1023 – Application for recognition of Exemption under Section 501 (C) (3) of the Internal Revenue Code Exemption as a religious organization under section 501(c)(3) is generally considered the most favorable status, because donations to 501(c)(3) organizations are tax deductible. To be exempt under that section, an organization must apply within 27 months after the end of the month in which it was created.

General Expectations  Clear purpose of existence – Demonstration of the organization’s main purpose.  Membership – maintain annual membership fee and issue membership card/certificate.  Accountability – Accurate books of accounting.  Transparency – Conflict of interest policy, operational disclosure to members.  Governance and oversight by the Board (Shura) or an Executive Management team. Follow company law. 5

Compliance matters  Strict adherence to the organization’s conflict of interest policy.  Maintain proper accounting records.  Develop robust internal control system to safeguard the organization’s assets.  File annual Form 990 with the IRS no later than May 15 of the following year for prior year’s activities. 6

Compliance matters (Cont)  Disclosure of “Unrelated Business Income” activities – For example: Sale of items where profit is generated.  It is a trade or business,  It is regularly carried on, and  It is not substantially related to furthering the exempt purpose of the organization.  Refrain from influencing legislation and elections. 7

IRS audit of religious organizations  Section 7611 of the Internal Revenue Code - Congress has imposed special limitations  The IRS may initiate a Religious organization tax inquiry if a high-ranking IRS official, reasonably believes, based on a written statement of the facts and circumstances, that the organization: a)may not qualify for the exemption; or b)may not be paying tax on unrelated business income or other taxable activity. 8

IRS audit of religious organizations (cont) The religious organization examination procedures do not apply to the following:  Routine requests for information or inquiries on matters that do not primarily concern the organization’s tax status or liability,  Criminal investigations,  Schools that, although operated by a religious organization, are organized as separate legal entities. 9

IRS audit of religious organizations (cont)  Any case involving the organization’s knowing failure to file a return or willful attempt to defeat or evade tax (including failure to withhold or pay social security or other employment or income tax required to be withheld from wages), or  Any inquiry or examination relating to the tax status or liability of persons or organizations other than the religious organization (including contributors). 10

Employment matters Employee (Form W2) or Independent contractor (Form 1099) – The Issue of Control- Facts that provide evidence of the degree of control and independence fall into three categories: ◦ Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? ◦ Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) ◦ Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? 11

Employment matters (cont) Generally, if the above does not apply then the worker is and employee and  You must withhold income taxes,  Withhold and pay Social Security and Medicare taxes, and  Pay unemployment tax on wages paid to an employee.  You do not generally have to withhold or pay any taxes on payments to independent contractors. 12

Employment matters (cont) Consequences of Treating an Employee as an Independent Contractor If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. See Internal Revenue Code section 3509 for more information 13

Employment matters (cont) Full time, Part time, Voluntary Service The Fair Labor Standards Act (FLSA) does not define full-time employment or part-time employment. This is a matter generally to be determined by the employer. Whether an employee is considered full-time or part- time does not change the application of the FLSA. Part time worker should not be confused with a self employed worker. 14

Red Flag Areas  Not filing Form 990 – for 3 consecutive years will cause your organization to lose its exempt status.  Maintaining proper accounting records.  Proper Board oversight – Every board member is responsible for the organization’s assets, finances, and regulatory obligations.  If the organization hires employees, it must be compliant with tax, social security, and Medicare laws.  Transparency to the members and the community is critical.  Conflict of Interest policy must be adhered to. Demonstrate the appearance of independence. 15

16 Carver Carver Guide on Basic Principles of Policy Governance American Institute of Certified Public Accountants (AICPA) North Carolina Association of CPAs (NCACPA) American Bar Association (ABA) Model Non profit Corporations Act Important Sources

17 Questions?