With almost any organization, your accounting function is important and should be reviewed regularly. I have seen the following six errors made by not-for-profits organizations. Make sure your finance department addresses each area.
1. Formal accounting processes.
All aspects of managing your organizations assets should be reflected in a detailed, written accounting manual. This should include the steps for accepting and depositing donations and paying bills. The person who regularly performs the accounting task should strictly follow these processes and so should anyone who fills in for that employee.
2. Misused accounting software.
Many nonprofits now use accounting software to track their accounts, and it’s an effective tool. Nonetheless, mistakes still happen. Always double-check entries and reconcile your bank accounts to ensure that the transactions your staff has entered are complete and accurate. Even if you use spreadsheets or manual books, this step is essential.
3. Not understand unrelated business income (UBI).
IRS officials have cited “failing to consider obvious and subtle” UBI tax issues as the top tax mistake nonprofits make. According to the agency, organizations commonly fail to report UBI — or they underreport this income. Follow guidance in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations.
4. Misclassified employees.
This is another area in which the IRS says that exempt organizations often make errors in judgment and practice. You must withhold and pay various payroll taxes on employee earnings, but don’t have the same obligation for independent contractors. If the IRS can successfully argue that one or more of your independent contractors meet their criteria and should be classified as employees, both you and the contractor possibly face financial consequences.
5. Not investing in the accounting function.
Compared with private industry, not-for-profits typically dedicate fewer resource dollars to their accounting function. For example, it’s important to use the services of an accountant or CPA with experience in the nonprofit sector, whether that person is on staff or external. Not having the right professional handle your accounting and tax issues is a problem that can lead to many other mistakes.
6. Data backup.
Would your accounting information be safe if a fire, natural disaster, terrorist attack or other emergency took place? Your accounting data should be backed up automatically and frequently with off-site backup as well. Web-based systems fit the bill because they store the information off-site.