Good intentions, poor execution: How to avoid the common mistakes of running a nonprofit

By Eli Segall (contact)

Las Vegas nonprofits feed the poor, shelter the homeless and help the mentally disabled. But behind the scenes, some of the most well-meaning groups can be an operational mess.

Many nonprofit leaders, locally and nationally, fail to file paperwork required by the Internal Revenue Service and lose their tax-exempt status. Others put friends on their boards of directors in spots that should be reserved for well-connected fundraisers. Some use their groups as personal piggy banks, looting donations. Others hire outside finance chiefs to control the purse strings only to discover that one day they have vanished, along with money from the group.

“Nonprofits are started by people with a passion for a cause. They’re not necessarily the best businesspeople,” accountant Brenda Stout said.

Of course, many nonprofits are well run, with a strong board of directors, balanced finances and consistent programming.

A good number, however, are riddled with problems. Many of the issues revolve around paperwork.

Managers often incorrectly believe that once an organization incorporates as a nonprofit in Nevada, they automatically are granted nonprofit status with the IRS.

That’s not the case. They still must apply with the federal agency if they want tax exemptions and donor write-offs.

“A lot of small (groups) don’t understand that,” said Rick Cunningham, a tax attorney with Roland & Kaplan.

Once they get IRS clearance, nonprofits that bring in at least $50,000 a year in revenue have to file annual tax returns that are available to the public. Known as 990s, they disclose revenue, expenses, executive salaries and vendors that get paid $100,000 or more a year.

Smaller nonprofits with less revenue have to notify the IRS using an e-Postcard, which takes a few minutes to complete.

The rules are relatively simple, but not everyone complies.

In Nevada, the IRS has yanked tax-exempt status from 1,100 nonprofits since 2011 because they failed to file either a 990 or e-Postcard for three consecutive years, according to federal records. There are almost 4,600 tax-exempt charities in Nevada, according to the IRS.

Almost all of them are small, little-known groups, such as sports leagues or religious organizations. Many likely failed to file because they no longer exist, Cunningham said.

Other common missteps involve retail sales.

If a tax-exempt chamber of commerce, for instance, leases out its conference room, the group might have to pay federal tax on the income it received from the rental. That’s because leasing falls outside its stated mission of business advocacy and education.

In addition, wealthy people sometimes set up charitable foundations, then decide to reverse course and take back their seed money. Under IRS rules, however, that money can’t go back to the founder. It must be spent on charitable purposes, donated to a service group or transferred to another check-writing foundation.

“It is a trap for the unwary if you don’t follow the rules,” Cunningham said.

Perhaps the biggest pitfall, however, involves boards of directors.

A board’s main responsibilities are raising money, setting policy and, when applicable, replacing themselves, Stout said. Directors should come from a range of industries and be well-connected in the community.

Instead, nonprofit leaders sometimes tap people who have benefited from the organization, figuring they know best about the group’s purpose and goals.

Although that might be true, “that’s not the purpose of the board,” said Jeff Gordon, president and CEO of the Nevada Childhood Cancer Foundation.

    Gordon and other experts also noted it’s crucial to have business-savvy      management.

Gordon, for instance, ran minor-league basketball teams, a radio station and an outdoor advertising agency before taking charge of the cancer foundation.

When he took the helm in 1998, the foundation had one part-time employee, $50,000 in the bank and scant programming. Today, it has nine full-time workers, four contractors and a $1.7 million annual budget, which pays for free counseling services, schooling and summer camp for critically ill children and their siblings and numerous other programs. About 80 percent of its funding comes from private donors.

“You’ve got to administer that business side or you will not be able to help anybody,” Gordon said.

Nonprofit fraud is common in Nevada and across the country.

Fraud can take many forms. Sometimes, politicians and others set up nonprofits as fronts to win public grants and private donations. Other times, staffers with access to bank accounts skip town with organization revenue.

“I’ve seen it many times,” said Dianna Russo, managing principal of accounting firm Houldsworth, Russo & Co.

Nonprofit groups lose a median $100,000 per fraud case, compared with $200,000 at privately held companies, $127,000 at public companies and $81,000 at government entities, according to the Association of Certified Fraud Examiners. The most common methods of theft are billing schemes, check tampering and expense reimbursement scams.

Altogether, nonprofits lost $40 billion to theft in 2006, according to a December 2007 report in Nonprofit and Voluntary Sector Quarterly, the most recent available. Experts believe that number is growing.

In Nevada, an American Red Cross officer once stole $120,000 from the organization, while an official with Citizens for Affordable Housing embezzled $1 million, said Gary Snyder, publisher of Nonprofit Imperative, a newsletter on industry fraud.

State prosecutors often lack the resources to tackle the problem, Snyder said. What’s more, industry leaders at Independent Sector, a Washington, D.C., coalition of nonprofits, foundations and corporate giving programs with 600 member organizations, refuse to discuss nonprofit theft for fear of scaring off donors.

“Nobody cares,” he said.

A spokeswoman for Independent Sector did not comment.

Most states have regulations for charities, including registration protocols, audits and publicly available databases of groups that have been disciplined.

Nevada, however, is one of 10 states with none of these, according to a report by the Tampa Bay Times, Center for Investigate Reporting and CNN.

The state took a step toward better scrutiny — albeit a very small one — in late May when Gov. Brian Sandoval signed Assembly Bill 60. The law, which takes effect Jan. 1, requires charities that seek donations from residents to include selected information from their latest tax form and a statement about whether collections are tax-deductible when they file incorporation papers with the secretary of state.

If a charity fails to comply, it faces a $50 penalty. Eventually, it could lose its right to do business in Nevada.

Nevada Attorney General Catherine Cortez Masto and Secretary of State Ross Miller introduced the bill to try to quash nonprofit fraud. Scammers, for instance, tell people they are collecting tax-deductible charitable donations when in fact they have no charity and simply pocket the money. AB60, in theory, should help donors by giving them more information about groups that ask them for money.

“It only makes sense to provide a little transparency,” Miller said.

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